Top personnel that make a business unique or different constitute an intangible asset in the common sense of that phrase. In fact, if your business has a founder, designer or other employee who is critical to your success, you can purchase "key person" life insurance, explains Allstate. Legally, you won't be able to list key employees as intangible assets on your balance sheet, but that doesn't mean you can't tell potential investors or buyers of your business about the value of these employees. Show
Tangible vs. Intangible AssetsYour company's assets fall into two categories: tangible and intangible. Tangible assets are the ones you can touch: buildings, equipment, inventory and the like. Financial resources also count as tangible; even though money is often just a number on a computer, it has a defined and universally agreed-upon value. Intangible assets are the ones without a physical manifestation. Intellectual property such as patents, trademarks and copyrights, as well as market share, customer loyalty and the talent and ability of a workforce are intangible asset examples. People vs. SkillsAt first glance, it would seem that your employees are tangible assets. After all, they're standing right there in a physical form. But while it's common for businesses to describe their employees as valuable assets, it's not really the employees – the flesh-and-blood individuals – that are the assets. Rather, it's their abilities. When a talented, skilled worker leaves your company, you can't replace her just by bringing in a warm body off the street. You need someone with equivalent abilities. The skill set of your company's workers, more than the workers themselves, is an asset, and since abilities can't be touched, it's an intangible asset. Accounting Treatment ConsiderationsWhether your employees count as intangible assets is mostly a thought exercise, as you can't include them as assets on your balance sheet, according to Life Cycle Engineering. U.S. accounting rules include a few overarching criteria for putting an asset on the balance sheet: The asset must have future economic benefits, and the company must either own the asset or have control equal to ownership. Your employees' skills undoubtedly have future economic benefit, but your company doesn't own them. Regardless of what you've invested in training your employees, their skills ultimately belong to them, not you. Further, accounting rules also stipulate that an asset can go on the balance sheet only if you can reliably assign an objective value to it. You can't do that with your employees' skills; what they're worth to you is not an objective value. In fact, because of the difficulty – the impossibility, in many cases – in assigning a value to intangibles, the rules prohibit companies from putting any "internally generated" intangible assets on their balance sheets. Goodwill of Key PersonnelIf you were to sell your business, the sale price would most likely be higher than your company's net assets – the sum total of all the tangible assets on your balance sheet minus all your liabilities. That's because the buyer is paying for your intangible assets, too. And the buyer can then put those intangibles on the balance sheet of the consolidated company. Recall that "internally generated" intangibles can't go on the balance sheet because they can't be objectively valued. But as far as accounting rules are concerned, the sale of your company established an objective value for your intangibles: It's the difference between the sale price and the value of your net assets. The portion of the sale price that can't be assigned to any particular asset goes on the buyer's balance sheet as an intangible asset called "goodwill." It is within goodwill that the value of your (former) employees now resides. Tangible Assets vs. Intangible Assets: An OverviewThere are two types of asset categories: tangible and intangible. Tangible assets are typically physical assets or property owned by a company, such as computer equipment. Tangible assets are the main type of assets that companies use to produce their product and service. Intangible assets don't physically exist, yet they have a monetary value since they represent potential revenue. A type of intangible asset could be a copyright to a song. The record company that owns the copyright would get paid a royalty each time the song is played. There are various types of assets that could be considered tangible or intangible, some of which are short-term or long-term assets. Key Takeaways
Explaining Tangible Vs. Intangible AssetsTangible AssetsTangible assets are physical and measurable assets that are used in a company's operations. Assets like property, plant, and equipment, are tangible assets. Tangible assets form the backbone of a company's business by providing the means by which companies produce their goods and services. Tangible assets can be damaged by naturally occurring incidences since they are physical assets. These assets include:
