Intangible Assets

Financial Dictionary -> Investing -> Intangible Assets

In Intangible Asset Finance, intangible assets are any form of personal property, except for goods, documents, instruments, accounts, deposit accounts, commercial tort claims, investment property, money, letters of credit, letters of credit rights, gas, oil, and minerals before extraction.

What Is an Intangible Asset?

By definition, an intangible asset is any asset that is non-physical in nature. Today, the group of intangible assets has expanded to include such non-physical valuables as copyrights on works of art, as well as invention patents, trademarks, and business methodologies.

Groups of intangible assets

In general, intangible assets fall into two main categories: definite and indefinite assets. For example, the brand name of a company is considered intangible assets of the latter entity, as long as the company is functioning on the market. If, however, this company assumes the name of another company or group of companies as a result of, say, a merger or takeover, the company's name will have a limited existence and will therefore be classified as a definite intangible asset. Other categories of intangible assets include legal and competitive intangibles. The legal form generates property rights that are defensible in court. Competitive intangibles are not legally owned but have impact on the productivity, effectiveness, opportunity costs, and wastage.

Intangible assets have tangible value

While it is true that the value of intangible assets cannot be grasped directly like, for example, the value of some technical equipment or means of production, they are very important for the long-term market success of a company. Coca-Cola, the multi-billion-dollar empire, owes its astonishing business success almost entirely to the high value of its brand name. Here is another more down-to-earth example. Today, blue jeans are the most popular unisex clothing item in the world. So, let's take two pairs of blue jeans made of hundred per cent cotton, the first pair being of the haute-couture brand, Versace, and the second - of the more casual brand Banana Republic. Needless to say, the former pair of jeans would probably cost close to a thousand dollars, while the latter would be widely affordable. What makes this difference of hundreds of dollars, then? If we take the structure of the tissue from which the two pairs of jeans are made, the results will be slightly in favour of Versace, in terms of comfort at least. However, the Banana Republic jeans may prove more durable. So, the big difference is fully and entirely in the brand name.

The value of intangible assets is difficult to assess

Owing mostly to their non-physical nature, the market value of intangible assets is rather difficult to assess. In most cases, the cost of intangible assets is allocated over the course of their legal existence, but this term is never longer than forty years. This process of allocation of cost is also known as amortization of intangible assets. It is good to know, for instance, that the legal life of a patent is not more than seventeen years, but most patents lose a significant part of their value after ten years or so.