Intangible Assets on the Balance Sheet

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Definition of an Intangible Asset:

Intangible assets are any assets that do not have a physical form and are recorded in the financial statements.

Intangible Assets List

Examples are goodwill, patents, trademarks, and copyrights. They are generally long-term assets that the business has.

A tangible Asset has a physical nature and can include buildings, vehicles, equipment, and stock.

Tangible Assets vs Intangible Assets

Tangible assets have a physical substance that has value. They can include cash, investments, property, and equipment. On the other hand, intangible assets are nonphysical items that have value. This can include things like patents, copyrights, and goodwill.

The main difference between tangible and intangible assets is that tangible assets can be seen and touched, while intangible assets cannot. Tangible assets are often easier to value because their worth is easier to value. Intangible assets, however, can be just as valuable as tangible assets and sometimes even more so.

It’s essential to consider both types of assets when valuing a company.

Acquiring Intangible Assets

A business can acquire intangible assets in a variety of ways. For example, it might develop new products or processes protected by patents or copyrights. Or it might develop valuable relationships with clients or suppliers that are protected by non-compete agreements.

Sometimes, a business might build up a store of goodwill with customers, patients, or the general public. This goodwill can be difficult to quantify, but it can be essential to the business’s long-term success.

What Intangible Assets are and how they are Classified:

Intangible assets can be divided into two categories: legal and contractual. Legal intangible assets are things like copyrights and trademarks, while contractual intangible assets are things like customer lists or leases. Intangible assets can also be classified by function, such as marketing intangibles, manufacturing intangibles, or administrative intangibles.

How to Value Intangible Assets

When valuing a business, the focus is often on tangible assets such as property, inventory, and machinery. However, intangible assets such as patents, copyrights, and trademarks can be just as valuable—if not more so. So, how are intangible assets valued for fair monetary value?

Income Approach

One common method is the income approach, which estimates an asset’s value based on the expected income.

The income approach is often used to value intangible assets because it focuses on the future earnings potential of the asset. This method can be used to value both leased and unleased intangible assets.  

Cost Approach

The cost model approach is sometimes used to value intangible assets, particularly when there is no market for comparable sales. This method focuses on replacement cost—the amount it would cost to replace an asset with one that has similar utility. When valuing an intangible asset using the cost approach, you need to estimate the reproduction or replacement costs of the asset. 

Market Approach

The market approach is another option for valuing intangible assets. This method relies on observing market transactions for similar assets to infer value. When using the market approach, you need to find comparable sales of similar assets and adjust for any differences between those transactions and the subject asset being valued. 

The appropriate method used will depend on factors such as the type of asset being valued and whether there is a market for comparable sales. It is always advisable to seek the advice of an accountant when valuing intangible assets.

Intangible Assets in Financial Accounting

An Intangible asset is recorded on the balance sheet as part of the business assets. The total of fixed assets and intangible assets equals the value of all the assets in the business.

An intangible asset is depreciated over time; it is called amortisation. An example of amortisation is that a business obtains a trademark that is valued at 5000 for ten years. The amortisation is, therefore, over ten years and would be 500.00 per year. At the end of the ten years, the trademark can be renewed.

Selling an Intangible Asset

When you sell an intangible asset, it’s important to record the transaction in your financial statements.

The asset will be recorded on the balance sheet at its value, and any profit or loss from the sale will show up on the income statement. This will give you a clear picture of how the sale has affected your business financially. 

Here is an example of selling computer software the business has developed. In the balance sheet, the software is valued at 50,000, and the sale was for 60,000. The balance sheet will reduce by 50,000 to remove the intangible asset; the profit is shown on the income statement.

Examples of intangible assets

Intangible assets are items that don’t have a physical form but still have value. Examples of intangible assets include patents, copyrights, and goodwill. 

Patients

When you run a small business, one of your most valuable intangible assets is your patient base. The fact that your customers keep coming back to you is a testament to the quality of your product or service. It takes a lot of time, energy, and money to acquire new patients, so hanging onto the ones you have is essential.

The government grants patents for new inventions, and it stops others from making, using, or selling an item without their permission. Patents are given to each country, preventing other businesses from importing or making the same item in that country.

The Intellectual Property Office grants patents in the UK. If you own a patent, a value can be put against it. Placing a value against a patent is not an easy task; it is best to seek the advice of a professional. Some patents may have no value at all.

Trademarks

A trademark is a sign or symbol that distinguishes your products or services from those of other businesses. Trademarks can be words, logos, slogans, or even colours. Small businesses should trademark to protect their brand identity and prevent others from using their name or logo without permission.

You will see examples of trademarks everywhere you go, from fast-food chains to accountancy software. Each business registers its trademark, ensuring that others can not use it or something very similar.

Goodwill

Goodwill is the difference between the amount a company pays for another company and the total value of its Tangible Assets & Intangible Assets. Goodwill usually arises when one company purchases another company for more than the fair market value of its assets. For example, if Company A buys Company B for $1 million but Company B only has $500,000 in Tangible Assets & Intangible Assets, the rest is considered goodwill. This can be a valuable asset for small businesses because it represents the perceived value that consumers see in your company. 

Brands

A brand is an identifier such as a name, term, design, symbol, or other feature that distinguishes one seller’s goods or services from those of other sellers. Building a strong company’s brand can help small businesses attract new customers and stand out from the competition. It can also make it easier to charge premium prices for your products or services 

Knowledge

Knowledge is perhaps the most important intangible asset a business can have. After all, it sets your business apart from others in your industry. Whether it’s knowledge of your customer’s needs or the latest trends in your industry, having this type of inside information gives you a significant competitive advantage.

Research and Development

Intellectual property can be extremely valuable if your business constantly innovates and develops new products or services. Even if you don’t bring any new products to market, your research and development can better understand your industry and help you make better decisions about your business.

Computer Software, eBooks and PDFs

These can also be considered intangible assets if you’ve developed any computer software, eBooks, or PDFs. These assets can be extremely valuable, especially if you sell them; they help your business run more efficiently or save money. If you have any unique or proprietary software, it’s important to protect it with a copyright or patent.

Intangible Asset – Accounting Standards FR102

Under the financial reporting standard FR102, an intangible asset is recognised if:

(a) it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and

(b) the cost or value of the asset can be measured reliably.

Intangible Asset Conclusion

An intangible asset cannot be seen or touched but still hold value. They do not have a physical presence. This can include patents, trademarks, research and development, goodwill, and knowledge.

It is important to protect these financial assets and to put a value on them on the balance sheet.

What is Considered Tangible Assets?

The following are tangible assets as they have a physical form: computers, cars, furniture, equipment and stock.

What are Internally Generated Tangible Assets?

Internally generated tangible assets are created by the company rather than purchased from elsewhere. They may include goodwill, trademarks and computer software developed.

Disclaimer

The information provided in this document is for informational purposes only. This document’s author and publisher make no representations of the accuracy, completeness, or suitability of the information contained herein. We always suggest seeking the advice of an accountant.