There are two types of tangible assets: Current AssetsCurrent assets include items such as cash, inventory, and marketable securities. These items are typically used within a year and, thus, can be more readily sold to raise cash for emergencies. Fixed AssetsFixed assets are non-current assets that a company uses in its business operations for more than a year. They are recorded on the balance sheet as Property, Plant, and Equipment (PP&E), and include assets such as trucks, machinery, office furniture, buildings, etc. The money that a company generates using tangible assets is recorded on the income statement as revenue. Fixed assets are needed to run the business continually. Types of Companies With Tangible AssetsThere are various industries that have companies with a high proportion of tangible assets. Manufacturing: Companies involved in producing goods have tangible assets, including the automobile and steel industries. The factory equipment, computers, and buildings would all be tangible assets. Technology: Technology companies that are involved in producing smartphones, computers, and other electronic devices use tangible assets to produce their goods. Oil & Gas Industry: Companies within the oil and gas industry also own a large number of fixed assets that are tangible. For example, companies that drill oil own oil rigs and drilling equipment. Oil producers are extremely capital intensive companies, meaning they require significant amounts of capital or money to finance the purchase of their tangible assets. Intangible AssetsIntangible assets are typically nonphysical assets used over the long term. Intangible assets are often intellectual assets, and as a result, it's difficult to assign a value to them because of the uncertainty of future benefits. Intangible assets are non-physical assets that add to a company's future value or worth and can be far more valuable than tangible assets. Both of these types of assets are initially recorded on the balance sheet, which helps investors, creditors, and banks assess the value of the company. Intangible assets are intellectual property that includes:
Depending on the type of business, intangible assets may include internet domain names, performance events, licensing agreements, service contracts, computer software, blueprints, manuscripts, joint ventures, medical records, permits, and trade secrets. Intangible assets add to a company's possible future worth and can be much more valuable than its tangible assets. Brand EquityA brand is an identifying symbol, logo, or name that companies use to distinguish their product from competitors. Brand equity is considered to be an intangible asset because the value of a brand is not a physical asset and is ultimately determined by consumers' perceptions of the brand. A brand's equity contributes to the overall valuation of the company's assets as a whole. Positive brand equity occurs when favorable associations exist with a given product or company that contributes to a brand's equity, which is achieved when consumers are willing to pay more for a product with a recognizable brand name than they would pay for a generic version. Companies can experience diminishing brand equity if their reputation is hurt by any negative actions. For example, a consumer might be willing to pay $4.99 for a tube of Sensodyne toothpaste rather than purchasing the store brand's sensitivity toothpaste for $3.59 despite it being cheaper. The Sensodyne brand has positive equity that translates to a value premium for the manufacturer. Negative brand equity occurs when consumers are not willing to pay extra for a brand-name version of a product. For example, producers of commodity products, such as milk and eggs, may experience negative brand equity because many consumers are not concerned with the specific brands of the milk and eggs they purchase. Since brand equity is an intangible asset, as is a company's intellectual property and goodwill, it cannot be easily accounted for on a company's financial statements; however, a recognizable brand name can still create significant value for a company. Investing in the quality of the product and a creative marketing plan can have a positive impact on the brand's equity and the company's overall viability. Types of Companies With Intangible AssetsSeveral industries have companies with a high proportion of intangible assets. They include the following: Technology: Technologycompanies, particularly within the area of computer companies, copyrights, patents, critical employees, and research and development, are key intangible assets. Apple Inc. (AAPL) would typically have intangible assets. Entertainment: Entertainment and media companies have intangible assets such as publishing rights and essential talent personnel. Intangible assets in the music industry, for example, involve the copyrights to all of a musical artist's songs. Musicians and singers can also have brand recognition associated with them. The music production company might own the rights to the songs, which means that whenever a song is played or sold, revenue is earned. Although these assets have no physical properties, they provide a future financial benefit for the music company and the musical artist. Consumer: Consumer products and services companies have intangibles like patents of formulas and recipes, along with brand name recognition, which are essential intangible assets in highly competitive markets. Coca-Cola Company (KO) is an example of an intangible asset with the value of its highly recognized brand name that is virtually inestimable and is a critical driver in the Coca-Cola Company's success and earnings. Healthcare: The healthcare industry tends to have a high proportion of intangible assets, including brand names, valuable employees, and research and development of medicines and methods of care. Automobile: The automobile industry also relies heavily on intangible assets, primarily patented technologies and brand names. For example, brand names like "Ferrari" are worth billions. Special ConsiderationsTangible assets are also the easiest to value since they