Intangible assets are defined as identifiable non-monetary assets that cannot be seen, touched or physically measured, which are created through time and/or effort and that are identifiable as a separate asset. There are two primary forms of intangibles - legal intangibles (such as
trade secretA trade secret is a formula, practice, process, design, instrument, pattern, or compilation of information which is not generally known or reasonably ascertainable, by which a business can obtain an economic advantage over competitors or customers...
s (e.g., customer lists),
copyrightCopyright is a form of intellectual property that gives the author of an original work exclusive right for a certain time period in relation to that work, including its publication, distribution and adaptation, after which time the work is said to enter the public domain...
s,
patentA patent is a set of exclusive rights granted by a state to an inventor or their assignee for a limited period of time in exchange for a public disclosure of an invention....
s,
trademarkA trademark or trade mark is a distinctive sign or indicator used by an individual, business organization, or other legal entity to identify that the products or services to consumers with which the trademark appears originate from a unique source, and to distinguish its products or services from...
s, and goodwill) and competitive intangibles (such as knowledge activities (know-how,
knowledgeKnowledge is defined by the Oxford English Dictionary as expertise, and skills acquired by a person through experience or education; the theoretical or practical understanding of a subject, what is known in a particular field or in total; facts and information or awareness or familiarity gained...
), collaboration activities, leverage activities, and structural activities).
Intangible assets are defined as identifiable non-monetary assets that cannot be seen, touched or physically measured, which are created through time and/or effort and that are identifiable as a separate asset. There are two primary forms of intangibles - legal intangibles (such as
trade secretA trade secret is a formula, practice, process, design, instrument, pattern, or compilation of information which is not generally known or reasonably ascertainable, by which a business can obtain an economic advantage over competitors or customers...
s (e.g., customer lists),
copyrightCopyright is a form of intellectual property that gives the author of an original work exclusive right for a certain time period in relation to that work, including its publication, distribution and adaptation, after which time the work is said to enter the public domain...
s,
patentA patent is a set of exclusive rights granted by a state to an inventor or their assignee for a limited period of time in exchange for a public disclosure of an invention....
s,
trademarkA trademark or trade mark is a distinctive sign or indicator used by an individual, business organization, or other legal entity to identify that the products or services to consumers with which the trademark appears originate from a unique source, and to distinguish its products or services from...
s, and goodwill) and competitive intangibles (such as knowledge activities (know-how,
knowledgeKnowledge is defined by the Oxford English Dictionary as expertise, and skills acquired by a person through experience or education; the theoretical or practical understanding of a subject, what is known in a particular field or in total; facts and information or awareness or familiarity gained...
), collaboration activities, leverage activities, and structural activities). Legal intangibles are known under the generic term
intellectual propertyIntellectual property is a number of distinct types of legal monopolies over creations of the mind, both artistic and commercial, and the corresponding fields of law...
and generate legal property rights defensible in a court of law. Competitive intangibles, whilst legally non-ownable, directly impact effectiveness, productivity, wastage, and opportunity costs within an organization - and therefore costs, revenues, customer service, satisfaction, market value, and share price.
Human capitalHuman capital refers to the stock of skills and knowledge embodied in the ability to perform labor so as to produce economic value. It is the skills and knowledge gained by a worker through education and experience...
is the primary source of competitive intangibles for organizations today. Competitive intangibles are the source from which competitive advantage flows, or is destroyed. The area of finance that deals with intangible assets is known as
Intangible Asset FinanceIntangible Asset Finance is the branch of finance that deals with intangible assets such as patents and reputation . Like other areas of finance, intangible asset finance is concerned with the interdependence of value, risk, and time.- Basic principles :In 2003, one estimate put the economic...
.
The
Uniform Commercial CodeThe Uniform Commercial Code , first published in 1952, is one of a number of uniform acts that have been promulgated in conjunction with efforts to harmonize the law of sales and other commercial transactions in all 50 states within the United States of America...
(Section 9-102(a)(42)) defines "general intangibles" as
- "any personal property
Personal property, roughly speaking, is private property that is moveable, as opposed to real property or real estate. In the common law systems personal property may also be called chattels or personalty. In the civil law systems personal property is often called movable property or movables - any...
...other than accounts, chattel paper, commercial tort claims, deposit accounts, documents, goods, instruments, investment property, letter of credit rights, letters of credit, money, and oil, gas, or other minerals before extraction. The term includes payment intangibles and software."
