What’s it: Intangible assets are types of assets with no physical substance but identifiable and flow the economic benefits to the company. Such benefits can be in the form of additional revenue, cost savings, or increasing market share. Examples are patents, trademarks, and copyrights. They aren’t like property, plant, and equipment (PP&E), which you can see physically.
The company gets them from internal development or from externals. Because of the limitations of accounting methods, and they are challenging to measure reliably, some intangible assets are unrecognized in its balance sheet.
How intangible assets affect business value + Example
Intangible assets are vital to long-term success. Although they have no physical substance, they often provide a higher value than tangible assets. Brand, customer relations, corporate image, intellectual property, and human capital determine the company’s competitiveness.
Goodwill
Goodwill usually arises when the company acquires another company (target) and pays higher than its fair value. The acquirer benefits from intangible assets (such as brand equity, trademarks, etc.) and the synergy of the target company’s resources and capabilities, allowing for more significant value creation. For this reason, the acquirer is willing to pay a premium.
Brand equity
Brand equity represents the perceived value of a brand. That explains why consumers prefer certain brands over others. Strong brand equity drives customer loyalty, keeping them buying.
Companies could charge a premium price for products with strong brand equity. Companies can also expand their product lines, taking advantage of this strong brand image, allowing the company to make more money.
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