If a company creates something new and unique, it can get a patent. In May 2014 the Board amended IAS 38 to clarify when the use of a revenue‑based amortisation method is appropriate. Please read what you should know about intellectual property valuations. The meaning of intangible is something that can’t be touched or physically seen, according to the Cambridge Dictionary.

Individuals or businesses may own, sell, or use them in operations. Fixed tangible assets, such as buildings, land and machinery, are long-term holdings that typically appreciate or depreciate over time. Current tangible assets, including inventory and cash, are more liquid and intended for short-term use or conversion. However, if the intangible asset is indefinite, such as a brand name or goodwill, then it will not be amortized.

A few examples of such assets include furniture, stock, computers, buildings, machines, etc. Financial assets can include stocks, corporate and government bonds, and other types of securities. They tend to be liquid unlike fixed assets and they’re valued according to their current price on the relevant market. An intangible asset may be seen as definite or indefinite, what is an intangible asset such as a contract or legal arrangement (for example, a brand name). The two types of tangible assets are current (quickly convertible into cash) and fixed (not easily convertible into cash). Yet they are critical for anticipating risk, building resilience, and creating long-term enterprise value.

Using Intangible Assets to Evaluate Stock Performance

• Taxation of royalties adds complexity, particularly in international contexts.
• Intangible assets, unless acquired, may not always be recorded at all.
• Let’s examine this through a real-life example – Coca-Cola’s brand recognition.
• GAAP guidance for asset recognition, amortization, impairment testing and financial statement presentation.

This oversight is particularly likely if intangible assets are internally developed, making their financial impact less immediately visible. Businesses often create intangible assets through marketing activities, displaying creativity and innovation or building customer loyalty. A well-known brand, for example, holds significant value due to consumer recognition and trust, even though it cannot be physically measured. Examples of intangible assets include intellectual property, brand equity, and patents. The cost of generating an intangible asset internally is often difficult to distinguish from the cost of maintaining or enhancing the entity’s operations or goodwill.

Intangible asset valuation helps protect intellectual property rights and enables firms to claim fair compensation in legal disputes. Knowing the value of a company’s IP is crucial for strategic planning and maximizing its economic potential. Valuing intangible assets is a complex task that requires specialized knowledge and methodologies.

Small Businesses

• Current assets can be easily used and converted to cash such as inventory.
• Some of them may have acquired other firms and some may not have.
• For instance, a software company may license its proprietary code to multiple clients while retaining control over its intellectual property.
• Goodwill is recorded as an intangible asset on the acquiring company’s balance sheet under the long-term assets account.

For example, a music publisher might earn royalties based on song streams, while a pharmaceutical company may receive royalties from drug sales based on patented research. Impairment addresses declines in an asset’s recoverable amount, triggered by market shifts, technological changes, or internal factors. It involves comparing the asset’s carrying amount to its recoverable amount—the higher of fair value less disposal costs or value in use. If the carrying amount exceeds the recoverable amount, an impairment loss is recognized. Explore the nuances of intangible property, including its types, valuation methods, and accounting practices for effective management.

Creating vs. Acquiring Brand RecognitionCoca-Cola did not buy its brand recognition; instead, it has built and nurtured this valuable asset over the years. Coca-Cola’s consistent messaging and iconic visual identity have made it one of the most recognized brands globally. A retail store’s inventory, for example, directly influences sales, while its physical location affects customer access. Personal tangible assets like real estate and precious metals serve as investment vehicles that may provide stability or hedge against inflation. However, properly valuing intangibles is critical, especially during the sale of a company, as these assets can be a big determiner of the purchase price above that of the tangible assets.

“Researchers and practitioners have reached a consensus that intangible assets play a vital role in the success and survival of firms in today’s economy. Disclosures must include a detailed reconciliation of the beginning and ending balances of intangible assets, highlighting additions, disposals, amortization, and impairment losses. This breakdown provides a clear picture of how an entity’s intangible asset portfolio evolves. In some cases, the cost approach is utilized, particularly for internally developed intangible assets where historical cost data is accessible. This approach considers the cost to reproduce or replace the asset, adjusted for obsolescence and other factors. Entities must document the assumptions and methodologies employed in the valuation process, as these underpin the credibility of the financial statements and facilitate audit scrutiny.

Therefore, understanding and managing IP is essential for maximizing business value. Intangible assets are crucial in today’s economy as they foster competitive advantages and innovation, often impacting a company’s market value more than tangible assets. Their influence on profits and sales underscores their importance in driving business success. Effective due diligence on IP assets during M&A helps identify risks and validate the potential of these intangible assets. Proper management of intellectual property post-acquisition is essential for maximizing its strategic value and integrating it into existing operations.

Unlike physical assets, which are easily quantifiable, intangible assets are not physical in nature and include things like intellectual property, brand equity, and knowledge capital. This introductory section will explore what intangible assets are, why they are significant, and how they can be valued—an essential aspect of modern financial analysis and business planning. Goodwill is a type of intangible asset that arises from the acquisition of another business. It represents the excess of the purchase price over the net assets acquired and can include items such as customer relationships, brand recognition, and proprietary technology. Goodwill is not amortized but instead assessed for impairment annually.

Other intangible assets have an unlimited life and are not amortized. If there is an impairment loss, the amount on the balance sheet is reduced and the loss is reported on the income statement. Non-identifiable intangible assets, such as goodwill, lack separability and often arise from the overall business reputation or customer relationships. Recognizing these categories aids in identifying and valuing the various intangible assets a company may possess, each contributing uniquely to the overall asset value. Intangible assets can be broadly categorized into identifiable and non-identifiable assets. Identifiable intangible assets are separable or arise from contractual or legal rights.