What are Intangible Assets?

What are Intangible Assets? They are the intellectual property a company owns that they can use to generate value for the business over time. Intangible assets are those assets that are not available in physical form but have value to a business.

They are non-monetary assets without physical substance. In accounting, intangible assets are typically recorded on the statement of financial position if they are identifiable and have a determinable value. They are amortized over their useful life, which is the period over which they provide economic benefits. Intangible assets with indefinite useful lives, like goodwill, are not amortized but are subject to annual impairment testing. Accounting standards, such as IFRS and GAAP, provide guidelines for recognizing, measuring, and disclosing intangible assets.

Intangible assets can be separated into two classes: identifiable and non-identifiable

TYPES OF INTANGIBLE ASSETS

Identifiable Intangible Assets: Identifiable intangible assets can be separately identified, measured, and recognized on a company’s statement of financial position. They have a clear, finite lifespan and are usually acquired through purchase, legal rights, or contractual agreements; common types of identifiable intangible assets:

Copyrights: Rights to reproduce, distribute, and display original creative works like books, software, and art.

Franchise Agreements: Rights granted by a franchisor to a franchisee to operate under a specific brand, business model, and support system.

Trademarks and Trade Names: Are brand names, logos, symbols and trade names that identifies a company’s products or services.

Customer Lists: Lists of existing or potential customers with value attributed to their potential sales or purchasing history.

Patents: Right to use, or sell a unique invention or design for a specified period .

Licenses: Permissions to use intellectual property, technology, or other assets owned by another entity.

Contracts and Agreements: Rights and obligations arising from contractual agreements, such as leases, supply contracts, or customer contracts.

Unidentifiable Intangible Assets: Unidentifiable intangible assets, also known as goodwill, are intangible assets that cannot be separately identified or measured directly. Unidentifiable intangible asset can’t be separated from a business. That means a business can’t buy or sell an unidentifiable asset

Goodwill: Goodwill refers to the reputation and positive associations that a company has built up over time with its customers, suppliers, and other stakeholders.

Brand Reputation: The positive associations, trust, and loyalty that customers have toward a brand.

Employee Loyalty and Expertise: The collective skills, knowledge, and experience of a company’s workforce that contribute to its growth and success

IMPORTANCE OF INTANGIBLE ASSETS

• Revenue generation: Some assets, such as licensing agreements and royalty streams, can generate significant revenue for a business without requiring a physical product or service.
• Brand recognition: Assets, such as brand names and logos, can help to build brand recognition and customer loyalty, which can be critical for long-term success.
• Innovation: Assets, such as patents and copyrights, can encourage innovation by protecting the ideas and inventions of businesses and individuals, providing an incentive for continued investment in research and development.
• Investor confidence: The presence of valuable assets on a company’s balance sheet can signal to investors that the business has a strong foundation and potential for long-term success, increasing investor confidence and attracting additional investment.

ADVANTAGES OF INTANGIBLE ASSETS

• Competitive advantage: Patents, trademarks, and copyrights can provide a business with a competitive advantage by protecting its unique products or services from imitators.
• Flexibility: Unlike physical assets, intangible assets can be more easily transferred or licensed to other parties, providing businesses with greater flexibility and the ability to expand into new markets and product lines.
• Brand recognition: Brand names and logos can help to build brand recognition and customer loyalty, making it easier for businesses to establish and maintain a strong market position.
• Revenue generation: Some assets, such as licensing agreements and royalty streams. It can generate significant revenue for a business without investing any further.
• Innovation:  such as patents and copyrights, can encourage innovation by providing businesses with legal framework to protect their ideas and inventions.
• Investor confidence: It can signal to investors that a business has a strong foundation and potential for long-term success, increasing investor confidence and attracting additional investmen

DISADVANTAGES OF INTANGIBLE ASSETS.

• Uncertainty of future value: Intangible assets, such as patents and copyrights, have a limited lifespan, and their future value is uncertain. For example, a patent may become obsolete before its expiration date, or a trademark may lose its value due to changes in market conditions.
• Maintenance costs: Such assets require ongoing maintenance and protection, such as trademark renewal fees, legal fees for enforcement, and costs associated with updating and defending patents.
• Limited collateral value: Unlike physical assets, intangible assets may have limited collateral value, making it more difficult for businesses to secure financing based on their value.

GUIDELINES FOR RECOGNIZING,MEASURING AND DISCLOSING INTANGIBLE ASSETS

• The guidelines for recognizing, measuring, and disclosing intangible assets vary depending on the accounting standards used, such as International Financial Reporting Standards (IFRS) or Generally Accepted Accounting Principles (GAAP). However, some general principles apply:
• Recognition: Intangible assets are recognized if they meet specific criteria, such as being identifiable, controlled by the entity, and expected to provide future economic benefits. They must also have a measurable cost.
• Measurement: Intangible assets are initially measured at cost, which includes all directly attributable costs necessary to acquire or develop the asset. After recognition, intangible assets are typically measured at cost less accumulated amortization (for finite-lived assets) or at fair value (for certain assets like acquired goodwill).
• Amortization: Intangible assets with finite useful lives are systematically amortized over their expected useful life. The method of amortization (e.g., straight-line or accelerated) should reflect the pattern in which the asset’s economic benefits are consumed or used up.
• Impairment Testing: With indefinite useful lives, such as goodwill, are not amortized but are subject to annual impairment testing. If the carrying amount of the asset exceeds its recoverable amount (i.e., the higher of its fair value less costs to sell or its value in use), an impairment loss is recognized.
• Disclosure: Companies must disclose relevant information about their intangible assets in the financial statements, including a description of the nature and carrying amount of each class of  the amortization methods used, and any significant judgments made in determining the asset’s useful life or recoverable amount. Compliance with these guidelines ensures that companies provide transparent and accurate information about their intangible assets, enabling stakeholders to make informed decisions. 

CONCLUSION

Intangible assets are valuable yet often overlooked components in a company’s overall value. Businesses that effectively manage and leverage these assets can enjoy a significant competitive advantage in today’s economy.

For more enquiry on Intangible Assets, kindly contact us at SOW Professional Services Ltd.

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