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Intangible Assets: Defined & Explained With Examples

Intangible Assets: Defined & Explained With Examples
Lauren Ward
Lauren WardUpdated January 3, 2023
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Not all company assets are things you can see and touch, like equipment, property, or inventory. Some business assets are actually nonphysical in nature, such as a copyright, patent, or your brand name. These are referred to as intangible assets.Just because an asset isn’t a material object doesn't mean it doesn’t have significant value. As a small business owner, it’s important that you recognize what your intangible assets are and understand how to value and amortize them. Here’s what you need to know.

What Is an Intangible Asset?

An intangible asset is a nonphysical asset that provides long-term economic value to a company. Common examples of intangible assets include a business’s reputation, copyrights, trademarks, and brand recognition. In some cases, intangible assets can have more value than a firm’s physical, or tangible, assets.Like all assets, intangible assets are expected to generate economic returns for the company in the future. As a long-term asset, this expectation extends for more than one year or one business operating cycle.Though intangible assets have value, they can’t be used as a guarantee (or collateral) to get different types of small business loans. That’s because, unlike tangible assets, lenders can’t seize an intangible asset should the business fail to repay the loan.

How Do Intangible Assets Work?

Intangible assets can be classified as indefinite or definite, depending on whether there is a foreseeable end to the intangible asset’s value. A company’s name, for example, would be considered an indefinite intangible asset, since it stays with the business for as long as that business continues to operate. Copyrights and patents, on the other hand, are only valuable until they expire, which means that they’re classified as definite intangible assets.

How Are Intangible Assets Valued?

While putting a value on tangible assets is relatively easy, coming up with a value for an intangible asset, like brand recognition, can be challenging. While there’s no simple formula for valuing an intangible asset, there are some approaches, such as:
  • The market approach This involves looking for similar assets that have been exchanged or purchased to come with a value of your own intangible asset.
  • The cost approach With the method, you consider the cost of developing the asset, along with an expected rate of return. This might work for a software program your business developed.
  • The income approach If the intangible asset produces income, you might be able to convert that into a value. This could work for intangible assets like copyrights and patents.
In many cases, however, it is not possible to give a value to an intangible asset. If that’s the case, the asset cannot be reported on your balance sheet.Recommended: How to Value a Small Business 

Identifiable vs Unidentifiable Intangible Assets

Identifiable intangible assets are nonphysical assets that can be separated from other assets, valued, and even sold by the company. Identifiable intangible assets include intellectual property, patents, copyrights, trademarks, trade names, and software. Unidentifiable intangible assets, by contrast, are nonphysical assets that can’t be bought or sold because they only exist in relation to the company. Examples of unidentifiable intangible assets include reputation, client relationships, goodwill, and brand recognition. You can’t sell any of these, plus they’re difficult –  if not impossible – to quantify. Nevertheless, they greatly contribute to the value of a company.

Tangible vs Intangible Assets

Unlike intangible assets, tangible assets are physical in nature, can be touched and seen, and are generally easy to measure and assign a monetary value to. In the event of a natural disaster like a flood or fire, a tangible asset could be destroyed, whereas an intangible asset typically would not be damaged.Another key difference: When securing a loan, lenders accept tangible (but not intangible) assets for collateral.Tangible assets include:
  • Cash
  • Heavy equipment
  • Real estate
  • Buildings
  • Office furniture
  • Fixtures
  • Computers
  • Vehicles
  • Inventory

Intangible Asset Examples

1. Goodwill

Goodwill is an intangible asset that is often recognized when one company acquires another. Things like the value of a company’s name and brand, customer loyalty, or even good employee retention are examples of goodwill. In an acquisition, goodwill represents the cost paid by a business in excess of the purchased business’s net worth. For example, a firm might pay $6 million for a company valued at $5 million, giving the acquired company a goodwill value of $1 million based on its business reputation, proprietary technology, and/or other intangible factors.Recommended: What Is Goodwill Accounting?

