Intangible Assets

Long-term assets that lack a physical substance

Intangible Assets

Like all assets, intangible assets are those that are expected to generate economic returns for the company in the future. As a long-term asset, this expectation is supposed to last for more than one year or one operating cycle. Intangible assets, however, lack a physical substance like other assets such as inventory and equipment.

Intangible Assets form the other largest category of long-term assets, other than PP&E. What distinguishes intangible assets from other long-term, fixed assets is that they are not physical and not tangible. Intangible assets can be separated into two classes. They are identifiable and non-identifiable.

Identifiable and Unidentifiable Intangible Assets

Identifiable, intangible assets are those that can be separated on its own and can even be sold by the company. These are such assets as intellectual property, patents, copyrights, trademarks and tradenames. Software and other computer related assets outside of the hardware also classify as identifiable intangible assets.

Unidentifiable, intangible assets are those that cannot be physically separated from the company, or do not have physical substance. The most predominant unidentifiable, intangible assets are goodwill. Internally generated goodwill is expensed as a loss, but externally generated goodwill when a company acquires or merges is capitalized as an asset. This means that when a company pays above the fair value of another company to acquire it, the difference is goodwill. This asset is not depreciated like PP&E, but is instead tested for impairment regularly. A company will take on an impairment loss, if it deems the goodwill’s value is not as high as it’s book value.

Another key unidentifiable asset is branding and reputation. While a company can sell its trademark, logos and such, it can be very difficult to separate good branding and reputation from a strong company. This branding is expected to generate good economic returns for the company in the future.

Amortization expense

While PP&E is depreciated, intangible assets are amortized (except for goodwill). These assets are amortized over the useful life of the asset. Generally, intangible assets are simply amortized using straight-line expense.

If an intangible asset has a perpetual life, it is not amortized. Consequently, if an intangible asset has a useful life but can be renewed easily and without substantial costs, it is considered perpetual and is also not amortized.

Example

McRonalds has two intangible assets. The first is a patent worth $25,000,000 and has a useful life of 50 years. This patent expires and cannot be renewed. The second is a trademark worth $1,000,000, has a useful life of 10 years upon which it expires. However, the trademark can be renewed at marginal costs. What is McRonald’s amortization expense per year?

The trademark is not amortized, as it virtually has a perpetual life. The patent, however, is amortized with straight-line over it’s 50-year life. Amortization expense is 25,000,000 / 50 = $500,000. Thus, yearly amortization expense for McRonald’s is $500,000.

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