Question

Find a company that carries intangible asset(s) on their books and explain how they determined the valuation. Discuss the types of intangibles you find.

Answer 1

Now we arrive at intangible assets on the balance sheet. 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 the 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.

Types of Intangible Assets

Trademarks

A trademark is an intangible asset legally preventing others from using a business’s logo, name, or other branding.

Key Points

As a trademarks are used to identify a specific type of business or service, they are important for businesses that want to protect their branding.

A trademark’s value for accounting purposes equals what it cost to acquire.

Trademarks are not amortized, but if one loses its value, it can be impaired.

Key Terms

Trademark: A word, symbol, or phrase used to identify a particular company’s product and differentiate it from other companies’ products.

impairment: A downward revaluation, a write-down.

A trademark is an image, word, phrase, logo or combination of those elements used to identify a specific type of business or service. A trademark allows a customer to instantly identify a product and associate the item with a response regarding its quality and price. If developed properly, a trademark will allow customers to make a positive connection with the product to which it is attached. In short, a trademark is a visual representation of a business’s brand or logo.

Valuing Trademarks

Trademarks have enormous value to businesses, although that may not translate to a business’s financial report. A business can only value any intangible asset, including a trademark, based on what it cost to acquire.

Annual Review of Trademarks

Some intangible assets are amortized over time. This means that the value decreases every year as an expense for using the item. The amount the value of the asset decreases also decreases the business’s income for that year. Trademarks are not amortized since each is considered to have an indefinite life, meaning a perception exists that a trademark can retain its value forever.

Copyrights

A copyright is an amortizable, intangible asset that is used to secure the legal right to publish a work of authorship.

Key Points

A work of authorship can include poetry, novels, computer software, movies, plays, songs and architectural drawings.

Most copyrights last for the duration of an author’s life plus 70 years.

The value of a copyright equals the cost it took to secure the legal copyright on a work the business created, or the price the business paid to purchase the copyright from the original owner.

Every year, the company must amortize the value of the copyright by an amount equal to the original value of the copyright divided by the projected amount of time that the copyright will be able to generate revenue.

Key Terms

amortization: The cost distribution of an intangible asset, like an intellectual property right, over the projected useful life of the asset.

Copyright: the right by law to be the entity which determines who may publish, copy and distribute a piece of writing, music, picture or other work of authorship.

Valuing a Copyright

The value a business attaches to a copyright depends on how it was acquired. If the business developed the work in question, the value of the copyright is equal to the cost the business incurred securing the copyright. This would include any legal or application fees it might have incurred to obtain the copyright.

If the business purchased the copyright from another company, the business will record the acquired asset at it acquisition cost.

Patents

A patent is an amortizable, intangible asset that grants a business the sole right to manufacture and sell an invention.

Valuing a Patent

The value of a patent that a company would record on its books depends on how it acquired the patent. If the business developed the invention internally, all the research and development costs associated with that item would have been listed as an expense as those fees were incurred. Therefore, the initial value of an internally developed patent could be quite low.

If the business purchased the patent from the original holder, the value of the patent equals the acquisition cost.

The value of the patent may be increased if a patent holding company defends its rights to the invention in a lawsuit. If the company uses an outside law firm, all fees the business pays to the firm to defend the patent will be included as part of the patent’s book value.

Goodwill

Goodwill is an intangible asset that equals an acquired company’s purchase price minus the value of its net assets when it was acquired.

Valuing Goodwill

A company can list goodwill on its balance sheet when it acquires another business at a higher cost than what the assets and liabilities on the acquired company’s balance sheet dictate. In short, goodwill equals the acquisition price minus net assets.

Franchises and Licenses

Franchises and licenses are intangible assets that legally entitle a business to sell a product or service developed by another entity.

AND MANY MORE .