2. Brand equity

Brand equity is an intangible asset that is based on consumer perception of that company. It represents the worth of a brand and its ability to generate sales and profit for the company. When a company has a positive brand equity, customers may be willing to pay more for its products, even if they could get the same thing for less from a different company. 

3. Intellectual property

Intellectual property refers to creations of the mind, such as inventions, designs, patents, trademarks, trade secrets, and literary and artistic works. Research and development (R&D) is another type of intellectual property, and refers to when a company performs research with the goal of developing a new product or solution. The owner of an intellectual property typically legally protects it from outside use without consent.

4. Licenses

A license is another example of an intangible asset. It can be something that legally enables a business to operate and make money in a particular location or industry. A business may also purchase licensing to use a particular software in order to operate and make sales.

5. Customer Lists

Customer lists like mailing lists take a long time to build, and are valuable intangible assets because they can help businesses increase or sustain profits. If you have a list of prior customers or people that are likely to become customers in the future, you can use this information to create targeted marketing campaigns.

Amortizing Intangible Assets

Since intangible assets are assets, you may wonder if they can be depreciated. This is where amortization vs depreciation comes in. With intangible assets, we don’t use the word depreciated. Instead, we use the word amortized, but it is essentially the same thing.  Amortizing intangible assets is the process of spreading out the cost of a nonphysical asset over the course of its intended or useful life. Some intangible assets have a set lifespan due to expiration dates, but many don’t. As a result, most intangibles are required to be amortized over a 15-year period for tax purposes.Accountants commonly amortize intangible assets using the straight-line method. This involves taking the cost or value of the intangible asset and dividing it by the number of years it will provide economic value for the company. This will yield a per-year amortization amount. Indefinite life intangible assets, such as goodwill, are not amortized. Rather, these assets are assessed each year for impairment (which is when the carrying value exceeds the asset's fair value).

Acquiring Intangible Assets

Intangible assets can be acquired through a variety of means. These include:
  • Making them (through R&D or another form of creation) 
  • Buying them from another business (patents, for example, can sometimes be bought)
  • Buying a business (when a company is purchased, both tangible and intangible assets are acquired)
  • Government grants (sometimes the government encourages growth by giving intangible assets, such as licenses to operate or land usage rights, to a company)
Recommended: How to Get a Business Acquisition Loan 

How Intangible Assets Interact With Balance Sheets

Assets normally appear on a company’s balance sheet, which is a key financial statement that contains details of a company's assets and liabilities at a specific point in time. Intangible assets, however, may or may not appear on a company’s balance sheet. Generally, intangible assets only appear on the balance sheet if they have been acquired in the process of purchasing another business or bought individually. For example, f company A buys a patent from company B for an agreed-upon price of $10,000, company A would record a transaction for $10,000 in intangible assets that would appear under long-term assets on the balance sheet.Internally-created intangible assets, like Goodwill, however, are not included on the balance sheet. That’s because these assets don’t have an identifiable fair market value.Recommended: Reading Balance Sheets: All You Need to Know

The Takeaway

An intangible asset is a nonphysical asset that provides economic value to a company, such as a patent, brand, trademark, or copyright. Though an intangible asset can’t be picked up or physically used to make money, it holds value and can help a business produce income. Businesses can create or acquire intangible assets. Taking stock of your company’s intangible assets and knowing their value can give your small business an edge, whether you’re looking to attract an investor or applying for a small business loan.

3 Small Business Loan Tips

  1. Generally, it can be easier for entrepreneurs starting out to qualify for a loan from an online lender than from a traditional lender. Lantern by SoFi’s single application makes it easy to find and compare small business loan offers from multiple lenders.
  2. If you are launching a new business or your business is young, lenders will consider your personal credit score. Eventually, though, you’ll want to establish your business credit.
  3. Traditionally, lenders like to see a business that’s at least two years old when considering a small business loan.

Frequently Asked Questions

What are the most common intangible assets?
How can you identify intangible assets?
Where do you put intangible assets on a balance sheet?
Photo credit: iStock/gpointstudio

About the Author

Lauren Ward

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
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