Intangible asset

Intangible asset is a non-physical resource with economic value that a company owns or controls, including patents, trademarks, copyrights, goodwill, brand recognition, and proprietary technology (Lev B. 2001, p.5)^[1]. You can't touch a patent or weigh a trademark. But when Microsoft acquired LinkedIn for $26 billion in 2016, only about $4 billion bought tangible assets—the rest paid for intangibles. When Apple's market capitalization exceeds $3 trillion, the factories and inventory on its books represent a fraction of that value. The difference? Intangible assets.

The shift matters enormously. In 1975, tangible assets comprised 83% of S&P 500 market value; by 2020, intangibles dominated at over 90%. Modern economies run on knowledge, brands, and intellectual property far more than on physical plant and equipment. Yet accounting standards struggle to capture this reality, often forcing companies to expense investments in intangibles while capitalizing brick-and-mortar purchases.

Classification

Intangible assets fall into several categories:

Intellectual property

Patents. Legal monopolies on inventions, typically lasting 20 years from filing. Pharmaceutical patents on blockbuster drugs represent billions in value. Tesla's decision to open its electric vehicle patents in 2014 signaled confidence that its lead depended on more than patent protection alone^[2].

Trademarks. Brand identifiers—names, logos, slogans—protected indefinitely with continued use and renewal. The Nike swoosh, Apple's bitten apple, McDonald's golden arches. Trademark protection prevents competitors from confusing consumers.

Copyrights. Protection for original creative works—books, music, software code, architectural designs. Disney's copyright portfolio includes characters generating billions annually decades after creation.

Trade secrets. Confidential information providing competitive advantage. Coca-Cola's formula, Google's search algorithm, KFC's "secret recipe." Protection lasts as long as secrecy is maintained—potentially forever, unlike patents.

Contractual rights

Licenses and franchises. Rights to operate under specific terms. A McDonald's franchise agreement, a radio broadcasting license, rights to manufacture a patented product.

Customer contracts. Documented relationships with committed revenue streams. Long-term supply agreements, subscription contracts, maintenance agreements.

Non-compete agreements. Restrictions on former employees or acquired companies from competing.

Relationship-based intangibles

Customer relationships. The value of established customer bases. Acquiring a company often means acquiring its customers—their buying patterns, loyalty, and future revenue potential^[3].

Supplier relationships. Favorable terms, priority access, or special capabilities secured through long relationships.

Employee expertise. Human capital—the knowledge, skills, and relationships employees possess. Harder to protect than other intangibles; employees can leave.

Goodwill

Goodwill represents the premium paid in acquisitions beyond identifiable asset values. When Company A pays $500 million for Company B whose net identifiable assets total $350 million, the $150 million difference records as goodwill. It captures synergies, reputation, market position, and other value drivers that resist separate identification.

Accounting treatment

Standards for intangible asset accounting differ between acquired and internally developed assets:

Acquired intangibles

Recognition. Intangibles acquired in business combinations are recognized separately from goodwill if they meet either the contractual-legal criterion (arise from contractual or legal rights) or the separability criterion (can be separated and sold, transferred, or licensed)^[4].

Initial measurement. Acquired intangibles are recorded at fair value. This often requires significant judgment—what is a customer relationship worth? Valuation experts employ income approaches (discounting future cash flows), market approaches (comparable transactions), and cost approaches (reproduction cost).

Subsequent measurement. Under US GAAP, intangibles are generally carried at cost less accumulated amortization (for finite-lived) or cost subject to impairment testing (for indefinite-lived). IFRS permits revaluation to fair value in rare cases where active markets exist.

Internally developed intangibles

General rule. US GAAP requires most internally developed intangible costs to be expensed as incurred. Research and development expenses flow through the income statement rather than appearing as assets. A pharmaceutical company spending $2 billion developing a drug shows no corresponding asset until the drug reaches commercialization.

Software exception. Both GAAP and IFRS permit capitalization of certain software development costs once technological feasibility is established.

