What it means
Property law divides property into real property, which is land and what is attached to it, and personal property, which is everything else. Personal property can be tangible, such as machinery, vehicles and stock, or intangible, meaning it exists as a legal right rather than a physical object.
A trademark or a patent is a right that can be owned, sold and protected, even though nobody can touch it. For many modern companies, intangible property is where most of the value sits.
A software firm, a pharmaceutical company or a consumer brand may own very little physical property, yet hold patents, brand names and customer relationships worth far more. Investors and lenders therefore pay close attention to how these assets are protected and valued.
Accounting treatment differs from tangible assets. Intangible assets that a company buys, such as a patent purchased from another business, are recorded at cost and then usually amortised, meaning the cost is spread over the asset's useful life.
Intangibles with no fixed life, such as some trademarks and goodwill, are not amortised in the same way but are tested regularly for impairment, which means checking whether they have lost value. Internally generated intangibles are treated more strictly.
Under most accounting rules, the cost of building a brand or developing a customer list inside the company is expensed as incurred rather than recorded as an asset, so many valuable intangibles never appear on the balance sheet at all. Tax rules vary by country.
Some places have taxed certain forms of intangible property, such as holdings of shares or licences, while others have removed such taxes, and the transfer or licensing of intangibles between related companies is a common area of scrutiny. Protecting intangible property takes legal work.
Registrations, contracts and confidentiality agreements all help to prove ownership, and a gap in this paperwork can leave a valuable asset hard to defend or sell.
In practice
Real-world examples.
Example
A drug developer buys the rights to a compound for $2,000,000. The rights are an intangible asset that the company records at cost and amortises over the patent's remaining life.
Example
A restaurant group owns a well-known brand name that it licenses to franchisees. The licence fees are income from intangible property, and the brand needs protecting through trademark registration in each market.
Example
A buyer purchases a small design agency for more than the value of its equipment and cash. The extra price is recorded as goodwill, an intangible that reflects the agency's reputation, staff and client relationships. The agency's founders also negotiate a clause protecting the client list, because it is the most valuable part of what is being sold.
Formula
Calculation
Annual amortisation (straight-line) = (Cost - Residual value) / Useful life in years
A company buys a patent for $120,000. It expects the patent to be useful for 10 years and to have no value at the end. Annual amortisation is (120,000 - 0) / 10 = $12,000.
After three years, accumulated amortisation is 12,000 x 3 = $36,000, and the patent's carrying value on the balance sheet is 120,000 - 36,000 = $84,000.Case study
Seen in the real world.
Quillfeather Games is an illustrative, fictional studio whose only physical assets are laptops and office furniture worth $60,000. Its main asset is the code and characters of a successful mobile game, protected by copyright and trademarks.
When the studio sought a $1.5 million loan, the bank asked how the intangible property would be valued and protected. The finance manager provided registration certificates, contracts showing that all developers had assigned their rights to the company, and a valuation of the game's expected income.
The bank approved a smaller loan secured against the intellectual property and the future royalties. In this illustrative story, the exercise showed that clean ownership records were what turned an invisible asset into something lenders could accept. The bank also required the studio to keep its registration certificates and developer contracts updated, since the loan terms treated any gap in ownership records as a reason to review the facility.
Watch out
Common mistakes.
- Assuming intangible means unimportant or not real property, when it can be the most valuable asset a company owns.
- Treating all intangibles alike, when purchased and self-created intangibles are accounted for very differently.
- Neglecting registration and contracts, which can leave ownership unclear and make the asset hard to protect or sell.
Questions
People also ask.
What is the difference between tangible and intangible personal property?
Tangible property can be touched, such as a machine or a car, while intangible property is a legal right or claim, such as a patent or a share.
Is goodwill intangible personal property?
Yes, goodwill is an intangible asset, and it arises when a business is bought for more than the fair value of its identifiable net assets.
Why are some valuable brands not on the balance sheet?
Under most accounting rules, brands built inside the company are not recorded as assets, whereas those bought from others are.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%