typically have a finite value and life span. Tangible assets are recorded on the balance sheet initially, but as they are used up, they get carried over to the income statement. Inventory, for example, is a tangible asset that when used, becomes included in the cost of goods sold for a company. Cost of goods sold represents the costs directly involved with the production of a good. As inventory is used up in the production process, it's recorded in cost of goods sold. Fixed assets, such as plant and equipment, are the other types of tangible assets that are recorded on the balance sheet but as their useful life is reduced, that portion is expensed on the income statement in a process called depreciation. Depreciation is the process of allocating a portion of the cost of an asset over the years as it is used to generate revenue for the company. Depreciation helps to reflect the wear and tear on tangible assets as they are used during their lifetime. Intangible assets can be more challenging to value from an accounting standpoint. Some intangible assets have an initial purchase price, such as a patent or license. Similar to fixed assets, intangible assets are initially recorded on the balance sheet as long-term assets. The cost of some intangible assets can be spread out over the years for which the asset generates value for the company or throughout its useful life. Whereas depreciation is used for tangible assets, intangible assets use amortization. Amortization is the same concept as depreciation, but it's only used for intangibles. Amortization spreads out the cost of the asset each year as it is expensed on the income statement. Tangible Assets vs. Intangible Assets ExampleBelow is a portion of the balance sheet for Exxon Mobil Corporation (XOM) as of Dec. 31, 2021, as reported on the company's annual 10-K filing. Current assets are recorded at the top of the statement and reflect the short-term assets of the company. The long-term assets are recorded below "Total Current Assets."
Is Goodwill an Intangible Asset?Yes, goodwill is an intangible asset. Goodwill is associated when one company acquires another company. Goodwill is the portion of the purchase price that is above the fair market value of the assets and liabilities of the company that was bought. Goodwill is meant to capture the value of a company's brand name, customer base, relationships with stakeholders, and employee relations. What Are the Main Types of Intangible Assets?The main types of intangible assets include goodwill, brand equity, intellectual property, such as patents, research and development (R&D), and licensing. Are Fixed Assets Considered Intangible or Tangible Assets?Fixed assets are always considered tangible assets as they have a physical presence to them. Fixed assets include items such as property, plant, and equipment. Fixed assets are long-term assets that can be sold for cash and are depreciated over their useful life. Which of the following is an intangible asset?These Intangible Assets include licenses, computer software, patents, copyrights, trademarks, goodwill, etc. Thus, Intangible Assets are identifiable non-monetary assets that do not hold any physical substance. Furthermore, assets are called Intangible Assets only if they meet certain recognition criteria as defined in IAS 38 – Intangible Assets.
What are intangible assets under IAS 38?Thus, Intangible Assets are identifiable non-monetary assets that do not hold any physical substance. Furthermore, assets are called Intangible Assets only if they meet certain recognition criteria as defined in IAS 38 – Intangible Assets. Thus, IAS 38 provides accounting treatment for Intangible Assets. That is, it tells you:
Is development cost an intangible asset on the balance sheet?However, you need to charge the Development Cost as an intangible Asset. Provided you can determine its technical and commercial feasibility for sale or use. Thus, you need to recognize only those items as Intangible Assets on the asset side of your balance sheet meeting both the intangible assets definition and recognition criteria.
What accounts are included in the amortization of intangible assets?Accounts receivable. III. Patents. IV. Copyrights. A company plans to amortize an intangible asset. When they journalize the amortization amount, they should debit an expense account and credit either the intangible asset account or an associated accumulated amortization account. limited-life or indefinite-life.
Which of the following is an intangible asset quizlet?Tangible assets- Include land, buildings, equipment, etc. Intangible assets- Include patents, trademarks, copyrights etc.
What are five examples of a firm's intangible resources?Intangible assets are long-term assets, meaning you will use them at your company for more than one year. Examples of intangible assets include goodwill, brand recognition, copyrights, patents, trademarks, trade names, and customer lists.
Which of the following is an example of an intangible company resource?Goodwill, brand recognition and intellectual property, such as patents, trademarks, and copyrights, are all intangible assets.
Which one of the following is not an intangible resource?The correct option is: c.
The technology is the tangible resources of the firm. The intangible assets of the firm are capital, reputation, human capital, and many more.
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In addition to human resources, which of the following are a companys intangible assets?
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