What is an Intangible Asset?
Intangible assets are assets that are not physical in nature, such as patents, copyrights, trademarks, trade names, software, and more, which contrast with tangible assets like property and equipment. Although intangible assets don’t physically exist, they still have monetary values assigned to them because they can be used in revenue streams.
Because of their non-physical nature, the value of intangible assets fluctuates based on current market conditions and other considerations. For example, an intangible asset like research and development (R&D) is tough to valuate for several reasons:
- The amount of labor involved
- How much that labor costs
- What’s involved in the research process (and factoring in roadblocks)
- Many other factors.
Intangible assets can be divided based on their use. Some can be indefinite, like the McDonald’s brand name, because it stays with the company for as long as it’s in operation. Others can be definite, like contracts or legal agreements, which means it has a prespecified shelf life. Companies can either create their own intangible assets or acquire them; with the former, they do not need to be recorded in balance sheets and will have no recorded book value.
Examples of Intangible Assets:
- Intellectual property: a form of property created by the mind.
- Patent: type of intellectual property (IP) that gives the owner legal protection from others’ using it for a set time period.
- Copyright: a form of IP that protects items regarding a company’s brand, such as a slogan or logo.
- Trademark: a form of IP that protects literary and artistic materials, such as books, songs, movies, etc.
- Trade secret: a category of IP that includes formulas, designs, patterns, processes, instruments, etc.
- Goodwill: the purchase of one company by another and acquires their brand, reputation, IP, commercial secrets, etc. It can be calculated with the formula P – (A-L), where P is the target company’s purchase price; A is the market valuation of assets; and L is the market valuation of liabilities.
- Brand equity: this is the worth of the brand, which includes how viable sales and profit generation are for the company.
- Licensing: a protective right for an individual or company that allows them to legally operate and draw in revenue.
- Customer lists: client information, like mailing lists or prospective customers, that can help elucidate potential and actual target demographics for the purpose of shaping business strategy.
Why are Intangible Assets Important?
Intangible assets are important because they’re an integral part of a company’s business plan regarding revenue. Although they can’t be handled the way physical assets can, no business will survive very long without intangible assets contributing to its growth. Apple would have never made the iPhone without the intangible asset of R&D; Pepsi and Coca-Cola would be synonymous with each other without trademarks; and musicians could freely profit from copied music if copyrights didn’t exist.
For any person or company looking to bring an idea to market successfully, they’ll almost certainly need to make use of intangible assets, such as patents to protect their intellectual property. Not only would they benefit from the various ways intangible assets help grow their idea, but there’s also the added value of not having to show them on balance sheets if they’re originally created.
As an example, patents can be a valuable type of intangible assets. By cornering the market, a company can leverage their patents into various revenue streams and boost their growth, such as selling license subscriptions or trade secrets, or forging partnerships with investors.