An intangible asset is an asset that does not have physical existence, and is not monetary, but is nonetheless of value to a person, business, or entity.
For example, Coca-Cola’s logo is a kind of intangible asset known as a trademark. It allows customers to instantly identify the company’s products even from a distance.
Other kinds of intangible assets include goodwill, patents, copyrights, etc.
Intangible assets are contrasted with physical assets. Physical assets include tangible, physical, touchable things of value such as buildings, machinery, and hardware.
Definition of Intangible Asset
An asset is a resource controlled by an individual or company from which “future economic benefits are expected to flow”. An intangible asset is essentially any such resource that does not exist in a physical or monetary form.
One of the most often cited definitions of intangible assets comes from the International Accounting Standards Board, which defines an intangible asset as:
“…an identifiable non-monetary asset without physical substance” (Source)
Other scholarly definitions, which tend to cohere with the above definition, include:
“Intangible assets refer to identifiable non-monetary assets without physical substance.” (Robinson, 2020)
“Intangible assets have two main characteristics: (1) they lack physical existence, and (2) they are not financial instruments.” (Kieso et al., 2019)
An important point in IASB’s definition is that an intangible asset is “non-monetary”. This means that things such as accounts receivable, derivatives and cash in the bank, etc. are not classified as intangible assets.
An intangible asset can exist for an indefinite or definite period. A brand name, for example, lasts for a very long time. A legal agreement or contract, on the other hand, can be made for a specific period.
Another aspect of intangible assets is that we can either create it or acquire it. Goodwill, that is, the reputation and business connections of a company, are built slowly over many years. But it can also be purchased, say when a company acquires another company like Google taking over YouTube.
In accounting, the intangible assets created by the company do not appear on the balance sheet; they have no recorded book value. However, the expenses involved in the process are written off.
Key Features of Intangible Assets
Intangible assets are characterized by these two important features:
An intangible asset is non-rivalrous, meaning that the cost of providing it to a marginal customer is zero.
In economics, a good is considered to be rivalrous when its consumption by one customer prevents its simultaneous consumption by others (Weimer, 2005). For example, when you own a car, it cannot be used by others at the same time.
But consider something like broadcast television. When one person is watching TV, it doesn’t prevent others from doing it. All intangible assets, such as software or trademarks, are non-rivalrous in a similar fashion.
Intangible assets are non-excludable, meaning that it is very difficult to restrict their benefit to only paying customers.
For example, a lot of intangible assets (such as software or copyrighted books) are digital. These can easily be copied and shared, often without the permission of the business owners.
Originally proposed by Paul Samuelson in 1954, excludability is the extent to which we can restrict a good/service to only paying customers. Besides being non-rivalrous, intangible assets are also non-excludable.
Examples of Intangible Asset
- Goodwill: Goodwill is an intangible asset that is built up over time due to business connections. MacNaughton defined it as the “advantage of good name, reputation, and connection of a business”—goodwill is what distinguishes an old established business from a new one (1901). Goodwill is created internally over many years, but there is also “purchased goodwill”. Think about a situation when one company acquires another one, such as Facebook taking over Instagram. Facebook paid a price more than the fair (market) price of Instagram’s various assets to make up for the “good name” that the latter company had built.
- Brand Value: Jeff Bezos perfectly defined a brand as “what people say about you when you are not in the room”. What comes to your mind when you look at a Nike shoe? You most likely recall their famous inspirational ads celebrating the world’s greatest athletes, and at the same time, encouraging you to push yourself—“Just Do It”. These images that come to your mind when you think of a brand are crucial in your purchasing decision. So, businesses invest a lot of money and effort in building their brand image: think of Coca-Cola’s TV commercials or Spotify’s online campaigns (such as #Wrapped).
- Patents: A patent is an exclusive right granted (by a government) for an invention. The word “patent” comes from the Latin term patere, which means “to lay open”. So, a patent involves you laying open (disclosing information to the public about) your invention, and in return, you get some exclusive rights. So, for example, Thomas Edison invented and got a patent for the electric light bulb in the 19th century. This meant that nobody else could commercially make, use, or distribute the bulb without Edison’s permission. Therefore, by protecting and rewarding ideas, patents encourage innovations, and they are crucial intangible assets for businesses.
