What Is an Intangible Asset? Definition and Type

Intangible assets can be hard to grasp. It’s kind of in their nature—in fact, it’s right there in the name. But just because you can’t touch them doesn’t mean you can’t understand them. Let’s take a close look at what intangible assets are, how to calculate their value, and how to account for them in your financial documents.

What is an intangible asset?

An intangible asset is an asset with no physical form. It’s a long-term asset that accrues value year over year. Examples of intangible assets includeintellectual property, brand recognition and reputation, relationships, and goodwill. Tangible assets, in contrast, are assets you can physically touch, which tend to fall under the PPE category—that is, “property, plant, and equipment.”

Two types of intangible assets

There are two main types of intangible assets: 1. identifiable intangible assets and 2. unidentifiable intangible assets.

1. Identifiable intangible assets

Identifiable intangible assets are assets that can be acquired or separated from the company (i.e., bought and sold) but that don’t have a physical form. Examples of identifiable intangible assets include intellectual property, like patents, trademarks, copyrights, or even non-monetary government grants, like airport landing rights or broadcasting licenses.

可辨认无形资产往往是无限期的e, meaning they stay with a company for as long as it exists. Proprietary data and algorithms all fall into this bucket. For example, a social media platform’s algorithm governing its feed is an indefinite intangible asset, because it can exist as long as the company does and will add value over the long term. It could also be separated from the company and sold to someone else, if the company chose.

2. Unidentifiable intangible assets

Unidentifiable intangible assets are a type of intangible asset that can’t be bought or sold because they only exist in relation to the company. Unidentifiable intangible assets include reputation, client relationships, goodwill, andbrand recognition. You can’t sell any of these; they’re difficult—if not impossible—to quantify, but they greatly contribute to the value of a company.

Unidentifiable intangible assets are often definite intangible assets, meaning they have a limited lifespan. Aclient relationship, for example, is only an asset for as long as it’s maintained.

How does a company acquire intangible assets?

There are two main ways a company can acquire intangible assets: by creating them from within the company or acquiring them from another entity.

Companies can develop assets in-house. For instance, to sell targeted ads, asocial media公司收集用户的行为数据,等as what they post, like, or look up on the platform—that’s an intangible asset. Or, the goodwill a creative agency builds with its freelancer talent by paying them top dollar and creating a positive work experience is an intangible asset. The viral TikTok post a hairdresser creates that boosts their salon’s reputation is also an intangible asset.

Companies can also acquire intangible assets from other companies. For example, when Facebook acquired Instagram in 2012, it gained ownership of everything underlying the app: its code, branding, design, relationships with advertisers, andintellectual property. It also acquired Instagram’s reputation and goodwill, which make up what Instagram is. There were, after all, plenty of other apps that performed similar functions, but none that would have come close to Instagram’s $1 billion valuation.

How to calculate the value of intangible assets

虽然它很容易看到有形资产contribute to a company—if you own a delivery company, for example, your business needs a vehicle to make deliveries—it can be a little trickier to quantify how intangible assets contribute. As such, it can also be hard to calculate their value and account for them on financial statements.

It probably doesn’t help that there are slightly different ways to calculate the value of different types of intangible assets. If you’re looking for a general idea of the value of your company’s intangible assets, you can use the following formula:

Intangible Assets Value = Market Value of Business - Net Tangible Assets Value

In other words, figure out the value of your net tangible assets by subtracting yourassets from your liabilities, then subtracting that number from themarket valueof your business.

How to calculate the value of goodwill

Although goodwill is a relatively abstract concept, there’s a concrete way to calculate the value of a business’s goodwill. But keep in mind that you can only do this when a company is bought or sold, because you need to know the purchase price.

To calculate, subtract the difference between the fair market value of the business’s assets and liabilities from its purchase price. In other words:

Goodwill = Purchase Price - (Assets - Liabilities)

Amortization of assets

Here’s where things get a bit trickier. To figure out the value of many intangible assets over the life of the asset, you’re going to use a process called amortization. To amortize is to gradually write off the initial cost of an asset over a given period.

You’ve probably heard of depreciation, the term used to describe how an asset decreases in value over time. A typical example is a new car, which depreciates as soon as you drive it off the lot. Amortization is conceptually similar to depreciation but is applied to intangible assets instead of tangible ones.

Not all intangible assets can be amortized—only those with a finite useful life, which refers to the set amount of time you own an intangible asset. Say your business gets a patent. In the US, that patent likely has a finite useful life of 20 years, after which it expires. But if that patent leads to your company becoming known as the best in the world at what you do, that brand recognition has no finite useful life—it has what’s known as “perpetual life.” Therefore, you can’t amortize its value.

To calculate the amortization of your assets, you’ll want to use the straight-line method for the amortization of intangible assets. The calculation is:

Amortization Expense = (Initial Value - Residual Value) / Lifespan

Residual value is the value of an asset once you’ve gotten all you can get out of it. The problem is that intangible assets don’t usually have a residual value, because once you no longer have them, they aren’t worth anything. So, for most intangible assets, you can use the following calculation:

Amortization Expense = Initial Value / Lifespan

How to record intangible assets on a balance sheet

Anything developed internally can’t be assigned a fair market value and therefore can’t count on the balance sheet. However, intangible assets that your company buys can be amortized using the method outlined above, then listed on the balance sheet under tangible assets.

For example, Meta (formerly Facebook) couldn’t list the Like button on its balance sheet because it’s an intangible asset it developed in-house. It could, however, theoretically list the “double tap” feature on Instagram, since it’s intellectual property it acquired when it bought Instagram—that is, it has a market value.