Intangible Assets

An asset is considered to be intangible if it has no tangible attributes. Intellectual property, including patents, trademarks, and copyrights, as well as goodwill and brand recognition are examples of intangible assets. Contrary to tangible assets, such as real estate, cars, equipment, and stock, intangible assets do not exist.

Because they derive their worth from contractual rights, financial assets like stocks and bonds are also viewed as tangible assets.

Understanding an Intangible Asset

A definite or indefinite category can be applied to an intangible asset. Because it remains with a firm for as long as it is in business, a company's brand name is regarded as an intangible asset with an unlimited shelf life. A written agreement to use a patent owned by another company, with no plans to prolong the arrangement, is an example of a specific intangible asset. As a result, the agreement is considered a definite asset and has a defined lifespan.

Calculating Intangible Assets

Use the following calculation to determine the monetary value of your small business's intangible assets:

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

Note: The result of the formula above is simply an approximation. Market value is the highest possible price that a buyer would offer for your business and that you, the owner, would accept.

List all of your tangible assets before calculating net tangible assets. The following are examples of physical assets:

• Inventory
• Money in your business bank account
• Buildings
• Land
• Machinery
• Furniture
• Computer hardware
• Office supplies (like a postage meter)

The two types of tangible assets are current (quickly convertible into cash) and fixed (not easily convertible into cash). Capital assets and fixed assets have similar meanings.

Example of an Intangible Asset

Intangible assets include goodwill, according to Dummies. It is created when a company is acquired for a sum more than the market worth of its net assets (total asset value minus liabilities such as debts). Despite not having a physical presence, it has long-term financial value.

Fair market value may be found for most items. For instance, the market value of cash matches the value recorded in the accounting books.

This is an illustration of goodwill in action:

A web developer pays $100,000 to acquire his rival. Nevertheless, the assets of his rival are only worth $80,000 in total. The purchase price was $20,000 more than the value of the competitor’s net assets. So the web developer now has $20,000 worth of goodwill as an asset.

Conclusion

An asset that is not physical in nature, such as a patent, brand, trademark, or copyright, is referred to as an intangible asset.

Businesses have the ability to create or acquire intangible assets.

An intangible asset may be seen as definite or indefinite, such as a contract or legal arrangement (for example, a brand name).

A company's intangible assets do not appear on the balance sheet and do not have a documented book value.