Fixed assets are those assets which are not tangible in nature but has some monetary values and are useful for rather longer period of time.
They increase a company’s potential future value, and they can be more valuable and importantly more real than real assets.
The majority of intangible assets are classified into the category of noncurrent assets which implies that their use life is more than one year.
They are usually intangible fixed assets including patents, trademarks, copyrights and goodwill.
They may be Internet domain names, service contracts, computer software, architectural plans, written copies and manuscripts, joint ventures and business, medical records and permits and many more.
Brand equity is an intangible variable because the value of brand is created by the company customers and it is not actual in terms of tangible.
In most cases evaluation and recognition of intangible assets experiences difficulties due to the challenges of placing value on them.
This is partly due to inherent uncertainty concerning the future gains from their use—and the capability to establish a probable cost for the gains.
How Do Intangible Assets Show on a Balance Sheet?
Since only purchased intangible assets appear on a company’s balance sheet, they have a discernable value connected with a discernable useful life.
It is recorded on the balance sheet as long-term assets and the cost is determined according to its price, and amortization period.
Intangible makes a difference with tangible assets that possess a physical character. Examples for the intangible assets are patents, goodwill, trademarks, franchises, customer list, licensing, copyrights and intellectual property.
On the other hand tangible assets refer to those assets that can be physically touched, seen or felt. Current assets, fixed assets and capital assets include buildings, machinery and stocks.
Key Takeaways
- Intangible assets only show up on the balance sheet if the company acquires it, not develops it themselves, and furthermore, these intangible assets have a recognizable value and a discernible useful life.
- In balance sheet, the intangibles are reported under the long-term heading and their value is stated at cost price and any amortization that has been done.
- Some of the intangible assets are patents; goodwill; trademarks; franchises; licensing; copyrights; and intellectual property.
- This section is not to be confused with tangible fixed assets which are items that have more or less a physical existence and include such things as buildings and office furniture.
- These assets increase the value of the possible future cash flows and can be far more valuable than stated tangible assets.
Tangible Assets vs. Intangible Assets on Balance Sheet
Tangible assets as well are recorded on a company balance sheet; they fall under the company’s total assets.
With respect to another distinction, tangible assets can be grouped into two account categories: current and non-current or fixed assets.
Current assets are those, which can be converted into cash, used or sold within a period of 12 months. They offer cash and enable a firm to carry out its normal business activities. Inventory is a good example of a current asset.
Non current assets are the assets that are physical in nature and do not match the condition of converting it to cash within the next twelve months. Non-current assets include property, plant and equipment.
While tangible assets in a business are recorded in line with the accounting Co Partnership and Depreciation principles and appear on the balance sheet, intangible assets only appear when they have a useful economic life and can be valued, they are shown in the balance sheet as fixed assets- being assets with a useful life exceeding one year and are amortized at a varying rate depending on the price set for them in the financial market.
Internally developed intangible assets cannot be captured on a balance sheet of a company.
An Example of a Balance Sheet
From Apple’s Form 10 K statement of 2017, I present a portion of the balance sheet.
Intangible assets comprise these categories on the balance sheet: “Goodwill” and “Acquired Intangible Assets, net.”
The above value presented as goodwill was 5,7 billion USD for Apple in the end of 2017.
The head result reflects the Appendix figure, where “Acquired Intangibles, net” were approximately $2.2 billion for Apple in 2017 (marked in blue).
Current assets or near cash items are not the proper place to recognize intangible assets which are exceptions but long-term assets (the pink-lined column).
They are in the business for over one period, the useful economic life of the assets are long.
However, huge name recognition value, like Apple’s internally developed logo, does not compile as an asset on the balance sheet.
The problem with this tool is that it is an internally developed tool and as such it does not have an inherent price that can be applied in ascertaining the fair market value of the tool. But if it was involved in the acquisition of another firm the assets of which include the logo then the logo finds its way onto the balance sheet.
For instance, assume a company goes out and buy some form of intangible asset, for example right to be using the customer list of another firm for the next ten years, which is a finite span- identifiable life.
They suggest that if that company buys the customer list—an identifiable intangible asset—for $10,000, and this license is for 10 years (given as a finite life), then $1,000 of the cost would be written off each year, and the value of the customer list license would be shown on the balance sheet in year three say, $7,000.
As such, goodwill that falls under the category of intangible assets with an infinite life, contra to intangible assets with finite life, is not amortized systematically.
They are put on the balance sheet, like Apple has done with its PPA contracts, and reviewed for impairment on occasion.
Identifiable and Unidentifiable Intangible Assets
However, tangible assets can be further divided into fixed and current, while identifiable intangible assets are those that are separable and may be sold by the business.