- Copyrights: A copyright protects original works of authorship/creation. It does so by granting the creator, the exclusive rights to copy, perform, and create derivatives from the original work. The actual creation can be in any form: it can be a musical composition, a literary work, a painting, etc. As soon as the creator “fixes” the work in a “tangible form”—say when you pen down a script or record a song—they automatically acquire its copyright and can stop others from copying/using their work. We can also get our creations registered with the government, which would give us a stronger legal claim. It’s important to note that copyrights only protect expressions of ideas, not ideas themselves.
- Franchise: A franchise is a license that allows one business (franchisee) access to another business’s (franchisor’s) brand name and products. Consider the McDonald’s restaurant in your city: it acquires the business knowledge and trademarks of McDonald’s and sells products/services under its name too. In return, the local restaurant pays an initial start-up fee and annual licensing fees. Franchises are a great way for businesses to expand their geographical and market reach. They began in the US during the mid-19th century with McCormick & Singer selling sewing machines, and today, franchises exist in every industry—from convenience stores (7-Eleven) to gyms (Anytime Fitness).
- Trademarks/names: Trademarks and tradenames are two distinct intangible assets that help a business establish its brand in the marketplace. A trademark is an official name under which a company does its business; it is mostly used for administrative and accounting purposes. A tradename, in contrast, gives a business legal protection for its logos, names, slogans, etc. For example, the “Swoosh” logo will instantly tell you that it’s a Nike product. Registering a trademark provides government protection, although businesses can use trademarks under licensing agreements. For example, the LEGO group acquired a license from Lucasfilm to create Lego Star Wars.
- Software: A company’s software—a set of programs that help perform a specific function—is of vital importance in today’s digital world. Adobe Creative Suite, for example, is a comprehensive software suite that is used by professionals in almost all creative industries: from graphic designers (Adobe Photoshop) to filmmakers (Adobe Premiere Pro). Many companies may also have software not meant for sale but for their internal operations. For example, your workplace may have a self-developed mobile app for marking attendance. These are also very important as they improve efficiency and allow for greater collaboration.
- Research & Development: Research allows businesses to discover new products and processes while also improving existing ones; through development, they convert these ideas into marketable products/services (Marriott, 2002). The accounting treatment of R&D expenditure has been quite a debatable subject, but legally, businesses are required to write off research expenditure as soon as it is incurred. This cautious treatment is done because one never really knows whether R&D will actually give benefits: imagine spending months on a new idea that ultimately fails to be executed. If R&D is overvalued, then investors and creditors will be misled, as happened with Rolls Royce in 1971.
- Customer Lists: A customer list is another important intangible asset. It is a list containing specific names, contact details, etc. Customer lists are built over time and they are crucial in targetted marketing. For example, you can take the email addresses of users accessing a certain resource from your website. Their presence on your page means that they are potential customers, so you can later send them more information about your paid services.
- Internet Domain Names: An Internet domain name is a name that is associated with a particular IP address. Each device connected to the internet has a globally unique IP address; however, being a number, it is difficult to remember, and that is why domain names were introduced. Internet domain names are also globally unique, and since they’re the primary means of online interaction with customers, they are extremely important for businesses. If a business does not have the same domain name as its own name, then customers will find it difficult to reach them online; or, worse yet, customers might accidentally land on another business’s page and buy from them.
Intangible assets are resources that do not exist in physical form.
They are opposed to physical assets, such as machinery and buildings. But, like all assets, they also create benefits for a business, and in today’s digital world, they are a large part of the corporate economy. Examples of intangible assets include goodwill, patents, software, etc.
MacNaughton, L. (1901). CIR v. Muller. London: Westlaw UK.
Marriott, P., Edwards, J. R., and Mellett, H. J. (2002). Introduction to Accounting. London: Sage Publications.
David L. Weimer; Aidan R. Vining (2005). Policy Analysis: Concepts and Practice. New York: Pearson.
Kieso, D. E., Weygandt, J. J., Warfield, T. D., Wiecek, I. M., & McConomy, B. J. (2019). Intermediate Accounting, Volume 2. New York: John Wiley & Sons.
Robinson, T. R. (2020). International financial statement analysis. New York: John Wiley & Sons.