What Are Intangible Assets? How Intangibles Create Value

In business, an intangible asset—also called an intangible—is a non-physical asset that contributes to a company's overall economic value and reputation. In other words, intangibles are abstract assets that can provide long-term value.

Examples of intangible assets include intellectual property and patents, brand recognition, software licenses, trade names, trade secrets, and trademarks. Even though these assets do not exist in physical form, entities can buy and sell them. Intangible assets are the opposite of tangible assets, which are physical assets like people, equipment, or products that have a limited life.

While both intangible and tangible assets can contribute to a company’s valuation on financial statements, they do so in different ways. Here are a few areas in which these types of assets differ:

• Book value: In accounting, book value is the measure of a company's financial assets, minus intangible assets. The balance sheets only include tangible assets, therefore book value only measures the net worth of a company's physical assets.
• Physical presence: Tangible assets have physical substance. They can be equipment, employees, real estate, physical customer lists, and other objects. By comparison, types of intangible assets include items like a company’s brand name, the goodwill of customers and employees, copyrights, computer software, and research.
• Reporting: In financial reporting, a tangible asset appears on a company’s balance sheet typically under the heading of fixed assets or long-term assets. The items typically depreciate in value over time. The majority of intangible assets do not appear on a balance sheet because it is difficult to assess the value of those assets—for example, a brand’s name recognition. The exceptions are intangible assets that a company acquires or purchases. For example, intellectual property (or IP) a company creates would not appear on the balance sheet. If the company acquired the IP from another company, that value or purchase price would appear on the balance sheet.

To be considered valuable, intangible assets should generate a measurable amount of economic benefit to business owners. There are two widely accepted accounting standards used to value intangible assets. The first is market approach: This method determines the price of an asset in relation to the price or fair value of similar assets in the marketplace today. The second is income approach: This valuation looks at the future for guidance and factors in estimated future economic benefits or future additions to cash flow to determine value.

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