Intangible assets refer to non-physical assets within a business that gives a value. These are elements of the company that cannot be touched but contribute significantly to its overall worth.
Examples of intangible assets are the value associated with trademarks, business names, logos and research. Additionally, goodwill is recognised as a significant intangible asset, representing the value attributed to a company’s reputation or brand.
Goodwill is an intangible asset
Goodwill is classified as an intangible asset because a company boasting a strong brand or positive reputation is deemed to possess higher intrinsic value. When such a company is sold, the selling price exceeds the company’s book value. The disparity between these values is identified as the company’s goodwill. In accounting terms, goodwill is categorised under fixed assets, denoting assets that retain value over an extended period.
Accounting for intangible assets
To incorporate an intangible asset into the balance sheet, specific criteria must be satisfied. Firstly, there should be a reasonable expectation that the asset will give economic benefits for the company. Secondly, the acquisition cost of the asset must be quantifiable. Assigning an unreasonably high value to assets such as logos and brands is not permissible.
Once these criteria are met, costs related to activities like research and development can be capitalised in the company’s financial statements rather than being expensed in the income statement.