Imagine an asset without any physical substance, but will generate returns for your company in the near future. Think of an asset that is non-monetary and long-term, but can be very resourceful in the days to come, And an asset that you can identify but cannot touch with your hands. Yes, we are talking about “Intangible Assets”. Assets as such do not have any physical appearance or a substance but can be beneficial to you in the long run. You can use the assets to bring back tangible assets or buy some more of them in the days to come.
Intangible assets are generally specified in two classes. They can be identifiable or non-identifiable.
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A Short Guide to Intangible Assets
Identifiable Intangible Asset
The title gives us a brief heads up about the features of these kinds of assets. Basically identifiable assets can easily be separated from all other assets, the companies may even sell them! In general, computer-based assets like software can be a good example of identifiable intangible assets. Apart from them, copyrights, patents, and trademarks are good examples of such assets.
Unidentifiable Intangible Asset
These are the assets that cannot be properly identified or separated from its mother company. They are usually generated from within and are mostly related to human psychology, something that cannot be sold or identified.
For example, goodwill is something a company cannot buy or sell. They might seem like a simple mental relief, but no. When you buy a product from a company, if there is goodwill and a good reputation out there, you would not mind paying extra money for it. This extra money can be considered as goodwill. Another very important unidentifiable intangible asset would be reputation and branding.
A company can sell away its logos, products, trademarks, and everything but they can never sell or buy a good reputation. The best part about being a brand and having a good reputation is that, as time passes, your brand will be known to more and more people in the future, doubling your profits.
Types of Intangible Assets
Goodwill is a very unique intangible asset, considering the fact that it cannot be identified or in no way meets the IFRS definitions. It never amortizes, doesn’t have a specific value of cannot be taken into account as a substance.
But that doesn’t mean goodwill brings about no returns or any financial benefits to the company. It actually does but on a larger scale. Say, a farm has a very good reputation and goodwill attached to it. Now if someone is to buy it, he has to pay a certain amount of money for the business. Now there are values of its individual assets, but the difference between the farm’s price as a whole and the individual asset price can be deemed as the rate of goodwill. If the buyer pays $40 million for a farm where the core value of assets was $20 million, then the value of goodwill would be a total of $20 million. But the only way to put this on the balance sheet is for a company to acquire another business.
2. Intellectual Properties:
There are intangible goods that can be identified, too. These do not have monetary values right away, but in the future, they might come handy to sell or buy farms or companies. The concept of intellectual property is quite simple. If you have created something with your own mind and creativity, then you reserve the right to own the product while other organizations or farms cannot copy your product. This is known as having the rights to intellectual properties.
The list of intellectual properties can be long, but the most common ones include patents, licenses, trademarks, and copyrights. These are assets that can be used later in the future. Say, if you have invented a product that you have a copyright on, then for the next 20 years only you can create it. After 20 years if you feel like selling it then you can sell the patent or copyright of that product at a pretty high price, so that’s a plus!
3. Government Grants:
Lastly, this is another intangible asset that is provided by the government. Quite often the government decides to provide financial help to certain organizations and companies that fulfill a few requirements. There are two methods to do the accounting here, one is the net method while the other one being gross method.
These kinds of grants come with certain regularities and requirements. They may be regarding the level of employment or pollution control. If the government finds anything unusual in the process, or any dissimilarities, they have the right to ask for refunds from the companies. Some of the grants include ‘forgivable loans’, generally provided to those who are in a mass crisis. The government will only grant financial help if the company can make sure that they will comply with the regulations set by the government and actually use the money.
Ways to Value Intangible Assets
As we have stated before, intangible assets are very difficult to even identify, let alone figure out the values. But people can do the impossible, and so they have figured out not one, not two, but three ways to value intangible assets.
1. Cost Method:
In this process, you have to figure out the cost for another business to actually copy your intangible asset.
2. Market method:
Here you compare your intangible asset with the asset of another company that has a similar business. Use the values given for the comparison.
3. Income method:
This process includes you measuring the benefits of the future, the benefit it might bring to other businesses if applied. Cash flow projections are required for this.
Intangible assets may seem like a far-fetched idea to people who believe in direct actions and immediate outputs. It is, however, true that intangible assets are not guaranteed to provide you with returns. The unidentifiable assets may not turn out good for you; your company may not have a brand value or reputation. Even your company’s patents may not turn out to be as ludicrous as expected. Even so, these assets are quite useful in the long run, so having them should be considered as a blessing.