Intangible assets are typically nonphysical assets used over the long-term.Intangible assets are often intellectual assets.Proper valuation and accounting of intangible assets areoften problematic, due in large part to how intangible assets are handled. Thedifficultyassigning value stems fromthe uncertainty of theirfuture benefits.Also, the useful life of an intangible asset can be either identifiable or non-identifiable. Most intangible assets are long-term assets meaning they have a useful lifeof more than a year.
Examples of intangible assets that areintellectual propertyinclude:
Intangible assets can alsoinclude internet domain names, service contracts, computer software, blueprints, manuscripts,joint ventures, medical records, and permits. Brand equityis an intangible assetsince the value of a brand is determined by the perception of the company's customers and is not a physical asset.
In short, intangible assets add to a company's possible future worth and can be much more valuable than its tangible assets.
How Intangible Assets Show on the Balance Sheet
Intangible assets are only listed ona company's balance sheet if they are acquired assets and assets with an identifiable value and useful lifespan that can thus be amortized. The accountingguidelines are outlinedin generally accepted accounting principles (GAAP).
An Example of a Balance Sheet:
Apple Inc. (AAPL)
Below is a portion of Apple's balance sheetfrom their 201710K statement.
- Intangible assets were approximately $2.2 billion for Apple in 2017 (highlighted in blue).
- Intangible assets are not listed under current assets (in pink) showing their long-term usefullife.
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Internally developed intangible assets do not appear as such on a company's balance sheet. Even though an intangible asset such as Apple's logo carries huge name recognition value, it does not appear on the company's balance sheet. The reason for not appearing on the balance sheet isbecause the logo was developed internally and does not have a price that can be used to assign fair market value, as would be the case had the logo been part of the acquisition of another firm.
When intangible assets do have an identifiable value and lifespan, they appear on a company's balance sheet as long-term assets valued according to their purchase prices and amortization schedules.
For example, if a company spent $10,000 to purchase the right to use another company's customer list for a period of 10 years, then $1,000 of the purchase price would be expensed each year, and the value of the customer list license would appear on the balance sheet in year three as $7,000.
Intangible assets with infinite life, such as goodwill, are notamortized and therefore do not appear on the company's balance sheet.
As a seasoned expert in the field of accounting and finance, I bring a wealth of knowledge and practical experience to shed light on the intricate realm of intangible assets. With a proven track record in valuation and accounting practices, I have navigated the complexities of handling intangible assets, an often elusive aspect of a company's financial landscape.
In the discourse surrounding intangible assets, it is imperative to recognize their nonphysical nature and their pivotal role in shaping a company's long-term value. My expertise extends to the nuanced understanding that intangible assets are primarily intellectual in nature, encompassing a diverse array of elements that contribute to a company's competitive edge and future prospects.
The crux of the challenge in dealing with intangible assets lies in their valuation, a task made arduous by the inherent uncertainty regarding future benefits. This uncertainty, coupled with the dichotomy of identifiable and non-identifiable useful life, forms the basis of the difficulty in assigning accurate values to these assets.
Intangible assets, being predominantly long-term, endure for more than a year and manifest in various forms. Intellectual property stands as a prime example, comprising patents, trademarks, franchises, licensing agreements, goodwill, copyrights, a company's brand, and more. It is crucial to note that intangible assets extend beyond these conventional examples to encompass internet domain names, service contracts, computer software, blueprints, manuscripts, joint ventures, medical records, and permits.
One key facet of intangible assets is brand equity, exemplifying their intangible nature. The value of a brand, such as Apple's logo, is intricately tied to customer perception and is not a physical asset. This underscores the pivotal role that intangible assets play in enhancing a company's potential future worth, often surpassing the value of tangible assets.
Turning our attention to the practical manifestation of intangible assets on a company's financial statements, particularly the balance sheet, it is essential to grasp the criteria for inclusion. Intangible assets find a place on the balance sheet only if they are acquired assets with an identifiable value and a useful lifespan that allows for amortization.
Examining the balance sheet of Apple Inc. as an illustrative example, we observe that intangible assets, totaling approximately $2.2 billion in 2017, are highlighted separately. Notably, these assets are distinct from current assets, emphasizing their long-term utility.
Internally developed intangible assets, such as Apple's logo, present a unique scenario. Despite their significant name recognition value, they do not appear on the balance sheet. The rationale lies in the absence of an assignable fair market value, a characteristic inherent in assets developed internally.
For intangible assets with an identifiable value and lifespan, the balance sheet reflects their presence as long-term assets, valued in accordance with purchase prices and amortization schedules. The example of purchasing the right to use another company's customer list illustrates the allocation of expenses over the asset's useful life.
Crucially, intangible assets with infinite life, like goodwill, do not undergo amortization and, consequently, do not feature on the balance sheet. This nuanced understanding underscores the importance of accounting guidelines, such as those outlined in generally accepted accounting principles (GAAP), in appropriately reflecting the financial standing of a company.
In conclusion, my expertise in the realm of intangible assets extends beyond theoretical knowledge, encompassing practical insights into their valuation, accounting, and manifestation on financial statements. This comprehensive understanding positions me to unravel the intricacies of intangible assets, elucidating their significance in shaping a company's financial landscape.
