What are Intangible Assets?

Published by Thomas Herold in Accounting, Corporate Finance, Economics

'Intangible Assets' is explained in detail and with examples in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Intangible assets refer to the possessions of a company that are not physical. They are difficult to quantify for several reasons. These types of assets can not be physically measured. They also represent an unknown or undetermined cash value to a company. Several criteria for intangible assets are that they are invisible and can not be touched. Despite this interesting characteristic they are intrinsically valuable. These assets prove to be critical to the overall success of any business.

Intangible assets are typically classed in two categories. These are legal assets and competitive assets. Legal assets are easier to understand than are competitive assets. Legal assets include the wide varieties of intellectual and creative property. In this category are such important holdings as patents, copyrights, brand names, trade secrets, and trademarks.

Each of these can be owned and has value, though it is not easy to assign a value to these elements. Patents are the rights to inventions. Copyrights give ownership of writings and similar creative property. Brand names are a company’s physical name or product, such as Coca Cola, McDonald’s, or Big Mac.

Trade secrets refer to a company’s ways of making things that are not known to rivals and competitors. The formula for Coca Cola is a well-known example of a trade secret. Trademarks are the ownership of popular company or product slogans or phrases as used in advertising.

The second category of intangible assets is the competitive intangible assets. These are more abstract and difficult to grasp. Competitive assets refer to reputation and the knowledge of how to do things for the business. Such assets as these can be obtained with experience mostly. These types of assets include human capital, know how, leveraging, reputation, and collaboration. Naming such ideas is hard enough, but assigning them values is a matter of conjecture.

There are reasons why coming up with values on such intangible assets is so incredibly hard. Valuing properties means that an analyst must gaze into a company’s future to determine the ways that these assets will impact its bottom line in the coming years. In the process they take the assets’ cost and allocate it through the expected life of the asset. Some intangible assets are valued in legal terms. An intangible asset will never be given a longer life span than forty years. When the analysts and accountants do this allocation, it is referred to as amortizing the intangible assets.

Another division of intangible assets is the category of either definite or indefinite assets. With definite assets, individuals are referring to those that will endure for a specific amount of time. Contract agreements are good examples of these types.

Indefinite assets can last for an indefinite time span. A well-known example of this is a company’s brand name. Such an asset will endure so long as the enterprise keeps making the products.

Intangible assets may be hard to value, but they are still valuable for a company. Clearly an intangible asset can not have the same easily assessable value that a physical plant or other equipment would. Such intangible assets are often of great value to the company though.

There are many cases of such a property being instrumental in the company’s eventual success or failure. McDonald’s is so wildly successful because of the tremendous value it gains from consumer recognition of its brand name. This recognition can not be physically touched or seen.

The results of its impact on the company profits are unquestionably valuable to McDonald’s. The strength of their global brand pushes sales around the world on every year. These intangible assets like brands are so powerful precisely because they make an impact on customers’ choices. This allows companies to charge higher prices for their products.

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The term 'Intangible Assets' is included in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.