A business asset is any item of value that your business creates, owns, or benefits from. Such assets can be either tangible (physical in nature) or intangible (not physical in nature). In this article, we are going to define tangible assets, review examples of both tangible and intangible asset types, and explain why valuating such assets is important to business operations.
Highlights/ Key Takeaways
- Tangible assets have a physical form and a finite monetary value.
- This tangible value can fluctuate depending on market conditions, such as supply and demand.
- Businesses can use tangible assets to operate and demonstrate their overall net worth.
- Equipment, inventory, real estate, land, and livestock are some of the most common examples of tangible assets that can be found on a company’s balance sheet.
What Are Tangible Assets?
A tangible asset is defined as an asset that has a physical form and a definite exchange value. In simple words, a tangible asset can be touched and could be sold for a certain amount of money.
Businesses record tangible assets on their balance sheets, usually under long-term assets. Recall that a balance sheet is a statement outlining the company’s assets, liabilities, and business capital at a specific point in time.
“A tangible asset is defined as an asset that has a physical form and a definite exchange value.”
Types of Tangible Assets
All tangible assets fall under one of the two broad categories: fixed assets and liquid assets. Let us take a closer look at each of these tangible asset types.
Fixed Assets
Fixed assets, sometimes called long-term assets or hard assets, are usually tangible assets that are larger in size and have less liquidity. Such assets are often used to provide services, produce goods, or for administrative or rental purposes. They are intended to be used on a long-term basis and are difficult to convert into cash
Some examples of long-term assets include land, buildings, capital equipment, office furniture, and more.
Liquid Assets
Liquid, or current, assets, are tangible assets that can be quickly converted into cash or remain in the business for a short period of time, typically for up to one year. Such assets have significantly higher liquidity than fixed ones.
Examples of current assets include cash and cash equivalents, stock inventory, accounts receivable, and short-term investments.
Why Tangible Assets Matter
Keeping track of tangible assets is crucial to help drive future economic benefits for a firm. As such, listing the estimated value of tangible goods can help a company to demonstrate its value to the existing shareholders, as well as attract new investors.
Tangible assets can also be used to generate money for business operations. For example, you can use a tangible asset as collateral to secure a business loan. Furthermore, you can use a company’s equipment (which is a tangible asset) to manufacture products to be sold for a profit.
“Keeping track of tangible assets is crucial to help drive future economic benefits for a firm.”
What Are the Pros and Cons of Tangible Assets?
The greatest thing about tangible assets is that they hold value beyond their monetary cost. Equipment can be used to make a product; a building can be occupied for an office; a piece of land can be used for farming or construction… However, the physical nature of tangible assets also means that they can be physically damaged and will lose value over time.
Pros of Tangible Assets
- Physical assets typically have real-world applications that increase their value.
- Consistent underlying use makes tangible assets a more stable investment.
- Such assets may generate cashflow, - for example, you could rent out a building or sell products manufactured by a piece of equipment.
- Tangible assets may have a low correlation with other types of assets due to differences in the nature of the assets.
Cons of Tangible Assets
- Tangible assets can be physically damaged, - via intentional human destruction, natural disasters, or regular wear and tear.
- Such assets are easier to access, which makes them more subject to theft.
- Introduction of more advanced technology may make existing tangible assets obsolete.
- The physical nature of tangible assets means that you will be faced with additional expenses to manage, store, and protect the property.
Tangible Assets vs. Intangible Assets: What’s the Difference?
All business assets can be classified as either tangible or intangible:
- Tangible assets represent property or physical assets owned by a business. This includes land, real estate, vehicles, equipment and machinery, and more. The value of tangible assets will depreciate over time due to physical wear and tear.
- Intangible assets have monetary value; however, they do not exist physically and can’t be touched. Some examples of intangible assets include patents, copyrights, computer software, and more. While intangible assets can’t depreciate, their value can be amortized to increase tax savings.
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Examples of Tangible Assets
The most common examples of tangible assets include real estate, equipment, inventory, livestock and agricultural assets, land, and furniture and fixtures. Let as explore these types of assets in more detail.
Real Estate
Real estate, or physical buildings, are typically the largest type of tangible assets. For example, companies may own and operate offices, manufacturing plants, warehouses, or other types of commercial real estate. Physical buildings can also be rented out or sold for cash.
Real estate is considered a fixed asset, as it presents a long-term investment with little liquidity. On the financial statements, real estate is listed under “long-term assets.”
Equipment
For manufacturing companies, all pieces of heavy machinery and equipment are considered tangible assets. This includes any piece of equipment that is physically used during the product preparation, manufacturing, assembly, and subsequent quality control.
While equipment has generally little liquidity and is considered a fixed asset, it can still be sold for cash.
Inventory
Any physical product is considered a tangible asset. Therefore, most types of inventory fall under the tangible asset definition. More precisely, inventory is a liquid type of tangible asset: it is meant to be sold for profit, which means that companies tend to hold it for a shorter period of time.
Keep in mind, however, that even similar types of inventory products may have different characteristics which will determine whether they are considered tangible or not. For example, a music CD could be a tangible asset, while digital files of the same songs are intangible.
