Intangible Assets: Meaning, Examples, & Types

These assumptions must be with regard to circumstances existing over the life of the asset. You need to recognize various types of intangible assets if they meet the following what is the difference between a general ledger and a general journal criteria. This is irrespective of whether you purchase or self-create such assets. Accordingly, the useful life assessment changes for such intangible assets.

• Intangible assets are business assets that do not have a physical existence, and the non-physical existence of these assets helps in the inflow of economic benefits.
• At the end of the first year, the copyright appears on the balance sheet of the automobile company as $750,000, the remainder of its historical cost.
• Goodwill is a miscellaneous category for intangible assets that are harder to parse individually or measured directly.
• It’s common to see companies combine liabilities and stockholders’ equity into one section called Liabilities and Shareholder’s Equity.

However, whereas tangible assets are depreciated, intangible assets are amortized. Intangible assets add to a company’s future worth and can be far more valuable than tangible assets. Both of these types of assets are initially recorded on the balance sheet, which helps investors, creditors, and banks assess the value of the company. Furthermore, you can use various methods to calculate the amortization expense to be charged to the intangible asset.

The Balance Sheet Equation

Anything your company develops that holds value, such as a specific design that your company created or a software program that was developed, are also considered intangible assets. All intangible assets are recorded on your company’s balance sheet. An asset is considered a tangible asset when it is an economic resource that has physical substance—it can be seen and touched. Tangible assets can be either short term, such as inventory and supplies, or long term, such as land, buildings, and equipment. The useful life is the time period over which an asset cost is allocated.

While intangible assets don’t have any direct impact on financial projections or closing entries, they do figure into your cash flow totals. In most cases, intangible assets are considered long-term assets because they provide long-term value to a company and cannot be quickly converted to cash. Basic accounting principles tell us that assets are anything of value that you own.

Non-monetary assets

We can see therefore that in valuing a company we need to give intangible assets serious consideration. Understanding and valuing intangible assets are crucial for an accurate assessment of a company’s worth. For business owners, grasping their company’s intangible assets can form strategic decisions and help maximize value.

The assets section of the balance sheet breaks assets into current and all other assets. In general, current assets include cash, cash equivalents, accounts receivable, and assets being sold. The subsequent measurement of intangible assets can be done using the cost model and revaluation model. If the life of intangibles is indefinite, no amortization is charged. However, annual testing for impairment needs to be performed to ensure the appropriate value of the assets is reflected in the financial statement. Similarly, impairment testing needs to be performed if there is any indication for the impairment in the value of assets.

Research and Development

Provided, it does not meet the intangible assets definition and recognition criteria. Furthermore, you do not amortize the intangible assets having indefinite useful life. Besides, you also have to review the useful life of such assets in each accounting period. This is done to know if the conditions exist for these types of intangible assets to have an indefinite useful life. For example, a business may create a mailing list of clients or establish a patent.

• Because fair value was not easy to determine for many of those assets, Enron officials were able to manipulate reported figures to make the company appear especially strong and profitable2.
• For example, the 2001 collapse of Enron Corporation was the most widely discussed accounting scandal to occur in recent decades.
• This process is referred to as the production of consolidated financial statements.
• In February 2008, Microsoft offered over $44 billion in hopes of purchasing Yahoo! for exactly that reason.
• In simple terms, an intangible asset is usually a right that helps the owner to generate revenues.
• However, if the life of an asset cannot be estimated, no depreciation is charged, but impairment is assessed annually.

Annual amortization is $250,000 ($1 million cost/4 year life) if the straight-line method is applied (which is normal for intangible assets). Goodwill only shows up on a balance sheet when two companies complete a merger or acquisition. When a company buys another firm, anything it pays above and beyond the net value of the target’s identifiable assets becomes goodwill on the balance sheet. Say a soft drink company was sold for $120 million; it had assets worth $100 million and liabilities of $20 million.

Some final thoughts on intangible assets

It is important to protect these financial assets and to put a value on them on the balance sheet. Below is a portion of the balance sheet for Exxon Mobil Corporation (XOM) as of Dec. 31, 2021, as reported on the company’s annual 10-K filing. Negative brand equity occurs when consumers are not willing to pay extra for a brand-name version of a product. Positive brand equity occurs when favorable associations exist with a given product or company that contribute to a brand’s value.

Several industries have companies with a high proportion of intangible assets. As mentioned above, Amortization is typically charged https://online-accounting.net/ as an expense. However, there are times when you use the economic returns generated from such an asset to produce other assets.

Types of Intangible Assets

Both amortization and depreciation are important accounting terms that you need to understand. Goodwill is a premium paid over the fair value of assets during the purchase of a company. Hence, it is tagged to a company or business and cannot be sold or purchased independently.

This is because it will help us in understanding the three important characteristics of Intangible Assets. These materials were downloaded from PwC’s Viewpoint (viewpoint.pwc.com) under license. 1Unique accounting rules have long existed in certain industries to address unusual circumstances. College accounting textbooks such as this one tend to focus on general rules rather than delve into the specifics of accounting as it applies to a particular industry.