Tangible assets are physical and measurable assets that are used in a company's operations. Assets like property, plant, and equipment, are tangible assets. These assets include:
- Securities like stocks, bonds, and cash
There are two types of tangible assets:
Current assets include items such as cash, inventory, and marketable securities. These items are typically used within a year and, thus, can be more readily sold to raise cash for emergencies.
Fixed assets are noncurrent assets that a company uses in its business operations for more than a year. They are recorded on the balance sheet as Property, Plant, and Equipment (PP&E), and include assets such as trucks, machinery, office furniture, buildings, etc. The money that a company generates using tangible assets is recorded on the income statement as revenue. Fixed assets are needed to run the business continually.
Explaining Tangible Vs. Intangible Assets
Intangible assets are typically nonphysical assets used over the long-term. Intangible assets are often intellectual assets, and as a result, it's difficult to assign a value to them because of the uncertainty of the future benefits.
Intangible assets are intellectual property that include:
Other Types of Intangible Assets
Depending on the type of business, intangible assets may include internet domain names, performance events, licensing agreements, service contracts, computer software, blueprints, manuscripts, joint ventures, medical records, permits, and trade secrets. Intangible assets add to a company's possible future worth and can be much more valuable than its tangible assets.
Brand equity is considered to be an intangible asset because the value of a brand is not a physical asset and is ultimately determined by consumers' perception of the brand. A brand's equity contributes to the overall valuation of the company's assets as a whole.
Positive brand equity occurs when favorable associations exist with a given product or company that contribute to a brand's equity, which is achieved when consumers are willing to pay more for a product with a recognizable brand name than they would pay for a generic version.
For example, a consumer might be willing to pay $4.99 for a tube of Sensodyne toothpaste rather than purchasing the store brand's sensitivity toothpaste for $3.59 despite it being cheaper. The Sensodyne brand has positive equity that translates to a value premium for the manufacturer.
Negative brand equity occurs when consumers are not willing to pay extra for a brand name version of a product. For example, producers of commodity products, such as milk and eggs, may experience negative brand equity because many consumers are not concerned with the specific brands of the milk and eggs they purchase.
Since brand equity is an intangible asset, as is a company's intellectual property and goodwill, it cannot be easily accounted for on a company's financial statements. However, a recognizable brand name can still create significant value for a company. Investing in the quality of the product and a creative marketing plan can have a positive impact on the brand's equity and the company's overall viability.
Industries With a High Number of Intangible Assets
Several industries have companies with a high proportion of intangible assets. They include the following:
Technology companies, particularly within the area of computer companies, copyrights, patents, critical employees, and research and development are key intangible assets. Apple Inc. (AAPL) would typically have intangible assets.
Entertainment and media companies have intangible assets such as publishing rights and essential talent personnel.
Consumer products and services companies have intangibles like patents of formulas and recipes, along with brand name recognition, are essential intangible assets in highly competitive markets. Coca-Cola Company (KO) is an example of an intangible asset with the value of its highly recognized brand name is virtually inestimable and is a critical driver in the Coca-Cola Company's success and earnings.
The healthcare industry tends to have a high proportion of intangible assets, including brand names, valuable employees, and research and development of medicines and methods of care.
The automobile industry also relies heavily on intangible assets, primarily patented technologies and brand names. For example, brand names like "Corvette" and "Ferrari" are worth billions.
The Bottom Line
Tangible assets are physical in nature that can be either long-term or short-term assets. Intangible assets are long-term assets that are not physical, but rather, intellectual property. Both tangible and intangible assets are recorded on the balance sheet. (For related reading, see "How Do Intangible Assets Show on a Balance Sheet?")