What are intangible assets?
Intangible assets  long-term assets that dont have a physical presence  can be difficult to wrap your head around, particularly when it comes to assessing their value. Find out everything you need to know about how to value intangible assets. Intangible assets explained  Basically, an intangible asset is an asset that isnt physical but holds long-term value for the business. Yes! Yes! Yes! Yes! You get the idea  an intangible asset is essentially any resource that isnt a material object. On the flip side, your business is likely to have many tangible assets. This is the term used to describe physical assets such as machinery, buildings, and office equipment. Depending on whether theres a foreseeable end to your intangible assets value, you can describe it as either definite or indefinite. For example, brand names have value for as long as the company is still in business, making them indefinite intangible assets. On the other hand, copyrights and patents are only valuable up to the point that they expire, which means that theyre classified as definite intangible assets. While financial assets such as stocks, shares, and bonds may sound like intangible assets (as theyre  at least to a certain extent  non-physical), its actually a little more complicated than that. No, these sorts of financial assets are classified as tangible assets because they derive value from contractual claims. When you start researching intangible assets, youll probably encounter the term amortization at one point or another. On the face of it, amortization and depreciation look relatively similar  theyre both terms used to describe the expensing of an asset over the course of its usable life. Essentially, they describe the same process, just for different types of assets. Amortization refers to the mechanism whereby you reduce the value of an intangible asset over time, whereas depreciation refers to the process of reducing the value of tangible assets. How to value intangible assets  The question of how to value intangible assets is an important one for business owners. After all, identifying the value of a tangible asset is simple enough, but for something non-physical like a patent or the general concept of brand recognition, theres a bit more of a challenge. While theres no standardised formula for working out the value of an intangible asset, there are three basic approaches that you may want to consider:  Market approach  Under the market approach, youll look for similar assets that have been publicly exchanged or traded and use this data to conduct a valuation of your own intangible asset. However, this type of information usually isnt made public, which may make it significantly more difficult to gather the necessary data. Its best suited for brand names, technology, and so forth. Cost approach  With a cost approach, you can attempt to determine the cost of developing the asset, as well as a reasonable rate of return. Its best for assets like internally developed software, while it can also be useful for early-stage start-ups that dont have access to enough data to make accurate revenue/sales forecasts. Income approach  If the intangible asset produces income or allows an asset to generate cash flow, you could try to convert these future benefits into a single, discounted amount. There are several different income-based approaches, including the royalty method and the excess earnings method. Its best for intangible assets like copyrights and patents. As you can see, theres no universally agreed-upon method for how to value intangible assets, so you should opt for the valuation method thats best suited to the type of intangible assets held by your business. In many cases, it simply wont be possible to accurately denote a value for a particular intangible asset, in which case, the asset cannot be reported on your balance sheet. We can help  GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.