Intellectual property is human capital, know-how and industry knowledge. It is somewhat expressed on Balance Sheet in the form of Intangible Assets. Intangible Assets are non-physical Fixed Assets that have the ability to earn revenue for a business. They are legally protected by intellectual property rights.
The main Intangible Assets that appear on Balance Sheet include brands, trademarks, patents, copyrights and goodwill.
Examples of Intangible Assets
Brand. This type of intellectual property is a name, term, sign, design, symbol, phrase, expression or any other feature that identifies one firm’s good or service as distinct from those of other businesses. Branding is considered an indefinite asset. It is because different brand features such as brand awareness, brand recognition and brand loyalty stay with the company for as long as it operates on the market.
For example, branding helps to generate sales for many multinational companies such as Apple, Coca-Cola, Audi, Nike, Pepsi, McDonald’s, Amazon, Google, Microsoft, IBM, etc. Brand value of those companies is counted in hundreds of billions of USD$ as almost everybody in the world recognizes those companies.
Trademark (®). This type of intellectual property uniquely identifies a brand, a product or a business. Registered trademarks provide legal protection to the owners against those imposters who might try to copy original creations. Trademarks however can be bought and sold, so ownership can be transferred for appropriate fees, and is reflected in the firm’s Balance Sheet.
For example, the Nike ‘swoosh’ mark, the Volkswagen ‘W’ mark, the McDonald’s ‘M’ sign, the Apple ‘apple’ logo, etc.
Patent. This type of intellectual property gives its owner the legal right to exclude others from making, using or selling an invention. The inventor has exclusive rights to commercial production for a specified time period preventing others from copying the inventor’s creation. Other firms must apply and pay a fee to the patent holder, if they wish to use or copy the ideas, processes or products created by the inventor. In the economy, patents act as an incentive to stimulate innovation.
For example, IT hardware and software are patented by electronics firms while drugs are patented by pharmaceutical firms.
Copyright (©). This type of intellectual property gives its owner, usually an artist, the exclusive right to copy and distribute a creative work in a literary, musical, artistic or educational form. Copyrights provide legal protection for the original artistic work of the creator, such as a writer, musician, photographer, painter or scientist. Anyone who wishes to reproduce or modify the artist’s work for commercial purposes must first seek permission from the copyright holder, and pay a fee.
For example, I am the copyright holder of this website. Also, media sources such as newspapers, books, songs, research papers, paintings, computer software and movies are examples of copyrighted works.
Goodwill. This type of intellectual property is the value of established reputation and positive image of a business. The prestige of a business that has been operating for a long time also gives value to the business above the value of its identifiable Net Assets. It is represented by the excess of the price paid for a company over its fair values of assets and liabilities at the moment of sale, takeover, transference, exchange, etc. It mainly includes the firm’s loyal customers and qualified workforce. A business that treats its customers and workers well is likely to see a lot of goodwill.
For example, goodwill can provide a major competitive edge for any business with loyal customers such as Apple, Siemens or Audi. Employees who are loyal to the firm also add greater value to the business.
In summary, Intangible Assets can account for a large proportion of a firm’s asset value, although it is usually difficult to place an objective and accurate price on such invisible items.
