CHAPTER FOUR

The Nature of Goodwill and Intangible Assets

The recognition of intangible assets at fair value is a relatively recent development in financial reporting that typically occurs because of business combinations. As a result, there has been an increased awareness that intangible assets contribute value to business entities. Every entity, large and small, is made up of both tangible and intangible assets that work in conjunction to create value for the entity. Tangible assets are easily understood; they are assets with physical characteristics that are typically observable. Inventory, machinery, and real estate are tangible assets that usually represent a significant portion of the business enterprise's operating assets. Intangible assets also can significantly contribute to the profitability of business enterprises. Intangible assets are distinguished by their lack of physical substance; they generally cannot be observed or touched. Even so, intangible assets provide valuable rights and privileges. Estimating the fair value of these intangible assets creates challenges for those engaged in financial reporting.

TheInternational Glossary of Business Valuation Terms definesintangible assets as “non-physical assets such as franchises, trademarks, patents, copyrights, goodwill, equities, mineral rights, securities, and contracts (as distinguished from physical assets) that grant rights and privileges and have value for the owner.”1 This definition of intangible assets in ...

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