Introduction to Intangible Assets
Intangible assets are a non-physical and non-monetary asset which are owned by the business that can be helpful in the production or supply of goods or provision of services. Such intangibles are without any physical form however business that are having intangibles, their major business will be dependent on it.
Explanation
One cannot touch, see, or feel intangible assets. They are of long-term in nature and the company will get the benefit of it for a prolonged period of time.
Intangible assets can be bifurcated into two types:
- Intellectual properties: Trademarks, copy right, customer lists, etc.
- Goodwill: Branding
Intangible assets are having specific given below specific features:
- They are not physical in nature
- Any business can create intangibles by their own or can purchase the same from the third party
- They cannot be seen or feel as an existence. However, business operations and results can be clearly identified peculiar impact of intangibles on them
- To identify, value and recognize the intangibles in the books of account is a highly complex task
- Intangibles do not give a guarantee of business. However, there are a business that can grow with huge momentum based on the presence of intangibles
Examples of Intangible Assets
Let’s understand intangible assets with different examples:
1. Goodwill
The most common form of intangible is goodwill. Often we keep on hearing that the business of any specific entity is purely running based on the goodwill either they have earned or they have purchased in the acquisition. Generally, it is the premium paid for the purchase of any business for getting leverage in the market. It has an indefinite life and is not getting amortized over the period of time.
Example: The valuation of ABC limited is $ 50 Mn. PQR is wishing to acquire the same. Based on the market condition and future prospects, PQR is quoting the price of $ 65 Mn. The difference $ 15 Mn is nothing but the goodwill purchased by PQR from this transaction
2. Trademark and Trade Dress
Trademark is a recognizable sign, design, or expression which identified the product or services of a particular source from those of others. Trademark exclusively identifies the commercial source of products. It contributes to cash flows by increasing sales volume or by enabling the owner to charge the brand premium.
Trade Dress are a unique colour, shape, or packaging of the product. If it is registered with the government registrar, then it fulfils the legal contractual criterion.
Example: XYZ limited is the manufacturing of cookies and biscuits. They are having trademark and Trade dress related to the size of the cookies, shape of the cookies, packing material quality, colour, look, feel, etc. Based on such trademark and trade dress owned in their name, no manufacturer in the United States can undertook the production of cookies and biscuits in a similar manner.
3. Patented Technology, Computer Software, Databases and Trade Secrets
A patent is a combination of rights granted by a nation to an inventor for a limited period in lieu for detailed disclosure of an invention. Patents have a useful life of 20 years. They contribute to cash flows not only in enhancing the products made by the concern but also from the royalty income when they are licensed out.
A trade secret is a formula, practice or design not generally known to others based on which one can achieve an economic advantage over competitors or a group of competitors.
Example: Coca Cola is having a trade secret formula for the production of famous coke since inception. They are also having patent and trade secret for flavours that are used n the manufacturing for more than 100 years.
4. Copyrights Related to Artistic Work and Video and Audio-Visual Material
Generally, Plays, Literary works, musical works, pictures, photographs, and audio visual materials are protected by copyrights. The copyright owner is paid royalty or remuneration on granting permission for the usage of copyright property. Valuation of artistic related assets is most challenging because a creative asset does not have any market comparable.
Example: Mr A produced Mission possible movie. With the release of the movie, Mr. A is having all satellite and broadcasting rights. Thus, based on such rights Mr. A is having full authority to determine in which theatre this movie will get released and on which television channel the same will be displayed.
5. Customer Relationships( Both Contractual and Non-Contractual)
The long-term relationship with customers has a great intangible value for the business. Customer relationships are developed out of past contracts that have given a different edge to the trade relationships. The value of customer contracts and related customer relationships may flow from either incremental cash flows owing to the contract or potential of new contracts from the same customers.
A firm’s relationships with customers can have significant value. This value is occasionally referred to as the customer list on financial statements
Example: ABC Bank is a credit card Company with having a broad customer base and are undertaking a variety of transactions. The list of such transactions is having huge value as it will depict the taste and preference of specific location and geo.
6. Contractual Agreements
Contract based intangibles assets represent the value of rights arising out of contractual arrangements. Such arrangements are easily identifiable since they meet the contractual legal criterion. Any of the below contracts mentioned may be classified as intangible if they are assessed to result in cash flow for the contracting party in future or intangible liability.
Such rights are conferred based agreement that allows to carry on a business.
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Following are the example of contracts related intangibles:
- License agreements
- Construction, service, sourcing and supply agreements
- Broadcasting permits
- Exploration rights
- Right of way
- Use rights
- Lease agreements
- Franchise agreements
- Contracts to service financial assets
Conclusion
Thus, intangibles have taken center stage in modern businesses. Companies are controlling the production and supply of services based on various intangible rights. There are few businesses that are dealing like e-commerce and internet technologies appear to be entirely in intangible businesses.
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