What are Intangible Assets?

What are intangible assets?
What are intangible assets?

Intangible assets: an introduction

Intangible assets are best understood as assets which do not have a physical basis.

Tangible assets in a business might include things like property, machinery and inventory.

On the other hand, types of intangible assets include:

  • Reputation or good will;

And forms of intellectual property, such as:

  • Unique knowledge and expertise;
  • Inventions;
  • Creative works like musical compositions, written works, video recordings and more
  • Brand assets, logos etc.
  • Original designs
  • And much more

In modern businesses it is typical for company value to be mostly based on intangible assets like the above, rather than physical assets.

Despite this, a lack of understanding about intangible assets leads businesses to often fail to manage or value intangible assets effectively.

Different types of intangible assets

Intellectual property (or IP) is a form of intangible assets which can be protected through various legal mechanisms.

In many cases, intangible assets can be protected with intellectual property rights (IPRs)

These include things like:

  • Trade marks
  • Copyright
  • Patents
  • Design rights
  • Trade secrets
  • Non-disclosure and confidentiality
  • Amongst others

In certain cases, intellectual property rights must be registered.

In other cases, the creator gains certain rights over intangible assets at the point they are created. These are known as unregistered rights.

Generally speaking, however, registered rights are more robust and enforceable.

Why protect intangible assets?

Most businesses have intangible assets, even if they take them for granted or simply do not realise it.

Below are some general examples of this happening in practice:

  • If you are a PR firm – your database of journalists may be what gives you the edge over your competitors.
  • If you are a software company – you may be working on several technologies and processes which are entirely new to the market.
  • If you are a professional services firm – you may have an enviable reputation, client base and methods of working which set you apart from the rest.

In each case, there are different ways to protect these intangible assets.

As a general rule protecting intangible assets:

  1. Helps you protect your market share
  2. Stops other people from benefiting from your intellectual property, but also;
  3. Helps you maximise the value of this intellectual property to your business

If you realise an intangible asset is business critical, you should speak to an intellectual property specialist to find out if it is properly protected.

Why are intangible assets important?

Intangible assets are becoming increasingly important to businesses.

There are many reasons for this.

Examples of the importance of intangible assets

Intangible Assets Example - Trainers

Example Number #1 – Branding Trainers

A footwear company produces trainers. The latest pair of trainers is seen to be the best available on the market. Consumers worldwide are now looking out for these trainers – and will recognise it by seeing the brand logo on the shoes.

Intangible Assets Example - Toys

Example Number #2 – Manufacturing Toys

A toy company produces this holiday season’s runaway success and is subject to worldwide demand. The company is finding it difficult to keep up with demand and have been contacted by manufacturers who can produce more for them. The toy company wants to make an agreement with these manufacturers to produce more. They would like these to be the exactly the same as their original product. They want to make sure their new partners don’t release their own version.

Intangible assets example - Restaurants

Example Number #3 – Restaurants

A restaurateur has established a successful new concept regionally. There is a gap in the market, which they are looking to take advantage of – and they have investment to grow the business nationwide. They would like to do this quickly (so, competitors can’t copy their ideas). The idea is to give interested parties a “business in a box” with specifications to use their concept – for a set percentage of their income. They want to make sure that they can grow quickly and that interested parties do not change anything about their successful formula.

Intangible Assets Example - Research and Development

Example Number #4 – Research and Development

A research and development company spends a decade and a lot of money solving a problem.  Their scientists collect data and conduct experiments. This research will result in a new innovation that will underpin an industry. The company wants to make sure that this process and all of the things that have been found out are kept secret.

How to Value Intangible Assets

It is important to value intangible assets in all businesses, but especially those where they play a critical role.

By reaching an accurate valuation of your intangible assets and IP, you can correctly resource their growth and protection.

There are three different ways that you can identify the value of the intangible assets in a business.

  1. By working out the amount of money it would cost for another business or organisation to duplicate your intangible asset e.g. for a competitor to build a client database which is the same as yours. This is known as the cost method.
  2. By identifying an analogous asset within the wider marketplace and surmising the value of your asset by comparison. This is known as the market method.
  3. By calculating how much money year over year that the asset would bring to a different business. This is known as the income method.

It is notable that intangible assets generally offer long-term return year on year, and may increase or decrease in the value they offer a business.

Once you understand how valuable an intangible asset is to your business – you should keep a record of this. If you have purchased the asset (and it has not been created within the business) you should record it on your balance sheet.

By doing so you can better decide how to manage intangible assets putting measures in place to increase their value in your business.

Your awareness should not only focus on the value of intangible assets but also measures in place to protect and grow them.

Conclusion

The correct handling of intangible assets is absolutely critical for the business to succeed.

These examples demonstrate that intellectual property assets can be fundamentally important to any business.

Underestimating the value of intangible assets in a business can limit the opportunity for growth.

At worse, lapse can result in instances of serious damage to a business.


Would you like to know more?

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Resources on Intangible Assets

TEDx talk about Intangible Assets
Baruch Lev on why accounting for intangible assets is overlooked

Definition of Intangible Assets at Investopedia