Intangible Asset

What Is an Intangible Asset?

An intangible asset is a resource that a company owns or controls and expects to generate future economic value, but that has no physical form. You cannot touch a patent, a brand name, or a software license the way you can touch a factory or a delivery truck. Even so, these assets can be among a company's most valuable possessions. Well-known brands, proprietary technology, and loyal customer relationships often drive a large share of a business's earnings.

Common Types

Intangible assets are usually grouped into a few broad categories:

• Legal or contractual rights, such as patents, trademarks, copyrights, and franchise agreements
• Acquired or internally developed know-how, such as software, databases, and trade secrets
• Relationships, such as customer lists and supplier contracts
• Goodwill, which arises when one company buys another for more than the fair value of its identifiable net assets

Some intangibles have a limited useful life and are gradually written down through amortization. Others, such as certain trademarks and goodwill, may have indefinite lives and are instead tested periodically for impairment.

Why It Matters to Investors

Accounting rules treat intangibles differently depending on how they were obtained. Intangibles bought in an acquisition are recorded on the balance sheet at their purchase price. Internally built intangibles, such as a brand built over decades, often do not appear on the balance sheet at all, because their costs were expensed as they were incurred. As a result, a company's book value can understate what its intangibles are worth. This is one reason investors often look beyond the balance sheet when assessing a business that depends heavily on brands, research, or data.

Intangible assets can also be a source of risk. Their value depends on legal protection, competition, and changing customer preferences, so they can lose value quickly. When a company writes down goodwill or another intangible, it signals that expected future benefits have fallen short of what was previously recorded.