Intangible Assets: Definition, Type and Examples (2024)

Intangible assets may seem elusive, but understanding them is crucial for business owners. While you can’t touch these assets, their impact on your company’s value is real.

Let’s explore intangible assets, how to calculate their fair value, and how to account for them in your financial documents.

What is an intangible asset? 

An intangible asset is a nonphysical long-term asset that accrues value over time. These are not just theoretical concepts but real assets that can significantly impact your business. Examples include intellectual property, brand recognition, customer relationships, and goodwill. 

In contrast, tangible assets are physical items you can touch, typically under the PPE (property, plant, and equipment) category.

2 types of intangible assets

Intangible assets fall into two categories: 

1. Identifiable intangible assets
2. Unidentifiable intangible assets

1. Identifiable intangible assets

Identifiable intangible assets can be acquired or separated from the company (bought and sold), but lack physical form. These often have an indefinite lifespan, lasting as long as a company exists.

Examples of other intangible assets include: 

• Patents
• Trademarks
• Copyrights
• Non-monetary government grants
• Airport landing rights
• Broadcasting licenses
• Proprietary data and algorithms

For instance, a social media platform’s feed algorithm is an indefinite intangible asset. It adds value over the long term and could potentially be sold to another company.

2. Unidentifiable intangible assets

Unidentifiable intangible assets can’t be bought or sold separately because they only exist in relation to the company. These are often definite intangible assets with a limited lifespan.

Examples of unidentifiable intangible assets include:

While difficult to quantify, these assets significantly contribute to a company’s overall value. A client relationship, for example, is only an asset for as long as it’s maintained.

How does a company acquire intangible assets?

Companies can acquire intangible assets by creating them internally or purchasing them from another entity.

Internal development

Companies often develop assets in-house. For example: 

• A social media company collects user behavioral data to sell targeted ads.
•  A creative agency builds goodwill with freelancers by offering top pay and a positive work environment.
• A hairdresser creates a viral TikTok post that boosts their salon’s reputation.

External acquisition

Companies can also acquire intangible assets from other businesses. For instance, when Meta (formerly Facebook) acquired Instagram and WhatsApp, it gained:

• Underlying technology (code, design)
• Branding
• Advertiser relationships
• Intellectual property
• Reputation and goodwill

While many apps perform similar functions, Instagram’s and WhatsApp’s intangible assets contributed significantly to their high valuations.

How to calculate the value of intangible assets

Unlike tangible assets, quantifying the value of intangible assets can be challenging. Here’s a general formula to estimate their value:

Intangible Assets Value = Market Value of Business – Net Tangible Assets Value

To use this formula:

Calculating the value of goodwill

Goodwill, while abstract, can be calculated when a company is bought or sold. Subtract the difference between the fair market value of the business’s assets and liabilities from its purchase price:

Goodwill = Purchase Price – (Assets – Liabilities)

Amortization of assets

To determine the value of many intangible assets over time. This process gradually writes off an asset’s initial cost over a given period.

Amortization applies only to intangible assets with a finite useful life. Say your business gets a patent: that patent typically has a 20-year lifespan in the US. However, brand recognition resulting from that patent has no finite useful life and can’t be amortized.

To calculate amortization, use the straight-line method:

Amortization Expense = Initial Value / Lifespan

Note: Most intangible assets have no residual value, simplifying the calculation.

Recording intangible assets on a balance sheet

Only acquired intangible assets can be listed on a balance sheet under tangible assets. Internally developed assets can’t be assigned a fair market value and, therefore, are omitted.

For example, Meta couldn’t list its like button (developed in-house) on its balance sheet. However, it could list Instagram’s “double tap” feature, as it was acquired intellectual property with a market value.

How are intangible assets disclosed?

To comply with International Financial Reporting Standards, intangible assets are measured and disclosed at cost. This means providing valuation and disclosures about your intangible assets when selling them. The purchaser can use these assets as a line item for expenses and amortization on their profit and loss statement. 

For intangible assets with finite useful lives, amortization expenses are included in the income statement. Assets with indefinite useful lives aren’t amortized but are tested annually for impairment. If impaired, the asset’s carrying amount is reduced to its recoverable amount, and the impairment loss is recorded in the income statement.

Legally protecting intangible assets

To preserve the value of your intangible assets, it’s crucial to take steps for legal protection. Here are some common methods: 

1. Patents: Grant exclusive rights to use, make, sell, and distribute an invention for a set period (usually 20 years).
2. Trademarks: Protect brand names, logos, slogans, and other identifiers that distinguish goods and services.
3. Copyrights: Safeguard original works of authorship, including literary, musical, artistic works, software, and architecture.
4. Nondisclosure agreements (NDAs): Protect trade secrets and confidential business information that gives you a competitive edge. 
5. Licensing agreements: Allow companies to grant rights to third parties to use their assets under specific conditions.
6. Noncompete and nonsolicitation agreements: Restrict employees or partners from engaging in competing activities or soliciting clients or employees for a certain period after leaving the company.
7. Intellectual property (IP) laws: Various national and international IP laws protect intangible assets.