Learn the meaning of an intangible asset. Discover methods of depreciation and amortization. How is the valuation of a financial capital intangible asset calculated?
Intangible assets for the most part are treated like any other assets. They’re recorded on the balance sheet and valued as part of owner’s equity. Like other assets, intangibles are used to generate revenue. They are however more difficult to put a value on. This article looks at how intangible assets are valued as well as methods of depreciation. First off it’s important to understand the definition of an intangible asset.
Definition of an Intangible Asset
Current assets, like cash and accounts receivables, are an accumulation of a monetary figure usually generated by revenue. Fixed assets, like equipment and furniture, have a physical form (tangible) and are easier to put a value on. Intangible assets on the other hand do not have a physical form. Just like any other assets, intangibles do have a value and are part of the owner’s equity of a company.
Examples of Intangible Assets
•Patents
•License
•Copyright
•Goodwill
•Contracts
•Trademark
•Franchise
Every one of the above examples plays a role in generating income. Patents for example allow a company to generate revenue with restraints on the competition. A license to sell a product, like alcohol for example, allows a business to increase revenue with the sale of alcohol.
Valuation of an Intangible Asset
How is a value assigned to an intangible asset? Liquor licenses maybe relatively easier to assign a value then say goodwill. A license has a price on it when it’s purchased, even though the current value maybe higher than the original purchase price. Goodwill on the other hand is the value put on customer retention and the good name of the business within the community.
The value of an intangible asset is generally calculated by how much revenue the asset will produce. It may sound simple, but there are a lot of variables involved for the future expectations of revenue generation. The value placed on a patent of a product for example can be very complex. Changing market conditions, future economic uncertainties and risk factors can be difficult to gauge.
Depreciation and Amortization of Intangible Assets
Depreciation and amortization are synonymous, it’s basically just different terms depending on the asset being devaluated. Fixed assets are depreciated and intangible assets are amortized. Other than the terminology, methods for depreciation of fixed assets can normally be applied when amortizing intangible asset.
Patents, licenses, copyright, contracts and other intangible assets generally have a useful life. Even though they may have a long life in legal terms, they generally have more value (generate more revenue) in the early part of the assets life. Methods of depreciation like straight-line and other accelerated depreciation can generally be applied to the amortization of intangible assets.
There are many rules that may apply to valuation and amortization of intangible assets. Before choosing and implementing a certain method of valuation and amortization, it’s always best to consult a certified public accountant (CPA) to discuss what the best options are for company profitability
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