Intangible Assets: A Simple Explanation

What are Intangible Assets?

Intangible assets are assets that you can’t see or touch, but they have significant value for a business. They can be created by the company (internally) or purchased from another company. These assets are listed on the company’s balance sheet, typically under non-current assets, if they meet certain accounting criteria.

Types of Intangible Assets

• Patents: Exclusive rights to produce or sell an invention for a specific period.

• Trademarks: Unique signs, symbols, or names that identify a brand or product.

• Copyrights: Legal rights protecting creative works, like books, music, or software.

• Goodwill: Value of a company’s reputation, customer relationships, and brand strength (arises during acquisitions).

• Franchises: Rights granted to operate under a company’s business model and brand.

Intangible Assets vs. Tangible Assets

Tangible assets are physical, like buildings, equipment, or inventory. Intangible assets are non-physical but often just as valuable. For example, Coca-Cola’s brand is an intangible asset worth billions, even though it doesn’t physically exist.

An Example of an Intangible Asset

Imagine a tech company develops software and patents it. This patent is an intangible asset because it gives the company exclusive rights to profit from its invention. If another company wants to use the software, they must pay for licensing, which adds to the asset’s value.

Key Takeaways

• Intangible assets are non-physical but valuable, like patents, trademarks, and brand reputation.

• They often provide a competitive edge and are crucial to a company’s success.

• Some intangible assets are amortized over time, while others, like goodwill, are tested for impairment.

Understanding intangible assets helps investors see beyond the physical resources of a company and assess the value of its brand, innovation, and intellectual property.

The information is provided for educational purposes only and does not constitute financial advice or recommendation and should not be considered as such. Do your own research.