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Intangible Assets

Definition: The assets you cannot touch or see but that have value. Intangible assets include franchise rights, goodwill, noncompete agreements and patents, among others.

One of the line entries on your balance, intangible assets are probably one of the hardest items to put an actual value to and are only recorded on the balance sheet if purchased and are ignored if internally generated. They're reviewed annually and written down if their value is deemed to have been impaired.

When it comes to valuing a company for sale, intangible assets rarely have any relation to economic value. Goodwill, for example, doesn't represent any measurable asset. It's simply the premium paid over and above the net value of the assets in the acquisition of a company. Goodwill presumably reflects the value of things such as employee talent, market reputation and technology. Until just a few years ago, goodwill was amortized over time. Starting in December 2001, the accounting changed so that goodwill stays on the books for the original amount unless the fair value of the acquired assets is judged to be "impaired."

A similar accounting treatment is used for patents. If purchased, they are carried for the purchase price. However, the research and development costs of internally generated patents, no matter how valuable, are expensed as they occur.

See also "Balance Sheet."