3 min read
Intangible assets – long-term assets that don’t have a physical presence – can be difficult to wrap your head around, particularly when it comes to assessing their value. How do you put a value on brand recognition? Is it possible to work out a market price for your latest copyright? Find out everything you need to know about how to value intangible assets. First, what are intangible assets?
Intangible assets explained
Basically, an intangible asset is an asset that isn’t physical but holds long-term value for the business. The international financial reporting standards (IFRS) describe them very simply as “an identifiable non-monetary asset without physical substance.” So, what counts as an intangible asset?
Is goodwill an intangible asset? Yes!
Is brand recognition an intangible asset? Yes!
Is research and development an intangible asset? Yes!
Is intellectual property (copyright, patents, trademarks) an intangible asset? Yes!
You get the idea – an intangible asset is essentially any resource that isn’t a material object. On the flip side, your business is likely to have many tangible assets. This is the term used to describe physical assets such as machinery, buildings, and office equipment.
Definite vs. indefinite intangible assets: what’s the difference?
Depending on whether there’s a foreseeable end to your intangible asset’s value, you can describe it as either definite or indefinite. For example, brand names have value for as long as the company is still in business, making them indefinite intangible assets. On the other hand, copyrights and patents are only valuable up to the point that they expire, which means that they’re classified as definite intangible assets.
Are stocks intangible assets?
While financial assets such as stocks, shares, and bonds may sound like intangible assets (as they’re – at least to a certain extent – non-physical), it’s actually a little more complicated than that. So, are stocks intangible assets? What about investments? No, these sorts of financial assets are classified as tangible assets because they derive value from contractual claims.
What is amortization of intangible assets?
When you start researching intangible assets, you’ll probably encounter the term “amortization” at one point or another. But what is amortization of intangible assets, and how does it relate to depreciation? On the face of it, amortization and depreciation look relatively similar – they’re both terms used to describe the expensing of an asset over the course of its usable life. Essentially, they describe the same process, just for different types of assets. Amortization refers to the mechanism whereby you reduce the value of an intangible asset over time, whereas depreciation refers to the process of reducing the value of tangible assets.
How to value intangible assets
The question of how to value intangible assets is an important one for business owners. After all, identifying the value of a tangible asset is simple enough, but for something non-physical like a patent or the general concept of brand recognition, there’s a bit more of a challenge. While there’s no standardised formula for working out the value of an intangible asset, there are three basic approaches that you may want to consider:
Market approach – Under the market approach, you’ll look for similar assets that have been publicly exchanged or traded and use this data to conduct a valuation of your own intangible asset. However, this type of information usually isn’t made public, which may make it significantly more difficult to gather the necessary data. It’s best suited for brand names, technology, and so forth.
Cost approach – With a cost approach, you can attempt to determine the cost of developing the asset, as well as a reasonable rate of return. It’s best for assets like internally developed software, while it can also be useful for early-stage start-ups that don’t have access to enough data to make accurate revenue/sales forecasts.
Income approach – If the intangible asset produces income or allows an asset to generate cash flow, you could try to convert these future benefits into a single, discounted amount. There are several different income-based approaches, including the royalty method and the excess earnings method. It’s best for intangible assets like copyrights and patents.
As you can see, there’s no universally agreed-upon method for how to value intangible assets, so you should opt for the valuation method that’s best suited to the type of intangible assets held by your business. In many cases, it simply won’t be possible to accurately denote a value for a particular intangible asset, in which case, the asset cannot be reported on your balance sheet.
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