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An intangible asset is a useful resource without any physical presence. The assets such as trademarks, copyrights, patents, goodwill etc are intangible assets. You can now understand that such assets produce economic benefits but you can’t touch them like other assets such as PPE.
Assets can be classified into different types based on
- Convertibility – Current Assets and Fixed Assets
- Physical Existence – Tangible Assets and Intangible Assets
- Usage – Operating Assets and Non-operating Assets
To learn more about the types of assets, refer to the article – Meaning and Different Types of Assets.
In this article, we will focus on understanding the meaning and types of Intangible Assets.
Meaning of Intangible Assets
An intangible asset is an asset that does not have any physical existence. Like tangible assets, you cannot touch or feel them but they have a current and future value. They are long-term assets of a company having a useful life greater than one year. A business can either develop these assets internally or can acquire them in a business combination.
Types of Intangible Assets
Following are the common types of Intangible assets:
It is a type of intangible asset that is recognized when one business acquires another business. Goodwill equals the cost of purchase of the business by the purchasing company minus the value of net assets of the purchased company. It represents the business reputation of a company.
Let’s say, A Ltd. acquires B Ltd. for $ 10 million. At the time of purchase, the fair value of net assets (assets minus liabilities) of B Ltd is $ 7 million. Here the difference between the cost of purchase $ 10 million paid by A Ltd. and $ 7 million net fair value of the assets of B Ltd. is the value of goodwill which amounts to $ 3 million.
Franchise agreements are another type of intangible asset that grants the legal right to a business to operate using the name of another company or sell a product or service developed by another company. These are classified as assets because the business owners reap monetary gains with the help of these intangible assets.
For example, many fast food restaurants like KFC, McDonald’s, Subway, Dominos, etc. operate using a franchise system. Here the franchisor grants varying amount of autonomy to the franchisees to use the brand name and benefit from franchisor’s extensive marketing.
A patent is a type of intangible asset that grants a business the exclusive right to manufacture, sell or use a specific invention. A company can purchase the patent from another company or it can invent a new product and receive a patent for it.
Copyright grants an extensive right to the business to reproduce and sell a software, book, journal, magazine, etc. It is an intangible asset used to secure legal protection by preventing others from reproducing or publishing a work of authorship.
A trademark is an intangible asset which legally prevents others from using a business’s name, logo or other branding items. It is a design, symbol or a logo used in connection with a particular product or a business.
Intangible assets lack physical substance but they have a value because of the long-term benefits, exclusive privileges and rights they provide to a company. Just like other assets, companies account for intangible assets in the balance sheet. However, the cost of intangible assets is periodically allocated to the expense during the useful life of the asset or its legal life, whichever is less.