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Intangible Property: Definition, Example, Calculation & more!
Intangible property refers to a non-physical property. In other words, it cannot be physically touched but has a business value. However, there are different types of intangible assets, and if you want to learn more about them, continue reading.
What Is an Intangible Property?
As mentioned earlier, an intangible property or asset is a resource with no physical presence but holds a long-term value for a business. For instance, reputational capital, patents, copyright, and anything can be an intangible asset. Additionally, they have value only because the business has a lone intellectual or legal right to them.
In general, intangible assets enhance small businesses' growth in the long term. Additionally, they hold specific values based on intellectual and legal rights and improve the value of other assets. For example, the value of the Coca-Cola inventory is hugely influenced by a good reputation and brand recognition.
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What Would Be Considered an Intangible Asset?
Intangible assets can be:
- Intellectual property
- Brand equity (recognition)
- Company reputation
- Intellectual property
- Domain name
- Customer lists
- Employment contracts
- Lease agreements
- Licensing agreements
- Client relationships
Why are Intangible Assets Important?
Intangible assets are important because:
- Intangible assets are essential as these provide a competitive advantage for companies. For instance, brand recognition can allow a business to charge more for its products.
- In some cases, it also indicates reliability and quality. However, this factor is particularly true for luxury brands as they indicate higher customer social standards. For example, Porsche, Louis Vuitton, and Chanel hold a special status in the consumer world.
- Furthermore, intangible properties like copyrights and patents offer an edge in providing unique products. They can also fill the gaps within the market.
What Are the Types of Intangible Assets?
Intangible assets can be classified into the following types:
1. Identifiable Intangible Assets
These assets can be separated or acquired from the company, meaning they can be bought and sold but lack physical form. Examples of identifiable intangible assets include trademarks, patents, copyrights, or non-monetary government grants, such as broadcasting licences or airport landing rights.
Moreover, these are often indefinite, which means they stay away from the organisation as long as they exist. This might also include algorithms and proprietary data. An example consists of the algorithm of a social media website overlooking its feed. This is because its duration is equivalent to the existence duration of the website and can add value in the long term.
2. Unidentifiable Intangible Assets
These properties can't be brought or sold as they only exist with the company. For instance, goodwill, client relationships, reputation, and brand recognition, can be recognised as unidentifiable intangible assets. You can't sell these as you can't quantify them, but it stays with the company as long as it does.
Additionally, they also have a limited lifespan. For instance, a client relationship can only stay as long as it is maintained.
3. Intellectual Property
These properties refer to specific things individuals create using their creative abilities. For instance, this might include new inventions, literary works, designs, and images. You can also use patents, copyrights and trademarks to prevent others from copying. This protection can also become intangible assets.
This intangible asset defines the company's ability to connect with customers. Hence, separating these assets is implausible. In addition, goodwill includes brand recognition, customer loyalty, and business strategies. These factors stay with the company even if the company is sold to another entity.
How Does a Business Acquire Intangible Assets?
There are two primary methods by which a business can obtain intangible assets. Those are by creating them or by buying them from other entities.
- In most cases, companies develop intangible assets in-house. For instance, collecting behavioural data from a website can be an intangible asset. On the other hand, the goodwill a company develops with its consumers can also be an intangible asset.
- Secondly, a business can also buy intangible property from other entities. For instance, in 2012, Facebook (now Meta) acquired Instagram and gained ownership of everything. This includes its intellectual property branding, code, design, and relationships with advertisers.
How to Calculate Intangible Assets?
Calculating intangible assets can be a challenge. Also, it is essential to do this to get the actual market value of the business. However, for the calculation, you can use the following steps:
Step 1: Evaluate the Value of Tangible Assets
In this step, you must divide what is tangible and what's not. In most cases, tangible assets are mentioned in the balance sheet. Then, you can add the value of all these assets to get the total value of tangible assets. This step will also allow you to calculate the actual market value of the company.
Step 2: List Intangible Assets
Then, make a detailed list of all the tangible assets. Also, it is recommended to think carefully about all the categories that add value to your company besides tangible assets. This could include branding, logos, customer loyalty, customer list, and intellectual property.
Step 3: Choose a Calculation Method
There are multiple methods available for calculating the value of intangible assets. However, if you need clarification on the method, you can take advice from accountants, and they will assist you in choosing the correct method.
This method involves calculating the value a different company will require to recreate. This includes the monetary value of time and labour, legal or materials, and registration fees for patents and copyrights.
The cost method involves finding a similar asset with the same value as yours. This is usually an intangible asset that a different entity holds, and by using that, you can estimate the value of your company assets.
This method involves cash flow projections for determining the assets of a different business.
Step 4: Calculate the True Market Value
After you get the value of the intangible and tangible assets, you can evaluate the company's market value. This is generally the highest value an entity will provide you to buy your company. You can evaluate it by adding the value of the intangible and tangible assets. Here is an example of the calculation.
For instance, Let us suppose that Company ABC purchases a patent from Company XYZ for ₹1 lakh. Then, ABC will record a transaction of the same amount under its intangible assets, which will appear under its long-term assets. Moreover, this asset of ₹1 lakh will also be used over the years through amortisation.
How to Perform Amortisation of Intangible Assets?
After calculating its value, it can be tricky to determine the value of multiple intangible assets over their life. However, the amortisation of assets is equal to writing the starting costs of an asset over a provided time.
Regardless, to calculate it, you can use a straight-line method –
Amortisation Expense = (Initial Value - Residual Value) / Lifespan
Hence, it is evident that intangible property is a business property that is not physical in nature. Also, you should note that as this has no physical presence, there is no such thing as an assigned value. Also, these are associated with value recognition and associated benefits; hence are essential for the growth and profit of a company.