In business, there are two types of assets – those that are tangible, such as properties and vehicles, and those that are intangible, such as commodities that cannot be physically held or touched. There is much confusion relating to these two types of assets, and with so many individual factors and restrictions applying to each type, not to mention the variants that exist within each category, many business owners find themselves struggling to ascertain which is which. In this post, we’ll be exploring intangible assets, what they are, how they work, and other important information about their level of functionality, accessibility, and application.
What is an intangible asset?
Intangible assets are a form of a commodity that has no physical presence. There are many types of IA, and each of them is unique in its own way. For example, a patent granted for a product is considered an intangible asset, whereas the product itself would be considered a tangible asset. Intangible assets, such as company registration information, are often used in a digital environment, including trading names, brand identification numbers, copyright notices, and other similar commodities. Although they may not exist in the physical realm, they are a prerequisite for many businesses that want to ensure that they are officially licensed, registered, documented, and so on.
What would be considered an intangible asset?
Any asset or commodity that cannot exist physically but is still a component of a business’s infrastructure could be considered an IA. For example, if a business registers under a specific trading name, that title would be deemed an intangible asset. This means that although the name may only exist in a database, it carries its own weight as it has been officially registered. As a result, this name, whether it is a trading name, a brand, or an entire franchise, would be deemed as an intangible asset. Everything that falls under that trading name, such as a rented property, work vehicles, or products, would be deemed tangible assets because they can be physically seen, touched, and interacted with.
For further clarification on intangible assets, an excellent way to view them would be to see them as the non-physical components of a business that are required to operate but cannot be touched in a physical sense.
Types of intangible assets
There are many unique types of intangible assets, often defined by their own categories. These can include intellectual property (IP) rights, company logos and branding, trademarks for specific terms and slogans, product patents, copyright notices, and goodwill. Not a single one of these assets can be touched physically, but each of them plays a significant role in the day-to-day running of a business. For example, a digital logo for a business may only appear on a website, but it is a part of the brand image that belongs to the intellectual property of that company.
The same goes for a patent – it may have been awarded in a theoretical sense, but it acts to protect specific parts of a company’s products. The different types of intangible assets might not apply to every single type of business, but some are universally applied, like a company logo, a trademark, or a slogan, and others are a little more unique depending on the structure of the business itself, such as with a patent, or goodwill.
Identifiable intangible assets
There are 5 types of identifiable intangible assets: patents, trademarks, copyrights, franchises, and licenses. These 5 types are considered identifiable because they have their own structures and are recognized for them. For example, a copyright is a form of IA that protects the content and media belonging to a business. Trademarks register a company’s protocols, such as when using a specific name, with a trademark acting to protect it from being stolen or duplicated. Patents protect particular elements of a product, such as a mechanism that has been designed within a tool or the shape of a design, from being copied.
Unidentifiable intangible assets
There is one type of unidentifiable IA, and that is commonly referred to as goodwill. It is essentially the reputation of a business, its customer relationships, brand name, and overall standing in the market. These elements contribute to the company’s value but are not distinct assets that can be individually identified or sold off separately.
Other examples of unidentifiable intangible assets might include a unique operating culture, superior management, or high employee morale. While these are valuable, they are not distinct or separate from the company and are unidentifiable intangible assets. It’s important to note that these assets often do not appear on the balance sheet unless they are acquired as part of a business combination.
Examples of intangible assets
5 examples of intangible assets would include:
- Patents
- Trademarks
- Copyrights
- Franchises
- Licenses
Intangible assets on balance sheets
When submitting a balance sheet for an LLP or LTD company, company owners must submit information relating to intangible assets, usually after the liquid assets are included. This is because IA can be sold, even if their value is not fully understood. When amortizing intangible assets, an estimate of their value can be added – or a more precise calculation. The purpose of the HMRC won’t be to evaluate their value, as they will only become valuable if sold – and only then will they be taxable. Before then, they are merely assets that should be listed to maintain transparency.
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