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What are Intangible Assets? How Does it Work?

IndianMoney.com Research Team | Posted On Monday, December 23,2019, 05:48 PM

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What are Intangible Assets? How Does it Work?

 

 

What are Intangible Assets?

An asset that does not have a physical existence but is a useful resource for a business or a company is known as an intangible asset. Unlike tangible asset, they cannot be touched, they merely exist in pen and paper. However, they have a current and future value.

Intangible assets are obtained for a certain time period and these are long-term assets of a company. Businesses can either develop these assets internally or can purchase them from other businesses during an acquisition.

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Intangible Assets List:

These assets do not have a physical presence, but they are beneficial for companies. The list of intangible assets includes:

  • Patents
  • Copyrights
  • Goodwill
  • Trademarks
  • Franchise agreements

Types of Intangible Assets:

In this section, we will try to understand the various types of intangible assets listed above. Here we will try to summarize the benefits and value of each of these intangible assets holds in case of a company:

Patents:

A patent is a legal right given to an entity that offers exclusivity for selling, using or producing a specific innovation. Patents can be further classified into three types – utility patent, design patent and plant patent. Each of these patents is a legal right allotted for different categories of inventions. For example, a person who is responsible for investing a new plant like a unique strain of corn can be granted a plant patent. Thus patents are intangible in nature that holds value to a business; they are listed in the company’s balance sheet.

A company can acquire a patent by purchasing it from other company or by inventing a new product. Thus the value of the patent depends on the process in which it is acquired.

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Goodwill:

Goodwill can be defined as the difference between the market value of the company and the value of the company recorded in its balance sheet. Goodwill is recorded at the time of acquisition of a business. Since goodwill is not associated with any physical objects owned by the company, thus it is a non-tangible asset that must be listed in the company’s balance sheet.

Generally, goodwill is listed on the balance sheet of the company if it buys another venture at a higher cost than what the acquired company’s balance sheet reflects.

Trademark:

A trademark is basically a symbol that is popularly used to represent a company. It may be an image, a logo, word, phrase, jingles, product names or a combination of these elements. To protect it from being copied, a company attains a trademark. Thus, it is legal protection barring other businesses from making use of the symbol in any manner.

Trademarks have enormous value as it helps the company to establish an identity and establish a bond with the consumers in terms of quality and price. Since it is connected to the business reputation they are listed as intangible assets.

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Copyrights:

Copyrights are granted to work of authorship like poetry, novel, computer software, work of art or architectural drawings etc. it is legal permission to secure the work from being copied or reproduced. A copyright lasts for a very long time and depends on several factors.

Although copyrights are granted to tangible things, they are categorized as an intangible asset because it is a legal right and can be included in a business’s balance sheet.

The value of a copyright depends on how the business has acquired it. If the product was developed internally, then the value of the copyright is equal to the value of acquiring the copyright. But if it was purchased from another company, then its costs would be equal to the cost of acquisition.

Franchise agreements:

Franchise agreements are another type of intangible asset that grants the legal right to a business to operate using the name of another company or sell a product or service developed by another company. Franchise agreements are quite common and most of the food chains, retail stores, groceries mart operate its business under the franchise system.

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How Do Intangible Assets Work?

Intangible assets are a recorded in the company’s balance sheet and are considered to be long-term assets of a company. A company’s balance sheet reflects the company’s liabilities, assets and shareholders’ equity. Now as we know, an intangible asset may not be physical but it holds immense value for businesses. So it should appear in the company’s balance sheet. However intangible assets do not always appear in a company’s balance sheet. Accounting standard mandates that a business cannot recognize an internally-generated intangible asset but only acquired intangible assets.

Though intangible assets are not physical assets, they have value because of the long-term benefits they offer to a business.

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