What are Intangible Assets?
Definition: Intangible assets are long-term resources that typically lack a physical presence and have an unknown amount of future value or amount of benefits. In other words, intangible assets are typically intellectual assets the benefit the company over several accounting periods.
What Does Intangible Asset Mean?
The main examples of intangibles assets are patents, trademarks, copyrights, franchise agreements, goodwill, and other business contracts.
Since intangible assets are difficult to value and have unpredictable future benefits, they are usually recorded at cost when they are originally purchased. Most of these assets’ recorded value, with exception of goodwill, is not adjusted over time. The original cost is all the balance sheet reflects for value no matter what future benefits materialize.
Take a trademark for example. A trademark is an intellectual property that gives a company exclusive use of a brand, symbol, or logo. Trademarks are worth millions of dollars, but in many cases are rarely capitalized for that much on the balance sheet. Why not?
Remember, intangible assets are recorded at their cost not the market value. Although the Nike swoosh logo is worth billions of dollars, it cost the company less then $50 to create. Some patents and trademarks, however, do cost significant amounts of money to create, establish, and protect. Typically, legal fees to acquire intangible assets are included in their cost.
Intangible assets are usually reported in either the long-term assets category or the other assets section of the balance sheet. They are amortized over their useful life or estimated useful. For instance, patents have a legal life of 20 years. After that, the patent expires and the idea becomes public domain. Thus, patents usually have useful lives of 20 years or less.
Goodwill is the exception to all intangible assets because it is not amortized. Instead, it is test for impairment on an annual basis and adjusted accordingly.