Intangible Assets: Definition, Types and Example

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Tally Solutions | Nov-28-2019

 

Intangible Assets: Definition

An intangible asset is an identifiable non - monetary asset without physical substance held for use in the production, supply of goods, services, administrative purposes and so on.

Components of Intangible Assets

Asset

An asset is a resource controlled by an enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.

Monetary Assets

Monetary assets are money held and assets to be received in fixed or determinable amounts of money.

Non- Monetary Assets

Non-monetary assets are assets other than monetary assets.

Types of Intangible Assets

Intangible assets require spending of resources or incurring liabilities on the acquisition, development, maintenance or enhancement of intangible resources such as scientific or technical knowledge, design and implementation of new processes or licenses, systems, intellectual property, market knowledge and trademarks (including brand names and publishing titles).

Patents, copyrights, computer software, etc., are common examples of items encompassed by these broad headings. Another example of an item of intangible nature is Goodwill which either arises on acquisition or is internally generated.

Recognition of Intangible Assets

An intangible asset can be recognized if it meets the definition and recognition criteria given in the standard. This standard has laid down proper recognition criteria for intangible assets. According to this standard, an intangible asset should be recognized if: -

  • It is probable that the future economic benefits generated by an intangible asset will flow to the enterprise.
  • The assets cost can be measured reliably.

Valuation of Intangible Assets

There are three approaches used in valuing intangible assets : -

  • Cost approach,
  • Market value approach and
  • Economic value approach.

The valuation concept of Intangible assets is to be selected after considering a number of factors like credibility, objectivity, relevance and practicality. The information’ available will also affect the selection

Cost Approach

Under the cost approach, expenditure incurred in developing the asset is aggregated. It means if the asset has been purchased recently, its purchase price may be taken to be the cost.

Market Value Approach

Under the market value approach, valuation is made by reference to transactions involving similar assets that have taken place recently in similar markets. The approach is possible if there is the existence of an active market of comparable intangible assets and adequate information in respect of transactions that have taken place recently is available.

Economic Value Approach

It is based on the cash flows or earnings attributable to those assets and the capitalisation thereof, at an appropriate discount rate or multiple. The economic value approach is to identify the cash flows - earnings directly associated with the intangible assets like the cash flows arising from the exploitation of a patent or copyright, licensing of an intangible asset etc.

It is possible only if cash flows from the intangible asset are identifiable from the management accounts and budgets, forecasts or plans of the enterprise.

Most common types of Intangible Assets With examples

Goodwill

Good Will is one of the most important types of intangible assets. When one company acquires another company by paying extra amount as premium for customer loyalty, brand value and other non-quantifiable assets, that premium amount is called Goodwill.

It is basically the difference between the value of tangible assets and the value paid during the acquisition of the company. Goodwill is a long - term and non-current asset which is not amortized, unlike other intangible assets that could be amortized over years.

Goodwill is only recorded in the balance sheet when one company acquires another company or two companies complete a merger. When a company acquires another company, anything which is paid beyond the net value of the company due to its brand reputation is called goodwill and would be recorded in the acquirer’s balance sheet. It is a separate line item from intangible assets.

Example: - ABC Inc., a registered company in India acquired the company XYZ Ltd having assets worth Rs. 5 Crore and liabilities of Rs. 1 Crore. So the net value of the company XYZ Ltd (i.e.,) Assets minus liabilities works to be Rs. 4 Crore ( Rs. 5 Crore ( - ) Rs. 1 Crore ).

But Company ABC INC., paid Rs. 6 Crore for the acquisition which is Rs. 2 Crore more the net value of Rs. 4 Crore.

Hence, in the given example this extra premium of Rs. 2 Crore is called goodwill which was paid due to company XYZ Ltd brand value, customer loyalty and good customer perception.

Brand Equity

Brand equity is another kind of intangible asset, which is derived from consumer perception for that company. It’s a marketing term that explains a brand value. It is a value premium which a company receives from its products or services as compared to another product or services in the same industry.

This is one of the parts of the premium paid as Goodwill by one company to another company during acquisition.

It’s a kind of intangible asset of any company which we cannot touch but have commercial value, which is responsible to increase sales of the company’s products.

Example: - PQR a branded mobile manufacturer in Kenya manufactures and mobile phones are sold under the brand name of PQR. The consumers all around the world are willing to pay a high amount of money as compared to PQR’s competitor cellphone maker, as consumer perception towards PQR phones is high due to its brand equity.

Intellectual Property

This is one of the important types of intangible assets which is a registration of creativity, it might be in technology or design. These are the most valuable assets of any corporation. It is also referred to as inventions or unique designs. These inventions or designs are legally protected by the owners from outside uses without consent.

The value of these intellectual properties arises during joint ventures, sale of these assets or licensing agreements. There are 4 different types of intellectual property as below:

Patents: - Protection of new technologies from using or developing by others. Example: -, Software patents, Design patents, etc.,

Copyrights: - Protection of authorship from using and publishing by others. Example - Most of the books published in the world cover from copyrights, prevent others not to publish without consent of the author.

Trademark: - Protection brand names, logo or unique designs of the company. Example - Logos or product designs are protected from trademarks.

Trade Secrets: - Protection of secret information of a product from using by others.

Research and Development

Results of Research & Development ( R&D ), patented or non-patented, is also a type of intangible assets. R&D is a process of acquiring new technical knowledge of any product and uses it to improve existing products or develop new products in the market.

As we know that R&D is an expense and recorded in profit & loss account, but due to its economic value which would convert more sales for the company, R&D can be considered as intangible assets. Companies invest huge money on R&D due to its economic value which is important to improve existing products or develop new products.

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