Accounting 101: What Are Intangible Assets?

Accounting 101: What Are Intangible Assets?

In basic terms, intangible assets can’t be seen but have a long-term value for your business, and a typical example of what this represents would be the perceived value of your company’s reputation.

When something is intangible it can’t be seen or exist physically, but it is abundantly clear that your business can accumulate intangible assets as it grows, and when you are calculating the value of your firm it is important to include these sorts of assets in your calculations.

How and why there are intangible assets in a business

It is straightforward enough to arrive at a current valuation figure for tangible assets such as equipment and things such as computer hardware that your business owns but it can be a slightly more challenging job to calculate your business’s net worth when you are including intangible assets.

However, it can be the case that some companies have intangible assets that have a value that far exceeds what their tangible assets are worth.

A global brand would be a prime example where the reputation and brand name may well have a value that exceeds the physical assets it owns.

It is also worth pointing out that even though intangible assets clearly have a value within a business it is not something that can be used to guarantee a loan because it is not something that can be taken to pay a debt if the loan is defaulted upon.

How do you calculate the value of intangible assets?

It is far easier to calculate the value of physical assets but there is a recognized accounting formula that is usually used in order to arrive at a valuation for any intangible assets your business has.

Firstly, you need to arrive at a market value for the business that you would accept for the company and then deduct the net value of any tangible assets you have. The figure you arrive at after that calculation will be the estimated value of your intangible assets.

Examples of intangible assets

There are a number of different items that will often be recognized as intangible assets, even if they don’t actually appear on the balance sheet.

For instance, if your company has developed an excellent reputation and enjoys a reasonable amount of brand recognition those two things would definitely have value as an intangible asset.

Other items that could also qualify would be your domain name, especially if you trade online and it attracts a lot of traffic each month. If you have a licensing agreement in place that could also add value to your business, as could any copyrights and intellectual property.

Finally, it should be noted that, in accounting terms, there are two types of intangible assets.

Limited-life intangible assets are deemed to have a limited life and their value will not last forever. A good example would be a patent that expires within a specific timeframe, which would be amortized over that period of time.

An unlimited-life intangible asset would be something like a brand or trademark, which would only lose its total value if the business ceased to trade.

When you are looking to establish the true value of your business make sure you take into account the hidden value of intangible assets.

Post Comment