Intangible Assets HL ONLY

To understand what intangible assets are and understand the difficulties of valuing them To be able to calculate depreciation and stock valuations

 Non-monetary assets that cannot be seen, touched or physically measured, and are created through time and effort, and are identifiable as a separate asset

 Prestige and reputation of a business will also give value to a business over and above the worth of its physical assets Goodwill Normally appears on a balance sheet just after it has been purchased for more than its assets are worth OR When the business is being prepared for a sale Can be “written off” if it has been included in the purchase of another company

 Business A buys Business B for $2M  Net asset value of B is only $5M  A has paid $0.5M for the “goodwill” of Business B  WHY? ◦ Well known ◦ Well established ◦ Good trading links

 Two accounting conventions regarding goodwill: ◦ It should NOT appear as an asset of an existing business it is so difficult to value and can disappear rapidly ◦ It will appear on a balance sheet of a business that has bought another firm and has paid for goodwill, it will appear as a non-current intangible asset but should be removed when necessary

 Examples ◦ Goodwill ◦ Patents ◦ Copyrights ◦ Reputation Difficult to put a value on intangible assets as they are rarely bought and sold on the open market Often known as intellectual property – unless acquired through merger or takeover For many companies, main source of future earnings Market value with many intangible assets will be much greater than the balance sheet or book value