Glossary
Intangible asset
A non-physical asset such as a patent, brand, software or goodwill that has value but no physical form.
An intangible asset is something a company owns or controls that has economic value but no physical form: patents, trademarks, copyrights, software, licenses, customer relationships and goodwill. For many modern businesses, from software makers to drug developers and consumer brands, intangibles are worth far more than the factories and equipment on the balance sheet, which makes how they are counted central to reading the accounts.
How they reach the balance sheet
Under US GAAP the answer depends on whether the asset was built or bought. Most intangibles a company develops internally never appear as assets: research and development is generally expensed as it is incurred, and so is brand advertising. Intangibles acquired in a purchase are recorded at fair value. So two companies with identical products can show very different balance sheets if one grew organically and the other bought its way in.
Intangibles with a finite life, such as a patent with 12 years left, are amortized: their cost is expensed over that life. Goodwill and indefinite-lived assets such as some trademarks are not amortized but tested for impairment at least yearly, and written down if their value falls.
What to watch for
Large impairment charges are often a sign that an earlier acquisition overpaid. Analysts also compute tangible book value (book value minus intangibles and goodwill) to see what equity would remain if the intangibles proved worthless, a test commonly applied to banks.