Ask Joey ™ a Question

Why is a noncompete agreement an intangible asset?

A noncompete agreement is a type of clause that restricts one party from starting or competing in a business that is similar to another party. For example, if Maria sells Bob her Jet Ski business, Bob may force Maria to sign a noncompete agreement that would prevent Maria from starting a Jet Ski business for the next 10 years.

Noncompete agreements usually have an effective date, a reason for the agreement, specific dates that the agreement is effective, and specific compensation if either party violates the terms of the noncompete agreement.

A noncompete agreement is an intangible asset because there is value in preventing another party from operating a business within the same industry. While it is difficult to place a specific value on a noncompete agreement, value can be assigned during purchase accounting. Any noncompete agreement would be amortized over the economic life of the agreement.


You might also be interested in...

  • What are the different types of intangible assets?

    Intangibles are considered long-lived assets that are not physical in nature or lack physical substance but are used throughout the ordinary course of business activities. Intangible assets are either identifiable intangible assets or unidentifiable. The only unidentifiable intangible asset that you will need to know is goodwill. Some examples of both identifiable and unidentifiable intangible […]

  • What does it mean to amortize an intangible asset?

    Amortization of intangible assets is the same thing as depreciating physical (tangible) assets. If the company has finite life, then the company would amortize the intangible asset over the estimated useful life. For example, if the company acquires a trademark that has a useful life of 10 years, then after 10 years, the net book […]

  • What is the journal entry to record the cost of an intangible asset?

    When a company purchases or acquirers an intangible asset, they can capitalize the cost of that asset on the balance sheet. The initial entry would be to debit intangible assets for the addition of the asset, and then credit cash for the cash outflow related to the purchase. Assuming it is a finite life asset, […]