What constitutes an intangible asset?

When one company makes an acquisition of another the price paid will not be equal to the value of the net assets as shown by the balance sheet. This should come as no surprise as we have already seen that the carrying value of many assets shown in the balance sheet does not equal their market value, but this is not the sole explanation for the disparity. If the company acquired has been established for a long period it will have built up a reputation, its staff will have unique expertise and customer loyalty will have been generated; all of these add value to the business and will be reflected in the acquisition price.

The additional premium paid by the acquirer for assets that lack physical substance is often in excess of that paid for the assets that can be seen and touched. The intangible asset we have described is more formally known as goodwill, but there are numerous other intangible assets:

• Royalties

• Franchises

• Intellectual property

• Development costs

• Brands

• Customer lists.

The nature of many intangibles makes them difficult to identify and value, but for...