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As the name suggests, intangible assets are assets that can’t be touched. These include goodwill, patents, brands, trademarks, research work, intellectual property, and franchises. In this article we will look at some popular non current intangible assets.
Intangible non current assets are those that can’t be easily converted to cash and can’t be seen or touched. One could say that you can only feel intangible non current assets with your heart. It is that value that a company has in the hearts and mind of its customers, employees, competitors, suppliers, and partners. It is this fluid characteristic that causes many analysts to view non current intangible assets with skepticism when valuing a company.
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What Makes Up Goodwill
The intangible fixed asset that shows up on a balance sheet is Goodwill. Goodwill represents the premium that is paid for a business above and beyond its book value. These assets are very difficult to value, and in many cases are overvalued. Even though there is some difficulty in valuing this asset, it does recognize that a going concern (a functioning business) has some positive reputation or expectation.
In essence, Goodwill represents anything that can give a company a competitive advantage. Determining the true value of Goodwill is a very subjective process, but there is no denying that it is there. Good examples include a good reputation, high employee morale, and a talented staff. As should be obvious, these are very fleeting advantages, to the extent that they can evaporate overnight. This is why goodwill is constantly revalued.
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What Happens if Goodwill is Overvalued?
Investors often deduct the full amount of goodwill when valuing a company, especially when there is a threat of insolvency as this leaves them with a value they believe the market will be willing to pay for the company's assets. However, this practice can be misleading, more so for companies that generate most, if not all of their income, from intangible assets such as patents and other intellectual property.
Earlier accounting standards required that goodwill be written off over a number of years, but new financial accounting standards require businesses to value their goodwill every year, in an attempt to align goodwill with the fair value of the business. If the goodwill is overvalued, the resulting downward adjustment will be recorded as impairment.
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While goodwill isn’t easily valued or identified, there is no mistaking that it does have a positive effective on a business’ competitive advantage. A good reputation, patents, and highly regarded brands are all pluses beside a company’s name. However, accounting rules do not allow for these intangible non current assets to be carried on the books without being constantly reassessed.