Question

Intangibles can be one of the most important yet most undervalued assets on a company balance sheet (if recorded at all).

Pick a company that has an intangible asset (recorded or not) - tell us what it is, how it's beneficial to the company and how it was developed or purchased.

Answer 1

Companies almost always end up owning assets of value that cannot be touched, felt, or seen. These intangible assets, as they are called, consist of patents, trademarks, brand names, franchises, and economic goodwill, which is different than accounting goodwill. Economic goodwill, which is frequently referred to as franchise value these days, consists of the intangible advantages a company has over its competitors such as an excellent reputation, strategic location, business connections, etc. While every effort should be made for businesses to carry these intangible assets at costs on the balance sheet, they are sometimes given what amounts to near arbitrarily meaningless values.

When analyzing a balance sheet, you should generally ignore the amount assigned to intangible assets or, at the very least, take it with more than a grain of salt. These intangible assets may be worth a huge amount in real life but the recorded accounting value probably doesn't approximate it to any degree of meaningful accuracy. Consider The Coca-Cola Company. Although it only has around $12.6 billion in net property, plant, and equipment on its balance sheet as of the end of the third quarter 2015 (the official full-year 2015 figures have not, yet, been released), if the whole firm went up in smoke tomorrow, it would easily take $100+ billion to replicate its existing infrastructure, facilities, and distribution network; the difference of which shows up nowhere on the balance sheet.

At the same time, the firm carries more than $13 billion in intangible assets on the books. That $13 billion includes things like the Coca-Cola brand name and logo, which are undoubtedly very, very valuable. If you woke up the next day without a single asset to your name except for that trademark, you'd instantly be a billionaire because investors would want to buy it or license it from you as it will lead to exponentially higher beverage sales thanks to more than a century of brand equity building through marketing, positive experiences, and positive associations.

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BY JOSHUA KENNON

Updated August 04, 2018

Companies almost always end up owning assets of value that cannot be touched, felt, or seen. These intangible assets, as they are called, consist of patents, trademarks, brand names, franchises, and economic goodwill, which is different than accounting goodwill. Economic goodwill, which is frequently referred to as franchise value these days, consists of the intangible advantages a company has over its competitors such as an excellent reputation, strategic location, business connections, etc. While every effort should be made for businesses to carry these intangible assets at costs on the balance sheet, they are sometimes given what amounts to near arbitrarily meaningless values.