Define intangible assets and explain the nature of these assets

DEFINATION

An intangible asset is an asset that is not physical in nature. Corporate intellectual property,
including items such as patents, trademarks, copyrights and business methodologies, are
intangible assets, as are goodwill and brand recognition.

 Intangible assets are either legal or competitive in nature, and can be very valuable to a
company's competitive position.
 Intangible assets can have either identifiable or indefinite useful or legal lives.
 The nature of an intangible asset will determine what costs are initially capitalized and
how expenses related to the intangible asset are subsequently recognized.

Intangible assets are identified separately on a company's financial statements, and come in two
primary forms: legal intangibles and competitive intangibles.

Legal intangibles are also known as intellectual property, and include trade
secrets, copyrights, patents, and trademarks. An example would be Coca-Cola's drink formula
which is a closely held trade secret that only a few employees know; this is an example of an
internally developed intangible asset.
Coca-Cola
The year 1950 ushered in an era marked by the consolidation of large companies.

Competitive intangibles include collaboration, leverage, structural activities, and customer

loyalty. Human capital is the primary source of competitive intangibles.
 Examples of intangible assets
Examples of intangible resources include:

 Goodwill. This intangible is often recognized when one business acquires another. It
represents the excess of cost paid by the purchasing business over the value of the purchased
business’ assets. For example, a purchasing company might pay $8 million for a company
valued at $7 million, giving the purchased company goodwill of $1 million based on its
business reputation and other contributing factors.

 Copyright. Granting copyright to a purchasing company allows them to continue creation

and sale of the purchased company’s services or products.

 Patents. A patent grants a manufacturing or research company control over the patent’s use
and sale of a specific design. For example, a company may possess a patent for the only way
of producing a specific product on the market. The purchasing company would claim
ownership of the patent and be allowed to continue overseeing production of the patented
design.

Amortizing intangible assets

Amortization of intangible assets entails expensing out their value over their intended lifetime.
Much like tangible assets, intangible assets have a useful lifetime or depreciation. Some
elements, such as goodwill, have an indefinite useful life, whereas things like patents only
possess a useful lifetime of 20 years. The remaining useful lifetime influences the overall value
of an intangible asset, much like the age of a company’s equipment.

Some intangibles possess a determinable life, also known as a legal life or economic life. The
overall value, or cost of the asset, is divided against the remaining duration of its useful life.
Such assets include software licenses, patents and customer lists. Other assets have
indeterminable lives dependent on how long the company’s brand will hold value. These include
assets such as brand name and goodwill — elements dependent on a company’s reputation and
growth.

Accountants commonly amortize intangible assets using a straight-line method. For example, a
patent may cost a company $50,000 to obtain. The patent’s legal life is 20 years, but the
company only plans on utilizing the patent for 10 years before creating a newer product. The
company would then be required to amortize the patent over 10 years, yielding a per-year
amortization of $5,000.
Companies are regularly advised to carry intangible assets on balance sheets at cost rather than
perceived value. When an entity decides to assign a value to things, such as jingles, this
deceptively changes the perceived value of an organization and can boost stock value. However,
when a company is audited and such incorrect information is included on an income statement or
balance sheet, this creates a potentially problematic situation for investors and stockholders.
Intangibles like the Coca-Cola brand name prove quite priceless, but cannot carry a value on
financial reporting statements.

Acquiring intangible assets

Intangible assets are obtained through a variety of methods. A common practice among
businesses is to obtain all assets during a company acquisition or merger. Additional methods
include:

 Separate purchase. Assets can be purchased from an existing company, just like purchasing
regular services. For the right price, companies will give up things such as patents and other
production rights to the purchaser.

 Government grants. In some circumstances, intangible assets are acquired free of charge
through the use of a government grant. For example, the government may transfer or allocate
intangible assets to a company, such as licenses to operate or land usage rights
.
 Assets exchange. A company might be acquired through the purchase of its assets in
exchange for cash or stock from the purchasing company.

 Self-creation. Not all assets need to be purchased and can be created internally for use or
future sale. In this instance, companies rely on their own in-house resources to create the
intangible resource.

The value of intangible assets is dependent both on the cost of creation and the long-term value
associated. How these assets are acquired and exchanged, in addition to how they influence the
market, contribute to their value, factors that tangible assets like real estate cannot mirror.