Characteristics of intangible assets

What are characteristics of intangible assets?

A. Upside, value-increasing characteristics:

- Intangible assets are non-scarce.
    - Deployment of an intangible asset is possible at the same time in multiple uses.
- Intangibles increase in value when used.
    - This is also referred to as scalability: intangibles value increases when the scale in which they are used increases.
    - Intangibles are not subject to diminishing returns as are tangible assets, but have increasing returns.
- Intangibles have strong network effects.
    - Although not exclusively applicable to intangibles, network effects are characteristic for intangibles in the sense that intangibles often form the core of important networks.
- Intangibles create future value. All intangibles are future-oriented. (Because of this they are ignored by traditional accounting systems – conservatism concept, materiality concept).

B. Downside, value-decreasing characteristics:

- Intangibles are difficult to manage and to exclusively control.
    - Taking full advantage of the tacit knowledge residing in employees is more difficult than exploiting the value of a building or a machine to it’s maximum,
    - Copying or re-engineering of intellectual assets is often relatively easy,
    - Limited ability to protect by property rights,
    - Cost accounting systems are not well geared towards intangible assets and are even wholly inaccurate for managing intangible assets-intensive corporations,
    - Intangibles cannot be owned (except legal property rights).
- Intangibles investments are typically more risky.
    - Due to the fact that intangibles play the most dominant role in early stages of the innovation process.
    - Proper management can deal with this – i.e. R&D alliances, diversified innovation project portfolios.
- Intangible assets are nonphysical and therefore inherently difficult to trade.
    - Legal protection is weak.
    - Large sunk costs, low marginal costs.
    - Open exchanges for intangibles are in their infancy.
- Intangibles cannot directly be measured.
- Valuing intangibles is difficult.
- Intangibles are not evidenced by financial transactions (as tangibles are).

Compare also: Organic Organization

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