Intangible assets are those that cannot be touched. In other words, they don’t have a physical existence. But they add value to business. The intangible assets are long-term assets, meaning they have a life more than one year. They can be created or acquired. They do not appear on balance sheet and have no book value. However, they appear on the balance sheet if they have been acquired. For example, a company is acquired on the cost more than the net value of its assets, the above cost would be recorded as an intangible asset on the balance sheet of the acquiring company.
Types of Intangible Assets with Examples
Following are different types of intangible assets:
Good will results from taking over another business. It is difference between the value of tangible assets that is bought and the price that is paid. For instance, the premium is paid for a business due to its brand name. In accounting, this premium is known as goodwill. Let’s say, B Ltd. acquires A Ltd. for rupees 20 million. At the time of purchase, the net value of assets (assets minus liabilities) of A Ltd. was rupees 18 million. Here the difference between cost of purchase (Rs. 20 million) and the net value of assets (Rs. 18 million) is goodwill which amounts to Rs. 2 million. This goodwill (Rs. 2 million) would be recorded on the balance sheet of the purchasing company.
Copyright is a legal right to provided by the law to protect the original work of creator. There are many works that are eligible for copyright protection, for example, articles, books, poetry, novels, musical compositions, movies, TV shows, online videos, dramas, video games and computer software. The primary objective of the copyright law is to protect the time, effort, and creativity of the creator. The copyright law gives right to the copyright owner to reproduce the work, distribute the copies of work and perform the work publically. The copyright owner has option to transfer his exclusive rights to others. Furthermore, copyright does not protect ideas, concepts or techniques. For the work to be copyrighted, it has to be in tangible form. This means any concept, technique or idea has to be written down in physical form in order to be protected by copyright.
Trademark is used to legally protect the logo, design, word or phrase that identifies the product of a business. For instance, the word “Pepsi” is a trademark. Once the trademark is registered, it cannot be used by any other organization. The trademark not only provides the trademark owner the exclusive right to use the mark but also permits the owner to prevent other businesses from using a similar mark that can be confusing for general public. When a firm claims the right for a particular mark, it is allowed to use ‘TM’ (trademark) to designate that the mark is trademarked.
A patent is an exclusive right granted for an invention by the federal government that permits the inventor to exclude others from making, using or selling the invention for a period of time. The patent system helps encourage inventions that are unique and useful for society. The federal government approves application for patent. Most patents are valid for 20 years in the US. However, there are circumstances whereby exceptions are made to extend a patent’s term. In addition, patents encourage firms to continue developing innovative products without the fear of infringement. For instance, large pharmaceutical firm can spend millions of dollars on research and development (R&D). Without patents, their medicines could be duplicated or sold by firms that did not invest on research and development.
A franchise is a type of license provided by a well known firm (franchisor) to a party (franchisee) allowing him to do a business under its name and system. Usually, the franchisee pays the franchisor an initial start up fee and annual licensing fee. The franchise is a very common method to start a business. One of the biggest benefits of acquiring franchise is that you have access to an established brand, meaning that you do not need to invest further capital to make your own brand. The” McDonald's” is the common example of franchise business.