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An asset is an essential component of any business. Assets are of two types when we divide them according to their physical presence: tangible and intangible.
What do intangible assets mean?
In simple words, an intangible asset is a non-physical item that has some value and could be converted to cash. We’ll go through intangible assets in detail in this article.
Intangible assets meaning
Intangible assets are non-monetary assets generated over time by effort and cannot be seen, felt, or materially counted. On a company’s financial accounts, intangible assets are listed separately. In addition, assets are only classified as intangible assets if they satisfy specifically recognised necessities as stated by Ind AS 26 – Intangible Assets.
Intangible assets are regularly acquired, developed, maintained, or enhanced, and businesses frequently spend a lot of resources or incur liabilities to do so. Examples of intangible assets are scientific or technical information, a new process or system design, licences, intellectual property, and market knowledge.
Intangible assets are typically recorded on a balance sheet. However, only items the company buys or secures (such as a patent, an email list, or a well-designed website) are listed. Some intangible assets are stored or held in a physical storage device, like videotape, legal documents, or compact discs (in software).
Intangible assets: characteristics
The intangible assets meaning is given under Ind AS 26. They are also recognised under Ind AS 26, which states characteristics of assets that need to be fulfilled. IAS recognises all other assets except goodwill. So, the main characteristics of intangible assets are:
Identifiable
According to the intangible assets meaning, intangible assets should be identifiable. Intangible assets must be easily distinguished from goodwill to be identifiable. If the firm could rent, sell, trade, or distribute the asset’s specific future economic benefits without trading future economic benefits derived from other assets employed in the same revenue-generating activity, the asset is separable.
Controllable
If an enterprise has the power to receive future economic rewards from a particular asset, it controls such assets. It can also restrict others’ access to such economic benefits. Furthermore, the laws give companies control over future earnings from an intangible asset. These are legal rights that can be enforced in a court of law. However, just because a company’s right is legally enforceable does not mean they control the item.
Capability to generate future economic benefits
Intangible assets can assist your company in several ways in the future. This could be revenue via the sale of goods or services, cost savings, or other incentives from the firm’s asset use are examples of future economic benefits arising from an intangible asset. Another example is that utilising intellectual property in a manufacturing process may lower future production costs rather than enhance future income.
Intangible assets: types
Intangible assets can be divided into two types based on time. They can be classified as either definite or indefinite assets.
Definite intangible asset
When an asset has a definite lifespan or has an expiry date, it can be classified as a definite intangible asset. These types of assets generate revenue for businesses for a particular amount of time. A patent or copyright with no current plans to extend the legal agreement is an example of a definite intangible asset. When an asset has a foreseeable end, it is deemed as a ‘definite,’ and in the example mentioned above, patent or copyright has a predetermined expiry date.
Indefinite intangible asset
When an asset stays with the company as long as it operates, then that asset is defined as an indefinite intangible asset. These types of assets generate financial benefits for the company or business in the long run. A brand name or company name is an example of Indefinite intangible assets. There are no restrictions imposed on these assets by age, contract, or legal requirements.
Intangible assets examples
The few most common intangible assets examples are discussed below:
Goodwill
Goodwill is the most prevalent type of intangible. We frequently hear that a company’s operation is solely built on the goodwill it has earned or acquired through acquisition. In general, it is the premium paid for the purchase of a business to gain market power. It has an infinite lifespan and does not need to be amortised over time.
Contractual Agreement
Contract-based intangible assets represent the value of rights deriving from contractual arrangements. Because they meet the contractual legal condition, such arrangements are easily identified. Any contacts listed below may be categorised as intangible if they are estimated to result in future cash flow or intangible liability for the contracting party.
Licence agreements
Supply agreements
Exploration rights
Use rights
Lease agreements
Patents
A company or individual can use patents for 20 years. A patent is a combination of rights granted by a nation to an inventor for a limited period instead of detailed disclosure of an invention. They contribute to the company’s cash flows by enhancing the products made by the concern and the royalty income when licensed out.
Copyrights
Copyrights safeguard plays, literary works, musical works, photos, photographs, and audiovisual materials in general. On granting permission for the use of copyright property, the copyright owner gets paid a royalty or payment. Because a creative asset has no commercial counterpart, valuing them is particularly difficult.
Trademarks
A trademark is a distinctive sign, design, or expression that distinguishes a particular source’s product or services from those of others. A trademark is the only way to identify the commercial origins of a product. It improves cash flow by raising sales volume or charging the owner a premium for the brand.
Conclusion
In today’s business world, intangible assets, including information, skills, brands, etc., are crucial strategic assets. Governments have begun emphasising the importance of intangibles as economic growth drivers and urging businesses to prioritise their intangible assets. Intangible assets play a significant role for investors when they want to invest in a company. Investors usually examine the contribution of intangible assets to the company’s financial growth. You can check out any company’s website to get the detailed contribution of Intangible assets in its growth.
