Intangible Assets

Definition

Valuable business possessions that do not take physical form but have certain property rights and attributes that create value for their owners.

What It Means

Intangible assets are a special type of business possessions. While they lack physical shape and substance, they have two key attributes:

  1. Their existence can be clearly demonstrated.
  2. Their effect is to increase overall business value.

Types of intangible assets

Intangible assets can be either real or personal business property. The real property intangibles are associated with immovable real estate and, more specifically, its ownership rights. These include the rights to use, sell, lease or control access to the real estate.

The personal business property intangible assets are the type most familiar to business people. As the name implies, these intangible assets are not attached to the real estate.

Examples of intangible assets

Depending on the industry, a business can have quite a variety of intangible assets in its possession. Here are just the most common ones:

  • Customer lists
  • Licenses and distribution agreements
  • Trained and assembled workforce
  • Intellectual property such as patents, trademarks, copyrights and trade secrets
  • Business goodwill

How to spot intangible assets in a business

Since intangible assets cannot be touched or seen, it is important to know what is or is not an intangible asset.

You can use this check list when establishing the presence of intangible assets in a business:

  • Intangible assets can be identified and described. They must be a specific property, not an idea.
  • Intangible assets are legal property. Just as tangible assets, the owners can assert their legal rights to and defend their possession of intangible assets.
  • Ownership of intangible assets can be transferred. For example, the owners can sell them or give them away.
  • Evidence of intangible existence. Documentation is a typical way to establish that. Examples are customer lists, blueprints, contract documents, software source code printouts.
  • Intangible assets have a life span. They are created at a certain point in time and are eventually destroyed or lose economic value. An example is a trademark or patent that is issued on a certain date and is in effect over a period of time.

What is not an intangible asset

Things that exist in a business may not have value. Conversely, some factors may contribute to business value creation, yet fail to exist as an intangible asset. Here are some examples:

  • Business longevity
  • Barriers to entry and exclusive market access
  • Competitive advantages
  • Market share
  • Profitability potential

While not intangible assets in and of themselves, these factors can contribute to the value of an intangible asset. For example, superior profitability is a key factor which creates business goodwill, a very important type of intangible asset.

What makes intangible assets valuable

As with tangible assets, the worth of intangible assets is defined by their ability to create value for their owners. In a business, the intangible assets do so in two important ways:

  1. They are used directly in the creation of economic benefits for its owners, namely income.
  2. They work to increase the value of other business assets.

Connection between the tangible and intangible assets

Tangible assets are often used to realize the value of intangible assets. Think of an invention that requires machinery the business uses to produce innovative products. On the other hand, such an invention can be patented and then licensed to someone else.

Either way the inventors enjoy the benefits by deriving income – directly from the product sales or royalties collected. What this means is that the intangible assets have existence of their own, separate from tangible assets.

See Also