Intangible Asset - Definition

There are different definitions of 'intangible assets'. In the most basic terms, it is an asset that is not physical in nature. The examples below, grouped into three categories, typically fall within the definition of intangible assets.

Rights:
Leases; distribution agreements;employment contracts; covenants; financing arrangements; supply contracts; licenses; certifications; franchises.

Relationships:
Trained and assembled workforce; customer and distribution relationships.

Intellectual Property:
Trademarks; patents; copyrights; proprietary technology (e.g. formulas; recipes; specifications; formulations; training programs; marketing strategies; artistic techniques; customer lists; demographic studies; product test results; business knowledge - processes; lead times; cost and pricing data; trade secrets and know-how).

International accounting standards (IAS) adopt an alternative method of classification, namely:

  • Artistic-related intangible assets
  • Marketing-related intangible assets
  • Technology-based intangible assets
  • Customer-related intangible assets
  • Contract-based intangible assets

In accounting terms, an asset is defined as a resource that is controlled by the entity in question and which is expected to provide future economic benefits to it. The International Accounting Standards Board definition of an intangible asset requires it to be:

A) Non-monetary
B) Without physical substance
C) 'Identifiable'

In order to be 'identifiable' it must either be separable (capable of being separated from the entity and sold, transferred or licensed) or it must arise from contractual or legal rights (irrespective of whether those rights are themselves 'separable').

It is important to recognise the distinction between internally-generated and acquired intangible assets. IAS only allow acquired intangible assets to be recognised on the balance sheet provided that they meet the above mentioned criteria. I.e; the internally generated intangibles of a company cannot be explicitly stated on its balance sheet.

This results in what is sometimes described as 'internally generated goodwill'. This is the difference between the fair market value of a business and the value of its identifiable balance sheet net assets. The treatment of this goodwill only changes if the company is acquired, converting the goodwill from internally-generated to acquired.

Intangible assets that may be recognised on a balance sheet under IAS are typically only a fraction of the total intangible asset value of a business, with the remaining value continuing to be classified as 'goodwill'. Brands, if acquired, can be identified under these rules and added to the balance sheet. This results in the unusual situation where internally-generated brands of the acquiree may be recognised on the acquirer's balance sheet but the acquirer's own internally-generated brands may not. For this reason, Brand Finance thinks there is a strong case for the inclusion of internally generated brands on the balance sheet.

Brands fulfil the definition of intangible assets above, in that they are controlled by management, provide future economic benefits and are identifiable and therefore can be sold, transferred or licensed as appropriate. We are increasingly seeing companies taking advantage of this transferability by moving brands (including trademarks and other associated intellectual property, such as design rights and other marketing collateral) to special purpose vehicles, such as brand holding companies, for the purpose of raising finance and tax planning.

 

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