Intangible assets are those
that cannot be touched. In other words, they don’t have a physical existence.
But they add value to business. The intangible assets are long-term assets,
meaning they have a life more than one year. They can be created or acquired.
They do not appear on balance sheet and have no book value. However, they appear
on the balance sheet if they have been acquired. For example, a company is acquired
on the cost more than the net value of its assets, the above cost would be recorded
as an intangible asset on the balance sheet of the acquiring company.
Types of Intangible Assets with Examples
Following are different types
of intangible assets:
1. Goodwill
2. Copyright
3. Trademark
4. Patent
5. Franchise
Goodwill
Good will results from taking
over another business. It is difference
between the value of tangible assets that is bought and the price that is
paid. For instance, the premium is paid
for a business due to its brand name. In accounting, this premium is known as
goodwill. Let’s say, B Ltd. acquires A Ltd. for rupees 20 million. At the time
of purchase, the net value of assets (assets minus liabilities) of A Ltd. was
rupees 18 million. Here the difference between cost of purchase (Rs. 20
million) and the net value of assets (Rs. 18 million) is goodwill which amounts
to Rs. 2 million. This goodwill (Rs. 2 million) would be recorded on the
balance sheet of the purchasing company.
Copyright
Copyright is a legal right to provided by
the law to protect the original work of creator. There are many works that are
eligible for copyright protection, for example, articles, books, poetry,
novels, musical compositions, movies, TV shows, online videos, dramas, video
games and computer software. The primary objective of the copyright law is to
protect the time, effort, and creativity of the creator. The copyright law
gives right to the copyright owner to reproduce the work, distribute the copies
of work and perform the work publically. The copyright owner has option to
transfer his exclusive rights to others. Furthermore, copyright does not
protect ideas, concepts or techniques. For the work to be copyrighted, it has
to be in tangible form. This means any concept, technique or idea has to be
written down in physical form in order to be protected by copyright.
Trademark
Trademark is used to legally protect the
logo, design, word or phrase that identifies the product of a business. For
instance, the word “Pepsi” is a trademark. Once the trademark is registered, it
cannot be used by any other organization. The trademark not only provides the
trademark owner the exclusive right to use the mark but also permits the owner
to prevent other businesses from using a similar mark that can be confusing for
general public. When a firm claims the right for a particular mark, it is
allowed to use ‘TM’ (trademark) to designate that the mark is trademarked.
Patent
A patent is an exclusive right granted
for an invention by the federal government that permits the inventor to exclude
others from making, using or selling the invention for a period of time. The
patent system helps encourage inventions that are unique and useful for
society. The federal government approves application for patent. Most patents
are valid for 20 years in the US. However, there are circumstances whereby
exceptions are made to extend a patent’s term. In addition, patents encourage
firms to continue developing innovative products without the fear of
infringement. For instance, large pharmaceutical firm can spend millions of
dollars on research and development (R&D). Without patents, their medicines
could be duplicated or sold by firms that did not invest on research and
development.
Franchise
A franchise is a type of license provided
by a well known firm (franchisor) to a party (franchisee) allowing him to do a
business under its name and system. Usually, the franchisee pays the franchisor
an initial start up fee and annual licensing fee. The franchise is a very
common method to start a business. One of the biggest benefits of acquiring
franchise is that you have access to an established brand, meaning that you do
not need to invest further capital to make your own brand. The” McDonald's” is
the common example of franchise business.
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