Intangible assets can be hard to grasp. It’s kind of in their nature—in fact, it’s right there in the name. But just because you can’t touch them doesn’t mean you can’t understand them. Let’s take a close look at what intangible assets are, how to calculate their value, and how to account for them in your financial documents.
What is an intangible asset?
An intangible asset is an asset with no physical form. It’s a long-term asset that accrues value year over year. Examples of intangible assets include intellectual property, brand recognition and reputation, relationships, and goodwill. Tangible assets, in contrast, are assets you can physically touch, which tend to fall under the PPE category—that is, “property, plant, and equipment.”
Two types of intangible assets
There are two main types of intangible assets: 1. identifiable intangible assets and 2. unidentifiable intangible assets.
1. Identifiable intangible assets
Identifiable intangible assets are assets that can be acquired or separated from the company (i.e., bought and sold) but that don’t have a physical form. Examples of identifiable intangible assets include intellectual property, like patents, trademarks, copyrights, or even non-monetary government grants, like airport landing rights or broadcasting licenses.
Identifiable intangible assets are often indefinite, meaning they stay with a company for as long as it exists. Proprietary data and algorithms all fall into this bucket. For example, a social media platform’s algorithm governing its feed is an indefinite intangible asset, because it can exist as long as the company does and will add value over the long term. It could also be separated from the company and sold to someone else, if the company chose.
2. Unidentifiable intangible assets
Unidentifiable intangible assets are a type of intangible asset that can’t be bought or sold because they only exist in relation to the company. Unidentifiable intangible assets include reputation, client relationships, goodwill, and brand recognition. You can’t sell any of these; they’re difficult—if not impossible—to quantify, but they greatly contribute to the value of a company.
Unidentifiable intangible assets are often definite intangible assets, meaning they have a limited lifespan. A client relationship, for example, is only an asset for as long as it’s maintained.
How does a company acquire intangible assets?
There are two main ways a company can acquire intangible assets: by creating them from within the company or acquiring them from another entity.
Companies can develop assets in-house. For instance, to sell targeted ads, a social media company collects its users’ behavioral data, such as what they post, like, or look up on the platform—that’s an intangible asset. Or, the goodwill a creative agency builds with its freelancer talent by paying them top dollar and creating a positive work experience is an intangible asset. The viral TikTok post a hairdresser creates that boosts their salon’s reputation is also an intangible asset.
Companies can also acquire intangible assets from other companies. For example, when Facebook acquired Instagram in 2012, it gained ownership of everything underlying the app: its code, branding, design, relationships with advertisers, and intellectual property. It also acquired Instagram’s reputation and goodwill, which make up what Instagram is. There were, after all, plenty of other apps that performed similar functions, but none that would have come close to Instagram’s $1 billion valuation.
How to calculate the value of intangible assets
While it’s easy to see how tangible assets contribute to a company—if you own a delivery company, for example, your business needs a vehicle to make deliveries—it can be a little trickier to quantify how intangible assets contribute. As such, it can also be hard to calculate their value and account for them on financial statements.
It probably doesn’t help that there are slightly different ways to calculate the value of different types of intangible assets. If you’re looking for a general idea of the value of your company’s intangible assets, you can use the following formula:
Intangible Assets Value = Market Value of Business - Net Tangible Assets Value
How to calculate the value of goodwill
Although goodwill is a relatively abstract concept, there’s a concrete way to calculate the value of a business’s goodwill. But keep in mind that you can only do this when a company is bought or sold, because you need to know the purchase price.
To calculate, subtract the difference between the fair market value of the business’s assets and liabilities from its purchase price. In other words:
Goodwill = Purchase Price - (Assets - Liabilities)
Amortization of assets
Here’s where things get a bit trickier. To figure out the value of many intangible assets over the life of the asset, you’re going to use a process called amortization. To amortize is to gradually write off the initial cost of an asset over a given period.
You’ve probably heard of depreciation, the term used to describe how an asset decreases in value over time. A typical example is a new car, which depreciates as soon as you drive it off the lot. Amortization is conceptually similar to depreciation but is applied to intangible assets instead of tangible ones.
Not all intangible assets can be amortized—only those with a finite useful life, which refers to the set amount of time you own an intangible asset. Say your business gets a patent. In the US, that patent likely has a finite useful life of 20 years, after which it expires. But if that patent leads to your company becoming known as the best in the world at what you do, that brand recognition has no finite useful life—it has what’s known as “perpetual life.” Therefore, you can’t amortize its value.
To calculate the amortization of your assets, you’ll want to use the straight-line method for the amortization of intangible assets. The calculation is:
Amortization Expense = (Initial Value - Residual Value) / Lifespan
Residual value is the value of an asset once you’ve gotten all you can get out of it. The problem is that intangible assets don’t usually have a residual value, because once you no longer have them, they aren’t worth anything. So, for most intangible assets, you can use the following calculation:
Amortization Expense = Initial Value / Lifespan
How to record intangible assets on a balance sheet
Anything developed internally can’t be assigned a fair market value and therefore can’t count on the balance sheet. However, intangible assets that your company buys can be amortized using the method outlined above, then listed on the balance sheet under tangible assets.
For example, Meta (formerly Facebook) couldn’t list the Like button on its balance sheet because it’s an intangible asset it developed in-house. It could, however, theoretically list the “double tap” feature on Instagram, since it’s intellectual property it acquired when it bought Instagram—that is, it has a market value.
Intangible assets FAQ
What are the types of intangible assets?
Intangible assets can be identifiable or unidentifiable, as well as definite or indefinite. Identifiable assets can be separated from the company and continue to exist, whereas unidentifiable ones cannot. Definite intangible assets have a precise lifespan, while indefinite ones do not.
What are examples of intangible assets?
Some examples of intangible assets include brand recognition, goodwill, and intellectual property (patents, domain names, confidential information, inventions, names, and the like).
Is real estate an intangible asset?
Real estate like buildings, offices, and land are tangible assets, not intangible assets. While you can’t hold a building in your hand, it’s still a physical asset and therefore tangible.