What are Intangible Assets?

Intangible assets are assets that have no physical substance. Organizations that have invested large sums to establish brands may find that the value of their intangible assets greatly exceeds the value of their physical assets. An organization usually also has a large number of tangible assets, such as buildings, land, and machinery.

Accounting for Intangible Assets

In order to record an intangible asset in the accounting records, it must be purchased (not developed internally) and have a useful life of longer than one accounting period. Once recorded as an asset, an intangible asset is amortized over its useful life, typically using the straight-line method of amortization. Amortization is the same as depreciation, with the intent of gradually reducing the carrying amount of the asset to zero, thereby accounting for the gradual consumption of the asset.

If an intangible asset is considered to have an indeterminate life, it is not amortized at all. Instead, it is periodically tested to see if the recorded cost of the asset has been impaired. Impairment occurs when the fair value of the asset declines below its carrying amount. If there is impairment, the difference between the fair value and carrying amount is charged to the asset, resulting in a reduction of the carrying amount to its fair value.

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Accounting for Intangible Assets

Intangible Asset Valuation

An intangible asset is recorded at its acquisition cost. Thus, if a patent is purchased from a third party, the price paid for the patent is recorded as the intangible asset. If a patent is acquired as part of a business acquisition, the patent is recorded by the acquirer at the allocated cost assigned to the patent, which is derived from its fair value on the acquisition date.

Presentation of Intangible Assets

When intangible assets have been recorded in a firm’s accounting records, they are then aggregated into the fixed assets line item on its balance sheet. Alternatively, they may be listed as a separate line item on the balance sheet. In either case, they are categorized as long-term assets. An example of this presentation appears in the following exhibit.

Using Intangible Assets for Collateral

An intangible asset cannot typically be used as collateral on a loan, since it is not easily liquidated to compensate the lender.

Examples of Intangible Assets

Several examples of intangible assets are noted below:

Trademarks. A trademark is a legally protected symbol, name, logo, or slogan associated with a business or product. It helps differentiate a company's goods or services from competitors and builds brand recognition. Trademarks can be renewed indefinitely as long as they remain in use and legally protected.
Patents. A patent grants exclusive rights to inventors or companies for a new product, process, or technology for a specific period (typically 20 years). This legal protection prevents others from making, using, or selling the patented invention without permission. Patents can be valuable assets, particularly in industries like pharmaceuticals and technology.
Copyrights. A copyright protects original works of authorship, such as books, music, films, and software, for a set period (often the creator’s lifetime plus 70 years). It grants the creator exclusive rights to reproduce, distribute, and display their work. Copyrights generate revenue through licensing, royalties, and sales.
Franchises. A franchise is an agreement that allows a franchisee to operate a business using an established company's brand, processes, and support. The franchisor grants rights in exchange for fees or royalties, providing access to trademarks, training, and a proven business model. This intangible asset helps expand business operations while maintaining brand consistency.
Brand recognition. A company’s brand represents its reputation, customer perception, and market presence. Strong brand recognition increases customer trust and loyalty, allowing businesses to charge premium prices. While difficult to measure, brand value can significantly impact a company’s financial success.
Licenses and permits. These are official permissions granted by governments or regulatory agencies to conduct specific business activities. Examples include broadcasting licenses, taxi medallions, and pharmaceutical drug approvals. Since they provide a competitive advantage or legal compliance, they are considered intangible assets.
Customer relationships. Established relationships with customers, such as long-term contracts, loyalty programs, or repeat business, are valuable intangible assets. Businesses that maintain strong customer relationships often generate consistent revenue and reduce marketing costs. These relationships can increase a company's valuation during mergers and acquisitions.
Trade secrets. Trade secrets include confidential business information, formulas, or processes that provide a competitive advantage. Examples include the Coca-Cola recipe or Google's search algorithm. Unlike patents, trade secrets are not publicly disclosed and can last indefinitely if kept confidential.
Software and proprietary technology. Custom-developed software and proprietary technology provide businesses with unique capabilities that enhance efficiency or generate revenue. Companies like Microsoft and Apple own software platforms that drive significant value. These assets are often amortized over their useful life but can continue generating income for many years.