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Anintangible asset is anasset that lacks physical substance. Examples arepatents,copyright,franchises,goodwill,trademarks, andtrade names,reputation,R&D,know-how,organizational capital as well as any form ofdigital asset such assoftware and data. This is in contrast to physical assets (machinery,buildings, etc.) andfinancial assets (government securities, etc.).[1]
Intangible assets are usually very difficult tovalue. Today, a large part of the corporate economy (in terms ofnet present value) consists of intangible assets,[2] reflecting the growth of information technology (IT) and organizational capital.[3] Specifically, each dollar of IT has been found to be associated with and increase in firm market valuation of over $10, compared with an increase of just over $1 per dollar of investment in other tangible assets.[4] Furthermore, firms that both make organizational capital investments and have a large computer capital stock have disproportionately higher market valuations.[5]
Intangible assets may be one possible contributor to the disparity between "company value as per their accounting records", as well as "company value as per their market capitalization".[7] Considering this argument, it is important to understand what an intangible asset truly is in the eyes of an accountant. A number of attempts have been made to define intangible assets:
The lack of physical substance would therefore seem to be a defining characteristic of an intangible asset. Both the IASB and FASB definitions specifically preclude monetary assets in their definition of an intangible asset. This is necessary in order to avoid the classification of items such as accounts receivable, derivatives and cash in the bank as an intangible asset. IAS 38 contains examples of intangible assets, including: computer software, copyright and patents.
TheInternational Accounting Standards Board (IASB) offers some guidance (IAS 38) as to how intangible assets should be accounted for infinancial statements. In general, legal intangibles that are developed internally are not recognized and legal intangibles that are purchased from third parties are recognized.[11] Wordings are similar to IAS 9.
Under US GAAP, intangible assets[11][12] are classified into: Purchased vs. internally created intangibles, and Limited-life vs. indefinite-life intangibles.[13]
Intangible assets are typically expensed according to their respective life expectancy.[11][9] Intangible assets have either an identifiable or an indefinite useful life. Intangible assets with identifiable useful lives areamortized on a straight-line basis over their economic or legal life,[14] whichever is shorter. Examples of intangible assets with identifiable useful lives are copyrights and patents. Intangible assets with indefinite useful lives are reassessed each year for impairment. If an impairment has occurred, then a loss must be recognized. An impairmentloss is determined by subtracting the asset's fair value from the asset's book/carrying value. Trademarks and goodwill are examples of intangible assets with indefinite useful lives. Goodwill has to be tested for impairment rather than amortized. If impaired, goodwill is reduced and loss is recognized in the Income statement.
Research and development (known also as R&D[11]) is considered to be an intangible asset (about 16 percent of all intangible assets in the US),[15] even though most countries treat R&D as current expenses for both legal and tax purposes.[11] Most countries report some intangibles in their National Income and Product Accounts (NIPA).[citation needed] The contribution of intangible assets in long-term GDP growth has been recognized by economists.[16] Also of note, acquired "In-Process Research and Development" (IPR&D) is considered an asset under US GAAP.[17]
IAS 38 requires any project that results in the generation of a resource to the entity be classified into two phases: a research phase, and a development phase.
The classification of research and development expenditure can be highly subjective, and it is important to note that organizations may have ulterior motives in their classification of research and development expenditures.[citation needed]
For personal income tax purposes, some costs with respect to intangible assets must be capitalized rather than treated asdeductible expenses. Treasury regulations in the USA generally require capitalization of costs associated with acquiring, creating, or enhancing intangible assets.[18] For example, an amount paid to obtain atrademark must be capitalized. Certain amounts paid to facilitate these transactions are also capitalized. Some types of intangible assets are categorized based on whether the asset is acquired from another party or created by the taxpayer. The regulations contain many provisions intended to make it easier to determine when capitalization is required.[19]
Given the growing importance of intangible assets as a source of economic growth and tax revenue,[16] and because their non-physical nature makes it easier for taxpayers to engage in tax strategies such asincome-shifting ortransfer pricing,[20] tax authorities and international organizations have been designing ways to link intangible assets to the place where they were created, hence defining nexus. Intangibles for corporations areamortized over a 15-year period, equivalent to 180 months.
Definition of "intangibles" differs from standard accounting, in some US state governments. These governments may refer to stocks and bonds as "intangibles".[21]
The most valuable firms, spanning high-tech, pharmaceutical, automotive and financial services industries, derive their competitiveness and market value from intangible rather than physical, that is to say, "tangible" capital. Among companies in theS&P 500, intangibles including intellectual property account for 90% of the totalmarket value.[22][23]
Intangible assets, though not always visible, play a crucial role in shaping the success of companies and countries in today's competitive environment. Investing in these assets helps businesses attract skilled talent, build customer loyalty, achieve market success, foster innovation and growth.[24][25] These assets also contribute to improved economic opportunities, higher-paying jobs, enhanced product quality. According toWIPO'sWorld IP Report (2017),intellectual property (IP) and other intangibles contribute on average twice as much value as tangible capital to products manufactured and traded along value chains.[26]
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Recent estimates from Brand Finance used in theGlobal Innovation Index (GII) suggest that the global value of intangibles has been growing rapidly over the last 25 years to reach around USD 62 trillion in 2023.[27][25]
In 2023, intangible investment accounted for over 16 percent ofGDP in highly intangible-intensive economies likeSweden, theUnited States of America (US) andFrance.[24]A trend showing intangible investment growing faster than tangible investment at country level.India was the country that experienced the fastest growth in intangible investment from 2011 to 2020.[24]
Software and data and brands are the two fastest growing types of intangible assets, both growing three times faster than R&D between 2011–2021.[24]
Valuing intangible assets is nevertheless a challenge. There is no single methodology to value them. Depending on the type of asset at hand, context and data availability, often a combination of different approaches is used. In most cases, the value of intangibles can be estimated considering the future economic benefits associated with the asset, like projectedcash flows. However, for many intangibles in practice this can be difficult. The cost to repurchase or recreate an asset or comparison with transactions involving similar assets are also common methods to determine value.[25]
Intangible asset finance, also known as IP finance, is the branch offinance that uses intangible assets such asintellectual property (legal intangible) andreputation (competitive intangible) to gain access tocredit. Intangible assets can for example be used inequity finance. For example, manySwiss companies use equity finance to support their growth, particularlyVenture capital. The information gathered through interviews indicates that a supportiveIP portfolio, particularly when reinforced by robustpatents, plays a crucial role as a contributing factor. Without these rights, investors are reluctant to engage withstartups.[28][29] InChina,pledge-backed lending is the earliest type ofIP financing developed and the fastest growing one. In 2022, the registered amount ofpatent andtrademark pledged lending in China reached CNY 486.9 billion, up 57.1 percent year-on-year. Twenty-eight thousand projects from 26,000 chinese businesses receivedloans, both increasing about 65.5 percent year-on-year.[30][29]
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