Question

What factors go into the consideration of if a transaction has an intangible asset created and how would it be valued? What are the differentiation factors to an internally developed intangible asset and one that is purchased?

Answer 1

An intangible asset is an asset that is not physical in nature. Goodwill, brand recognition and intellectual property, such as patents, trademarks, and copyrights, are all intangible assets.

The difference is multiplied by the company's average tangible assets to calculate an average annual earning from the Intangibles. Dividing the above-average earnings by the company's average cost of capital or an interest rate, one can derive an estimate of the value of its intangible assets or intellectual capital.

Internally developed intangible assets are those that are non-physical, but identifiable. Think of a company’s proprietary technology (computer software, etc.), copyrights, patents, licensing agreements, and website domain names. These aren’t things that one can touch, exactly, but it is possible to estimate their value to the enterprise. Intangible assets can be bought and sold independently of the business itself. This type of assets are not separately shown in Balance Sheet

But Purchase intangible assets is one of the concepts that can give non-accounting (and even some accounting) business folk a fit is the distinction between goodwill and other intangible assets in a company’s financial statements. Perhaps the confusion is to be expected. After all, goodwill denotes the value of certain non-monetary, non-physical resources of the business, and that sounds like exactly what an intangible asset is. It shows in Balance Sheet separately.