They include a form of property as patents, copyrights, trademarks and trade names, goodwill, etc. Software and other non-hardware related items also group them as identifiable intangible assets.
Non-identifiable fixed / Intangible assets are those that cannot be separated from the business. The best known unidentifiable intangible asset is goodwill. Internally generated goodwill is always treated as an expense and has no place in the balance sheet.
Nonetheless, acquired goodwill from outside can be recognized as an organization’s asset if it ends up acquiring another organization through a business combination and pays more than the actual value for that specific asset. That difference is reflected as goodwill in the accounts.
Such an asset is not written off in the same manner as PP&E. However, it is instead tested for impairment on a regularly basis.
A company will take an impairment loss charge when it feels that the value of goodwill is below the figure that has been recorded on the company’s balance sheet.
Another unidentifiable asset is closely associated with branding and reputation. It implies that unlike other resources including the trademark, logos and such like, it becomes hard to disentangle good branding and reputation from a strong company.
However, brand awareness and brand image are expected to offer a good economic value in the future in the company.
Amortization Expense
Although, PP&E is being depreciated, intangible assets are being amortized (except goodwill). Such assets are written off over useful life of the asset.
In a broad sense, intangible assets are just written off using the straight-line method of expense.
Intangible asset that has a perpetual life are not amortized. Therefore, if an intangible asset has a useful life but can be easily renewed without significant expense it is considered to have an indefinite life and is not amortized.
Example
McDonald’s has two types of assets and they are; The first one is a patent $25,000,000 and useful life span of fifty years.
The patent term expires and it cannot be renewed.
The second is a trademark, the value of which is a million dollars, however it has a useful life of 10 years after which it will no longer be so valuable. However, the trademark can be renewed at a nominal price.; What amount of amortization expense is McDonald recognizing each year?
Trademarks are not amortized since they are almost immortal with almost infinite useful economic life. The patent, however, is written off on the straight-line scale over the 50 years lifetime of the patent.
The amortization expense is $25,000,000 divided by 50 which constitutes $500,000. So, the yearly amortization expense for McRonald’s is $ 500,000.
Goodwill
According to the earlier mention of identifiable intangible asset ‘Goodwill’ does not fit in the IFRS definition because it falls under Not Identifiable/not separable. Still, goodwill is still an intangible asset, in a separate class of its own.
The only major difference concern goodwill is that unlike other intangibles the goodwill is almost never amortize (there may be some exceptions to this the U S private companies are only allowed to amortized goodwill over 10 years while companies in the public domain are not allowed in any way to amortize their goodwill.)
In accounting, goodwill is defined as a difference between the value, for which an acquisition took place and the value of the fair share of assets minus liabilities.
FAQ’s
Is an Intangible Asset a Noncurrent or Current asset?
Noncurrent assets can also be Intangible assets. Noncurrent assets are the company’s long-term investments; these have a useful life that spans for more than one year; and they cannot become cash quickly.
Examples of intangible noncurrent assets include patents, trademarks, copyrights, brand reputation, customer lists and goodwill.
What Should Be Included in The Balance Sheet Under the Classification Of Tangible Assets?
Tangible assets are those physical assets that one can touch with his/her hands, for instance; property, plant, equipment, and stocks.
In balance sheet, tangible assets are usually recorded by historical cost adjusted with accumulated depreciation.
Amortization expense and Intangible assets?
Amortization expense on the other hand is the systematic allocation of the cost of an intangible asset over the notified useful life.
They are similar to the depreciation on fixed assets but ITED is on intangible assets.
Can intangible assets be classified as non-current assets, nonetheless?
Of course, intangible assets are categorized as noncurrent assets because they offer the benefits that extend beyond one year.
What are the issues regarding the valuation of intangible assets, and how do they define the difference between intangible and tangible assets?
Technical assets do not have a physical form and include assets like patents and trademarks, whereas, the physical assets are fixed assets like building, machinery and stocks.
Can you describe the concept of intangible asset and give example of the same?
Examples of intangible assets include:
Patents: Legal rights to inventions.
Trademarks: Brand names and logos.
Copyrights: Copyright and Neighboring Rights: Protection of Legal rights to original works of Authorship.
Goodwill: Positive value associated with corporate image and customer linkages.
What is bad about intangible assets?
Valuation Challenges: Some of the reasons for BHP Billiton’s reported value difficult to value Intangible strength asset.
Amortization: Consequently, it has again emerged that not all intangible assets are amortized, and it becomes a bit difficult to compare the financial statements.
Impairment: They can also become impaired, meaning that the company has to test for impairment.
In what way can intangible assets be tested for impairment?
While goodwill and other indefinite-lived intangible assets are only tested for impairment annually or when there is an indication of impairment.
This entails carrying an evaluation of the asset in the company’s balance sheet against the fair value of the asset at any given time.