An intangible asset is an asset that has no physical form, is not something material and therefore cannot be seen or touched.
Intangible assets come from the knowledge, skills and attitudes of people and companies. There are many types of intangible assets such as patents, trademarks, copyrights, goodwill, internet domains, franchises, etc. The opposite of an intangible asset is a tangible asset.
Despite not having a physical nature, intangible assets are very valuable resources for companies. They are resources that belong to the company and that can generate a great competitive advantage if they are properly managed.
The set of intangible assets that a company has at a given time is known as intellectual capital, since they generate great value thanks to the knowledge and skills of employees and the company itself. Most intangible assets are not accounted for in the traditional financial statements of companies, as they are very difficult to quantify.
Characteristics of intangible assets
An intangible asset, like all assets , must provide reasonably estimated future economic benefits and must be the result of a previous transaction (for example, a purchase). The main difference with the tangibles, is that they have no physical form.
According to the international accounting standard, “an intangible asset is characterized in that it is an identifiable asset, without physical substance and that is intended to be used in the production or supply of goods or services, for lease to third parties or for administrative purposes.”
However, there are non-identifiable intangible assets, which cannot be acquired separately from the company and that can have an indefinite life. The most common example of an unidentifiable intangible asset is goodwill, which is the company’s know-how, brand influence, customer loyalty, etc.
Some intangible assets have defined lives, such as patents, while others have an indefinite life, such as goodwill. In accounting, intangible assets of indefinite life are not amortized. However, intangible assets that have a defined life are amortized.
Example of intangible asset
Suppose a company that buys the right to exploit a patent for 5 years. This patent allows you to manufacture containers that are much less harmful to the environment while being cheaper to produce.
This patent will be an intangible asset, which will also be amortized over those 5 years.