What are Intangible Assets?
Intangible assets are the non-physical things of value that a company owns. These assets have no set monetary value and no physical measurement. They can not be seen or touched, but are nonetheless important to the company's success.
There are two classifications of intangible assets: legal and competitive. Legal assets include things such as intellectual property and copyrights. Competitive assets include know-how and reputation.
Legal assets are the more straightforward of the two. Copyrights, patents, trademarks, brand names, and trade secrets are among them. These assets are definable in more exact terms than competitive ones. For example, Company A owns the rights to Brand Name B. Brand Name B is something recognizable as something that can be owned, although monetary valuation can be a much more difficult task.
Competitive intangible assets are a bit more difficult to define. These assets are usually gained by experience. They are things like know-how, human capital, reputation, leveraging, and collaboration. If naming them is a difficult task, valuation is a science of best guesses.
Intangible assets can also be divided into those that are definite or indefinite. Definite assets are those that last for a particular amount of time, like contract agreements. Indefinite assets go on for an unspecified amount of time, like a brand name that will continue on for as long as the company chooses to produce the product.
As mentioned above, valuation of intangible assets is extremely difficult. Valuation looks into the future of the company to decide how the assets will effect it monetarily in the years to come. The cost of the assets is usually allocated over the course of their useful life or legal terms, whichever is more important in that particular asset's situation. This term is never greater than forty years. This allocation is called amortization of intangible assets.
For example, Company A is selling a patent to Company B that is 2 years old at the time of the transaction. The legal life of the patent is 17 years, so there are 15 years of legal life left in the patent. Most patents are no longer useful after only 10 years, so Company B could argue that the useful life of the patent is only 8 more years. If the original patent cost $50,000 US Dollars (USD), an accountant would divide that cost by the useful life to find what the purchase value would be. In this case $50,000 USD divided by 10 years means it is worth $5,000 USD a year or $40,000 USD at the time of purchase.
@Perdido - A company’s secret recipe is also considered a trade secret. Kentucky Fried Chicken’s recipe is a highly guarded type of intangible asset. Different parts of the secret spice get mixed at different locations. The only full handwritten copy is at corporate headquarters in a vault.
I love KFC, and I was intrigued to read about their safeguards. The recipe is scribed in pencil on notebook paper that is signed by Colonel Sanders. The paper was locked inside a filing cabinet that has two combination locks. Only two unknown executives had access to it, and one of them said nobody has even come close to guessing what makes up the secret recipe. He said it has some surprising ingredients.
Though the paper is yellow now and the handwriting has faded, it remains the only copy. Today, a computerized vault houses the paper, and the area is monitored by security cameras and motion detectors.
I can think of another example of an intangible asset. I suppose it could fall under the category of trade secrets.
This example is a secret formula. Soda companies each have their own, and I hear that they guard them very closely. In fact, the Coca-Cola company went to extremes to hide theirs.
The story goes that an early president of Coca-Cola worried that competitors would get the recipe, so he insisted that it never be written down again. The staff had to remove the labels from all the ingredient containers. They could only identify the ingredients by smell and sight. The president went so far as to go through the mail and shred invoices, fearing that employees might try to sell them to the competition.
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