What is an Intangible Asset?
An intangible object is something that cannot be touched, is hard to describe, or assign an exact value to. It does not have a physical nature or presence but still has value.
In accounting terms, an intangible asset is a non-physical resource with a financial value that has been acquired by a third party. A company can develop intangible assets internally which can be very valuable, but these won’t be recognized on the balance sheet.
According to the IFRS Standard (IAS 38) for recognizing and measuring intangible assets, an intangible is an identifiable non-monetary asset without physical substance. Goodwill, brand recognition and intellectual property, such as patents, trademarks and copyrights, are all intangible assets.
Intangible assets which have been acquired by a third party are recorded on the balance sheet at their purchase price. Purchased intangibles are divided into two categories: finite and infinite. In both cases, intangibles are not revalued upwards. Finite intangibles are amortized the same way you would calculate straight-line depreciation of PP&E. Infinite intangibles are revalued using a present value calculation and impaired if their value has fallen. For example, Coca-Cola owns the Coca-Cola brand which is estimated to be worth over $50 billion. The brand is intangible and was developed internally so it’s not recorded anywhere on the balance sheet.
Key Learning Points
- An intangible asset is a resource controlled by an entity with no physical substance such as licenses, patents and goodwill
- They are reported on the balance sheet and amortized over their useful economic life
- Goodwill only arises as the result of a business acquisition and represents the difference between what a company pays to acquire another company and the market value of that target company’s individual assets
- Intangible assets are often very difficult to accurately value and are often valued as the difference between the market value and net tangible value of the business
- An impairment is an extraordinary loss in the value of an asset and intangible assets with and indefinite life should undergo regular impairment tests to accurately report its net book value
Examples of Intangible Assets
Items that are considered intangible assets are listed below:
|· Brand equity (recognition)
· Company reputation
· Intellectual property
|· Customer lists
· Domain names
· Employment contracts
· Lease agreements
· Client relationships
· Trade secrets
· Computer Software
· Import Quotas
Calculating Intangible Assets
The formula below can be used for calculating the total (on and off-balance sheet) financial value of a company’s intangible assets:
Market Value of Business – Net Tangible Assets Value = Intangible Assets Value
It should be noted that this formula only gives an approximate value. Market value is the current value of the company in the stock market.
Intangible Assets in the Balance Sheet
The value of tangible and intangible assets are reported on the company’s balance sheet.
The following extract is taken from the balance sheet of the Coca Cola Company showing the company’s assets with comparative amounts for 2018 and 2017.
The Coca-Cola Company – Extract from Balance Sheet 2019
As seen above, the value of Coca Cola’s intangible assets has increased to $17,270m (2018) from $16,636m (2017).
Impairment means ‘damaged’ or ‘spoiled’. According to the IASB, an intangible asset with a finite useful life is amortized and should undergo impairment testing regularly. Moreover, an intangible asset that has an indefinite useful life is not amortized but is tested annually for impairment. When the intangible asset is disposed of, the gain or loss on disposal is included in the income statement.
Where the carrying value of goodwill cannot be recovered through sale or use, it is said to be impaired. The goodwill is impaired when the business will not be able to recover the amount recorded in the company’s balance sheet, either through use or through a sale. In conclusion, the asset value in the balance sheet must be reduced.
If the company believes that impairment may have taken place, an impairment review must be conducted. It involves comparing the net book value with the cash-generating ability of the asset. If the review shows that there has been an impairment of the recorded net book value, the loss in asset value (reduced) results in an expense in the income statement.
The International Accounting Standards Board (IASB) is an independent, private-sector body that develops and approves the International Financial Reporting Standards (IFRS). The IASB operates under the oversight of the IFRS Foundation.