Intangible Assets Research Paper


IntangibleAssets Research Paper

IntangibleAssets Research Paper

Definitionof intangible assets

InternationalAccounting Standards (IAS) 38 defines Intangible Assets asnon-monetary assets that are identifiable, but do not have physicalsubstance. Intangible assets are not destructible by physicaldisasters such as fire or accidents. They also cannot be used ascollateral to obtain a loan. The only way intangible assets can bedestroyed is through carelessness or business failure.

Ifwell safeguarded, they add to an organization’s future worth andcan be helpful in building back or regaining destroyed tangibleassets. The monetary value of intangible assets can be computed bydeducting the net value of the company’s tangible assets from thecompany’s market value. There are cases where the company’sintangible assets outweigh by far the value of its tangible assets.

Thethree attributes that distinguish intangible assets from others are:

  1. Identifiability: An intangible asset is said to be identifiable if it is capable of being licensed, sold, transferred, or rented either separately or together with a contract it is related to. The asset is also deemed identifiable if it is as a result of contractual or other legal rights, whether the said rights are separable or transferable from the asset in consideration or not.

  2. Control: This is the power the asset gives the owner to obtain benefits from it.

  3. Future benefits: This is the ability to be of economic benefit by generating revenues or reducing costs in future.

Classificationof intangible assets

Thereare two categories of intangible assets, namely ownership, and usefullife. Under ownership, there are purchased and internally createdintangible assets. Under useful life, there are limited life andindefinite life intangibles.

Purchasedintangible assets: This are purchased from another entity. Inaccounting for it, the acquisition costs, and all expenses incurredin the acquisition process such as legal fees are recorded.

Internally-createdintangible assets: Internally developed assets are often not recordedin the balance sheet. Rather, all costs incurred in the process ofcreating them are charged under research and development. The onlycosts that can be capitalized are legal, and patent fees in case suchare incurred.

Limited-lifeintangible assets: Such intangible assets have a foreseeable limit tothe benefits the owner will derive from them. For example copyrightsand patents. Even though they are termed as limited-life, suchintangible assets have a useful life of not less than one year.Limited-life intangible assets are usually amortized systemicallythroughout their useful life. An example of limited life intangibleasset is when a company enters a contractual agreement to operateunder another company’s patent for a specified period with nointentions of renewing the agreement.

Indefinite-lifeintangible asset: These are assets that do not have a foreseeablelimit to the cash flows they will generate and are, therefore, notsubject to amortization. They are not subject to any regulatory,economic, legal or contractual factors. Examples of indefinite-lifeintangibles include goodwill and trademarks. For instance, acompany’s brand name stays with it for as long as the company is inoperation. Brand recognition is among the most valuable intangibleassets. Brand strength drives the company’s sales and therefore hasa direct effect on the bottom line profits of the company. Sinceindefinite-life intangible assets are not amortized, it isrecommended that an impairment test be performed on them annually.

Typesof intangible assets

Artistic-relatedintangible assets: These includes copyrights for literary works,music, photos, videos, television programs, paintings.

Customer-relatedintangible assets: Customer lists, contractual customerrelationships, order backlog, supplier relationships.

Market-relatedintangible assets: trademarks, noncompetition agreements, internetdomain names, newspaper mastheads, marketing rights.

Contract-basedintangible assets: lease agreements, franchise agreements, servicecontracts, employment contracts, broadcast rights, licensingagreements, import and export permits, construction permits,exploration permits.

Technology-basedintangible assets: trade secrets, patented technology, patentedcomputer software, technical documentation.

Goodwill:general business going concern value, institutional goodwill,personal goodwill, professional practice goodwill.

Examplesof intangible assets

Coca-ColaTrademark: Coca-Cola has been the strongest brand in the world formany years, and its trademark has been the most valuable until 2012when it was overtaken in value by Apple. Through various valuationmodels, Coca-Cola’s trademark has been estimated to be worth overseventy billion dollars. Interpreted in terms of operations, it is tosay that if all Coca-Cola’s tangible assets were destroyedcatastrophically, the Coca-Cola trademark and other intellectualproperty would be sufficient to sustain positive cash flows for awhole year.

Inother words, Coca-Cola has what it takes to bounce back from adisaster, all lying in their brand name and other intellectualproperties. To attain such a strong brand name, Coca-Cola hasinvested time and money over many years. The result has been globalrecognition and customer loyalty that are the pillars that supportdemand for their products.

Anotheroutstanding Coca-Cola intangible asset is their soft drink tradesecret. The Coca-Cola recipe is among the most guarded trade secretsin history. The documented secret formula had been stored under heavysecurity at the SunTrust Bank Atlanta since 1925. In 2011, it wasmoved to the World of Coca-Cola in Atlanta where it is stored in avault built build purposely for it. The formula is known to only afew employees. This enables them to produce soft drinks that areunmatched by their competitors, and this product differentiationgives them an edge in the market.

Apple’sPatent: Apple was ranked number one on the Patent power scorecards in2010. Apple thrives on innovation, and has been on safeguarding theirintellectual property. These efforts can be seen in the number ofpatents they hold but also through the quality of those patents. In2010, Apple obtained 566 U.S patents, which was five times the numberthey had been granted in 2006.

Thisrobust patent portfolio put Apple ahead of Electronics giants such asPanasonic and Sony. This score is not necessarily about having thehighest number of patents, as a matter of fact, Panasonic, Hitachi,Sony and Canon have a higher number of granted patents. Rather, ithas to do with connectivity with prior innovations (Pipeline Impact),and their general applicability (Pipeline Generality).

Appleis growing their patent portfolio by applying for new patents undertheir name or under the names of their subsidiaries through that is aresult of internal research. They are also through acquisitionsgrowing their portfolio through acquisitions, such as the purchase ofNortel Networks together with their patent portfolio.

Asevidenced by the cited examples, intangible assets play an enormousrole in the organization’s growth and future profitability. Thereare guidelines on how to handle expenses and taxation issues relatingto intangible assets as well as how to account for them accurately onfinancial statements. A proper understanding of intangible assets isparamount for one to appreciate the disparity between a company’svalue according to the accounting records and the same company’svalue under market capitalization.


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