Accounts & FinanceIntangible Assets

HL ONLY

To understand what intangible assets are and understand the difficulties of valuing them

To be able to calculate depreciation and stock valuations

Learning Objectives

Non-monetary assets that cannot be seen, touched or physically measured, and are created through time and effort, and are identifiable as a separate asset

What is an intangible asset?

Prestige and reputation of a business will also give value to a business over and above the worth of its physical assets

Valuing intangible assets

Goodwill

Normally appears on a balance sheet just after it has been

purchased for more than its assets are

worthOR

When the business is being prepared for a

sale

Can be “written off” if it has been

included in the purchase of

another company

Business A buys Business B for $2M Net asset value of B is only $5M A has paid $0.5M for the “goodwill” of

Business B WHY?

◦ Well known◦ Well established◦ Good trading links

Goodwill

Two accounting conventions regarding goodwill:◦ It should NOT appear as an asset of an existing

business it is so difficult to value and can disappear rapidly

◦ It will appear on a balance sheet of a business that has bought another firm and has paid for goodwill, it will appear as a non-current intangible asset but should be removed when necessary

Goodwill

Examples◦ Goodwill◦ Patents◦ Copyrights◦ Reputation

Intangible Assets

Difficult to put a value on intangible assets as they are rarely bought and sold on the open

market

Often known as intellectual

property – unless acquired through

merger or takeover

For many companies, main source of future

earnings

Market value with many

intangible assets will be much

greater than the balance sheet or

book value