Intangible Assets vs. Goodwill
It should be noted that while
goodwillGoodwill is an accounting term used to reflect the portion of the book value of a business entity not directly attributable to its assets and liabilities; it normally arises only in case of an acquisition. It reflects the ability of the entity to make a higher profit than would be derived from...
is technically an intangible asset, it is usually listed as a separate item on a company's
balance sheetIn financial accounting, a balance sheet or statement of financial position is a summary of a person's or organization's balances. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a snapshot of a...
. As a distinct type of intangible asset, goodwill typically comes into play only in an acquisition, and represents the amount of money a company has paid or would pay over book value to acquire another company.
Research & Development
Millions are spent each year by corporations to research and develop new intangible assets. To protect their
research and developmentThe phrase research and development , according to the Organization for Economic Co-operation and Development, refers to "creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and the use of this stock of...
(R&D) efforts, corporations generally rely on intellectual property law.
General standards
The
International Accounting Standards BoardThe International Accounting Standards Board founded on April 1, 2001 is the successor of the International Accounting Standards Committee founded in June 1973 in London...
(IASB) offers some guidance (IAS 38) as to how intangible assets should be accounted for in financial statements. In general, legal intangibles that are developed internally are not recognized and legal intangibles that are purchased from third-parties are recognized. Wordings are similar to IAS 9
Expense recognition
Intangible assets are typically expensed according to their respective life expectancy. Intangible assets have either an identifiable or indefinite useful life. Intangible assets with identifiable useful lives are
amortizedAmortization or amortisation is the process of increasing, or accounting for, an amount over a period of time. The word comes from Middle English amortisen to kill, alienate in mortmain, from Anglo-French amorteser, alteration of amortir, from Vulgar Latin admortire to kill, from Latin ad- + mort-,...
on a straight-line basis over their economic or legal life, whichever is shorter. Examples of intangible assets with identifiable useful lives include copyrights and patents. Intangible assets with indefinite useful lives are reassessed each year for impairment. If an impairment has occurred, then a loss must be recognized. An impairment
lossLoss may refer to:*A negative difference between retail price and cost of production*An event in which the team or individual in question did not win.*Loss , a pitching statistic in baseball...
is determined by subtracting the asset's fair value from the asset's book/carrying value. This impairment loss may only be reversed under certain circumstances. Trademarks and goodwill are examples of intangible assets with indefinite useful lives.Goodwill has to tested for impairment rather amortized. If impaired,goodwill is reduced and loss is recognized in the Income statement.
Taxation
For personal income tax purposes, some costs with respect to intangible assets must be capitalized rather than treated as deductible expenses. Treasury regulations generally require capitalization of costs associated with acquiring, creating, or enhancing intangible assets. For example, an amount paid to obtain a trademark must be capitalized. Certain amounts paid to facilitate these transactions must also be capitalized. Some types of intangible assets are categorized based on whether the asset is acquired from another party or created by the taxpayer. The regulations contain many provisions intended to make it easier to determine when capitalization is required.
See also
- Intellectual capital
The term Intellectual capital collectively refers to all resources that determine the value and the competitiveness of an enterprise. As such, it includes as subsets the attributes that concur to building all financial statements as well as the balance sheet...
- Intellectual property
Intellectual property is a number of distinct types of legal monopolies over creations of the mind, both artistic and commercial, and the corresponding fields of law...
- Copyright
Copyright is a form of intellectual property that gives the author of an original work exclusive right for a certain time period in relation to that work, including its publication, distribution and adaptation, after which time the work is said to enter the public domain...
- Patent
A patent is a set of exclusive rights granted by a state to an inventor or their assignee for a limited period of time in exchange for a public disclosure of an invention....
- Trademark
A trademark or trade mark is a distinctive sign or indicator used by an individual, business organization, or other legal entity to identify that the products or services to consumers with which the trademark appears originate from a unique source, and to distinguish its products or services from...
- Trade secret
A trade secret is a formula, practice, process, design, instrument, pattern, or compilation of information which is not generally known or reasonably ascertainable, by which a business can obtain an economic advantage over competitors or customers...
- Goodwill (accounting)
Goodwill is an accounting term used to reflect the portion of the book value of a business entity not directly attributable to its assets and liabilities; it normally arises only in case of an acquisition. It reflects the ability of the entity to make a higher profit than would be derived from...
- Value networks
- Value network analysis
Value network analysis is a methodology for understanding, using, visualizing, optimizing internal and external value networks and complex economic ecosystems. The methods include visualizing sets of relationships from a dynamic whole systems perspective...
- Intangible Assets Definition via Wikinvest
- Goodwill definition via Wikinvest
External links