Livestock and Agricultural Assets
All tangible items or animals owned by a farm business that have value are considered tangible assets. This includes market and breeding livestock, grain, feed, as well as vehicles, machinery, and equipment. Farmland and buildings are also considered “tangible.”
Land
Any type of land is considered to be a tangible fixed asset. Whether your company is holding land to redevelop, to resell later for a profit, or for any other purpose, the piece of land can be listed under long-term assets on the balance sheet. This also applies to all types of land, regardless of whether it is located in a rural or urban area.
One exception to this is virtual land ownership, which has been on the rise over recent years. Such land does not exist in reality, which means that it is not a tangible asset.
Furniture and Fixtures
Virtually all items that belong to your company and are used in the office are physical assets. This includes cubicles, office furniture, computers, supplies, and other furnishings and fixtures. If a part of your workspace can be touched and interacted with, it is a tangible asset.
Examples of Intangible Assets
As mentioned earlier, intangible assets have value but cannot be touched. Examples of intangible assets include:
- Trademarks: recognizable symbols or phrases that present a specific product belonging to a company
- Patents: intellectual property rights belonging to an inventor
- Franchises: a type of license that a party buys to allow them to use a company’s brand and sell products or services under their name
- Copyrights: intellectual property protection against duplication by non-authorized parties
- Goodwill: the value above a company’s assets that another company is willing to pay to acquire them
- Research and Development (R&D): any internally-generated intangible assets during the Research and Development (R&D) phase.
- Brand equity: the value of a company’s brand, which equals the valuation of the company’s assets as a whole
Other common examples of intangible assets include computer software, internet domain names, licensing agreements, trade secrets, service contracts, and more.
What Kind of Companies Have Intangible Assets?
Virtually any type of company can have intangible assets like brand equity and intellectual property. However, several specific industries are known for having companies with a relatively high proportion of intangible assets:
- Healthcare. The healthcare industry has a large proportion of intangible assets like valuable employees, brand names, and R&D of medicines and healthcare methods.
- Technology. Technology companies, especially the ones dealing with computers and software, rely on a variety of intangibles. These include R&D, patents, copyrights, computer software, and critical employees.
- Entertainment. Media and entertainment companies own a high proportion of intangible assets as well. This includes publishing rights and critical talent personnel like musicians and singers.
- Automobile. The automobile industry relies heavily on patented technologies and brand names. Both of these are examples of intangible assets.
- Consumer. Companies offering consumer services and products have intangible assets like patents of recipes and formulas, along with brand equity.
What Are Net Tangible Assets?
The term net tangible assets describes the difference between total assets and the sum of liabilities and all intangible assets.
Te concept of net tangible assets largely focuses on the company’s physical assets alone, including cash instruments, inventories, and other physical assets like Property, Plant, and Equipment (PPE). Based on the value of a company’s net tangible assets, the firm can access financing or determine how much risk it carries.
How Do You Calculate Net Tangible Assets?
Net Tangible Assets can be calculated as follows:
Net Tangible Assets = Total Assets - (Liabilities + Intangible Assets)
Here, Total Assets include all assets listed on a company’s financial statement, while Intangible Assets are assets without a physical form. A Liability is the opposite of an Asset, representing something a company owes.
Example
Company ABC has total assets valued at $1.5 million, total liabilities of $100,000, and intangible assets (goodwill) of $800,000. Net Tangible Assets can be calculated as:
Net Tangible Assets = $1.5 million - ($100,000 + $800,000) = $600,000
The Valuation of Tangible Assets
To be included on a company’s balance sheet, tangible assets must first be valuated. The calculation can be performed with the help of one of the following valuation methods.
1. Appraisal
With this method, a professional appraiser is hired to estimate the real fair market value of a company’s assets. First, the appraiser will evaluate the current condition of the asset, - this includes looking at the asset’s level of wear and tear and the degree of obsolescence. Next, the appraiser will perform a market comparison to determine how much similar assets can sell for in the open market.
2. Liquidation
Any assets can be converted into cash. The liquidation valuation method aims to calculate the minimum value a company would receive from a quick sale or liquidation of its assets. A professional assessor is hired to determine the value that an equipment seller, an auction house, or other types of bulk asset buyers would agree to pay for assets similar to the ones owned by a company.
3. Replacement Cost
Most insurance companies use the replacement cost valuation method to determine the value of an asset for insurance purposes. This simply involves estimating how much it would cost to replace the asset.
Why Do Tangible Assets Lose Value Over Time?
The physical nature of tangible assets means that they will wear and tear over time. Such assets have a limited useful lifespan, with their value decreasing each year. This value loss can be estimated with a depreciation calculation - an important tax and accounting method that can be applied to any tangible asset.
Including depreciation on a company’s financial statement helps to more accurately represent the current cost of tangible assets. Plus, it reduces taxable income, leading to valuable tax savings.
Final Word
A tangible asset is any item of value that has physical substance, - in other words, it can be seen and touched. Intangible assets, on the contrary, are not physical in nature, - yet, they still possess value. Keeping track of both tangible and intangible assets and including them on a company’s balance sheet is an important accounting practice, as it can demonstrate the company’s value to shareholders and new investors.
