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Published Articles by David Balovich
| Title: |
INTANGIBLE ASSETS |
| Published in: |
Creditworthy
News |
| Date: |
2/1/99 |
INTANGIBLE ASSETS
The third and final category of assets are known as intangibles.
Assets may be either tangible or intangible. Tangible assets have physical form and
substance and are usually given a value and shown on the financial statements. Intangible
assets do not have any physical form. They consist of items such as customer lists,
trademarks, patents developed by the firm, skilled employees. It is difficult to measure
the value of intangible assets.
True, they have value but that value is not measurable unless someone was willing to pay a
price to purchase them. At that time the value could be established based on the purchase
offer.
Accountants differ in opinion as to whether intangibles should be allowed on the balance
sheet. Some accountants feel that intangibles should only be allowed if a clear measurable
value can be established for the asset. For example, if we were to purchase a customer
list from a source outside the firm, then the price we paid puts a reasonable minimum
value on the asset. It may be worth more then the price paid, but it can't be worth less
or we, using common sense, wouldn't have paid as much as we did. In this situation
accountants generally would be willing to allow the intangible to be shown on the balance
sheet for the amount we paid for it.
If we come across a financial statement that includes an asset called goodwill, it is an
indication that a merger has occurred at some time in the past. The firm paid more for the
company it acquired then could be justified based on the market value of the specific
tangible assets.
It is important to recognize that intangible assets tend to inflate the equity section of
the balance sheet. For this reason, many recommend that intangible assets be subtracted
from the asset side of the balance sheet and at the same time subtracted from the equity
section.
Doing this provides the analyst a clearer picture of the net worth of the firm.
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