What is an intangible asset?
An intangible asset is an identifiable non-monetary asset without physical substance. Under IAS 38, an entity recognises an item as an intangible asset only where it meets both the definition of an intangible asset and the recognition criteria, including that future economic benefits are probable and cost can be measured reliably.
The definition is important because not every valuable business capability is an accounting asset. IAS 38 specifically prohibits recognition of internally generated brands, mastheads, publishing titles, customer lists, and similar items. Expenditure on research, training, advertising, and start-up activities is also expensed rather than capitalised.
Value is not the same as book value
The absence of an asset from the balance sheet does not mean it has no economic value. It may simply mean that the asset does not satisfy the accounting recognition requirements, or that its cost cannot be reliably measured. IAS 38 distinguishes between the conditions for accounting recognition and the economic contribution an asset may make to future cash flows.
Common categories of intangible value
Intangible assets can take many forms. The appropriate valuation approach depends on the nature of the asset, the availability of market evidence, and the cash flows attributable to it.
Marketing-related assets, such as trademarks, trade names, and brand equity.
Technology-based assets, including patents, software, proprietary processes, and developed technology.
Customer-related assets, such as customer relationships, contracts, and order backlogs.
Contract-based assets, including licences, franchise agreements, and supply arrangements.
Artistic-related assets, such as copyrights and literary or musical works.
Human-capital-related capabilities, such as an assembled workforce, which may have economic value but are generally not separately recognised as accounting assets.
1. Start with the source of economic benefit
Before valuing an intangible asset, it is necessary to understand how it creates value. The analysis should identify the cash flows, cost savings, pricing premium, or risk reduction attributable to the asset, as well as the period over which those benefits are expected to continue.
Key questions include:
What economic benefit does the asset generate?
Can that benefit be separated from the value created by other assets?
How long is the asset expected to remain useful?
What legal, contractual, technological, or competitive factors limit its life?
What investment is required to maintain or replace it?
An intangible assetʼs value is closely linked to its economic life. Finite-life assets are generally valued over their expected useful period, while indefinite-life assets require careful analysis of the durability of the underlying advantage.
2. Select an approach that fits the asset
International Valuation Standards identify three principal valuation approaches: market, income, and cost. The appropriate method depends on the asset and the evidence available; a valuer is not required to use more than one method, but may consider multiple approaches where a single method would not produce a reliable conclusion.
Approach | Underlying logic | Common use |
Market approach |
Value is inferred from prices or multiples for similar assets | Trademarks, copyrights, or other assets with observable transactions |
Income approach | Value reflects the present value of income, cash flows, or cost savings attributable to the asset | Brands, customer relationships, technology, and software |
Cost approach | Value reflects the cost to replace or reproduce the asset’s service potential | Internally used software and assembled workforce |
The market approach requires armʼs-length transaction information for identical or similar assets near the valuation date, together with sufficient information to adjust for significant differences. In practice, such evidence is often limited for unique intangible assets.
3. Income methods are commonly central
For many intangible assets, the income approach is the most relevant because value is driven by future economic benefits. IVS identifies methods including relief from royalty, excess earnings, premium profit or with-and-without, greenfield, and distributor methods.
A relief-from-royalty method estimates the royalty a business would otherwise pay to license the asset, then discounts those avoided payments over the assetʼs economic life. It is often used for trademarks and other rights where licensing evidence is available.
An excess earnings method isolates the cash flows attributable to an intangible asset after considering the returns required by other contributing assets, such as working capital, fixed assets, and other identified intangibles. This approach requires clear attribution of cash flows and support for the contributory asset charges.
A with-and-without method compares expected cash flows with and without the asset. It can be useful where the asset enables a measurable pricing premium, cost saving, or incremental revenue stream.
4. Avoid double counting
Intangible assets often work together. A brand may support customer retention; customer relationships may support recurring revenue; technology may enable both. A valuation must allocate value among contributing assets without counting the same cash flow more than once.
5. Consider legal protection and obsolescence
Legal rights can strengthen an intangible assetʼs value, but legal protection alone does not create value. A patent, trademark, or copyright is valuable only to the extent it supports economic benefits, such as market exclusivity, licensing income, cost advantage, or customer loyalty.
Closing perspective
Intangible assets matter because they often explain why businesses with similar tangible assets produce very different financial outcomes. Understanding value beyond the balance sheet requires identifying the asset, isolating its economic contribution, assessing its useful life, and selecting a valuation approach supported by the available evidence.