IFRS development costs. IFRS allows capitalization of development expenditures (though not research) when specific criteria are met—technical feasibility, intention to complete, ability to use or sell, probable future benefits, adequate resources, and reliable cost measurement^[5].

Amortization

Finite-lived intangibles. Assets with limited useful lives are amortized systematically over those lives. A 17-year remaining patent life means 17 years of amortization. Customer relationships might amortize over expected attrition periods.

Indefinite-lived intangibles. Assets with no foreseeable end to benefit periods—certain trademarks, goodwill—are not amortized. Instead, they face annual impairment testing.

Impairment

Testing triggers. Events suggesting impairment—market declines, technological obsolescence, loss of key customers—require testing for both finite- and indefinite-lived intangibles.

Goodwill impairment. US GAAP now permits a simplified one-step test comparing fair value to carrying amount for reporting units. Impairment losses are not reversed^[6].

Valuation methods

Three primary approaches value intangible assets:

Income approach. Estimates present value of future economic benefits. For a patent, this might mean projecting royalty savings, premium pricing, or market share advantages, then discounting at appropriate rates. Relief from royalty method is common—what would licensing this asset cost?

Market approach. Uses prices from comparable transactions. Difficult for unique assets but applicable when similar assets have changed hands. Technology licensing databases provide reference points for some intellectual property.

Cost approach. Estimates reproduction or replacement cost. Appropriate when income or market data is unavailable. What would recreating this customer database cost?

Strategic importance

Intangibles drive competitive advantage:

Barriers to entry. Patents prevent competitor imitation. Brand loyalty makes customer acquisition expensive for entrants. Network effects in platforms create increasing returns that reinforce market position^[7].

Premium pricing. Strong brands command price premiums—Tide versus generic detergent, Rolex versus functional watches. The intangible brand value translates directly to margins.

Operating leverage. Intangible-heavy businesses often show high operating leverage—low marginal costs once the intangible is created. Software distributes globally at near-zero marginal cost; a pharmaceutical pill costs pennies to manufacture.

Acquisition currency. Companies with strong intangibles often acquire using stock. Their high market values (reflecting intangible value) make equity cheap acquisition currency.

Challenges and limitations

Intangible assets present difficulties:

Measurement uncertainty. Fair values involve projections, assumptions, and judgment. Small changes in discount rates or growth assumptions produce large valuation swings.

Rapid obsolescence. Technology intangibles can become worthless overnight. Kodak's photography patents couldn't save the company from digital disruption.

Limited collateral value. Banks hesitate to lend against intangibles. Physical assets can be seized and sold; brand value evaporates when the company fails^[8].

Accounting opacity. Expensing internally developed intangibles means balance sheets understate true asset bases for knowledge-intensive companies. Comparing companies becomes difficult when one grew organically (expenses showed) and another acquired (assets capitalized).

Intangible asset — recommended articles

Accounting theory — Goodwill — Brand management — Intellectual property

References

• Lev B. (2001), Intangibles: Management, Measurement, and Reporting, Brookings Institution Press.
• FASB (2023), ASC 350: Intangibles—Goodwill and Other, Financial Accounting Standards Board.
• IASB (2023), IAS 38: Intangible Assets, IFRS Foundation.
• Damodaran A. (2012), Valuation of Intangible Assets, NYU Stern.

Footnotes

1. ↑ Lev B. (2001), Intangibles, p.5
2. ↑ FASB (2023), ASC 350-20-25
3. ↑ Lev B. (2001), Intangibles, pp.34-56
4. ↑ FASB (2023), ASC 805-20-55
5. ↑ IASB (2023), IAS 38, paragraphs 57-64
6. ↑ FASB (2023), ASC 350-20-35
7. ↑ Lev B. (2001), Intangibles, pp.112-134
8. ↑ Damodaran A. (2012), Valuation of Intangible Assets, Chapter 3

Author: Sławomir Wawak