The financial accounting term intangible asset is used to describe those assets that lack physical structure (they cannot be seen or measured), and have a high degree of uncertainty surrounding future benefits to be derived from them. The most common types of intangible assets appearing on the balance sheet are goodwill, copyrights, trademarks, patents, franchises, and organization costs.
The value of purchased intangible assets is recorded on the balance sheet at their original cost. In the same way depreciation is used for assets, amortization is used to account for the expiration in an intangible asset’s value, which is difficult to determine because:
- They are often only valuable to a given company
- The exact useful life is difficult to determine
- The benefit might be based on competitive advantage, and this can lead to large swings in value
Generally, intangible assets fall into two categories:
- Legal: includes brand names, copyrights, trademarks, patents, and trade secrets
- Competitive: includes process and business methods