Identifiable and Unidentifiable Intangible Assets
Identifiable intangibles are assets that are derived from a specific right or ability. Most of them are created by registration with government authority or by contract.
Some major types of identifiable intangible assets are listed below:
Patent—unique right to manufacture a product or to use a process; protected by a legal authority for 17 years.
Patent license—the right to manufacture a product or to use a process that is patented by another party.
Copyright—unique right to benefit from a creative work, such as a song, film, painting, photograph, or accounting textbook; registered copyrights are protected under both domestic and international law; U.S. copyrights are valid for the life of the creator plus 50 years.
Trademark (also trade name and service mark)—unique right to display a word or an emblem that identifies a firm, product, or a service; protected by law when registered as long as the word does not become accepted in common language as descriptive of all similar items.
Leasehold—unique right to use another party’s tangible asset; created under long-term lease contracts.
Franchise—unique right to use another party’s intangible asset, such as a trademark; contract may include other benefits, such as participation in training, or national advertising campaigns; the term is also used to describe rights granted by government authorities to private enterprises to perform public services, such as restaurants in public buildings or mass transit systems.
Organization costs—unique right to operate as a business entity; obtained through registration with authorities, payment of permit and legal fees, and issuance of securities.
Other identifiable intangibles may exist; those listed above appear as assets in balance sheets when appropriate conditions are met.
Unidentifiable Intangible Assets
The term unidentifiable is used to denote a general class of intangible assets commonly called goodwill, which can be defined as the unique ability of the firm to use its identifiable assets to earn a higher than normal rate of return. Possible specific sources of goodwill are such things as competent management, well-motivated employees, an efficient distribution system, the product’s reputation for quality, and customer satisfaction.
Virtually all types of intangible assets can be acquired by purchasing the underlying rights from their owners. This category includes both identifiable and unidentifiable intangibles. The availability of a purchase transaction makes the reliable measurement of the acquisition cost feasible.
Internally Generated Intangibles
As an alternative to purchasing, some types of intangibles can be developed internally for the firm’s own use. Not all kinds of intangibles can be internally generated; for example, patent licenses, leaseholds and franchises can be obtained only by transactions with outside parties. The category of internally generated intangibles includes trades secrets or other knowledge that is not protected by legal authorities.
The lack of a purchase transaction (or series of transactions) makes the measurement of the acquisition cost more difficult and unreliable.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.