There are two types of categories of assets called tangible and intangible assets. Tangible assets are typically physical assets or property owned by a company, such as computer equipment. Tangible assets are the main type of assets that companies use to produce their product and service.
Intangible assets don't physically exist, yet are they have a monetary value since they represent potential revenue. A type of an intangible asset could be a copyright to a song. The record company that owns the copyright would get paid a royalty each time the song is played.
There are various types of assets that could be considered tangible or intangible, some of which are short-term or long-term assets.
- Tangible assets are typically physical assets or property owned by a company, such as equipment, buildings, and inventory.
- Tangible assets are the main type of assets that companies use to produce their product and service.
- Intangible assets are non-physical assets that have a monetary value since they represent potential revenue.
- Intangible assets include patents, copyrights, and a company's brand.
Understanding How Tangible and Intangible Assets Differ
Tangible assets form the backbone of a company's business by providing the means to which companies produce their goods and services. Tangible assets can be damaged by naturally occurring incidence since they are physical assets. Intangible assets are the non-physical assets that add to a company's future value or worth and can be far more valuable than tangible assets. Both of these types of assets are initially recorded on the balance sheet, which helps investors, creditors, and banks assess the value of the company.
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 non-current 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.
Accounting for Tangible and Intangible Assets
Tangible assets are also the easiest to value since they typically have a finite value and life span. Tangible assets are recorded on the balance sheet initially, but as they are used up, they get carried over to the income statement.
Inventory, for example, is a tangible asset that when used, becomes included in the cost of goods sold for a company. Cost of goods sold represents the costs directly involved with the production of a good. As inventory is used up in the production process, it's recorded in cost of goods sold.
Fixed assets, such as plant and equipment, are the other types of tangible assets that are recorded on the balance sheet but as their useful life is reduced, that portion is expensed on the income statement in a process called depreciation. Depreciation is the process of allocating a portion of the cost of an asset over the years as it is used to generate revenue for the company. Depreciation helps to reflect the wear and tear on tangible assets as they are used during their lifetime.
Intangible assets can be more challenging to value from an accounting standpoint. Some intangible assets have an initial purchase price, such as a patent or license. Similar to fixed assets, intangible assets are initially recorded on the balance sheet as long-term assets.
The cost of some intangible assets can be spread out over the years for which the asset generates value for the company or throughout its useful life. Whereas depreciation is used for tangible assets, intangible assets use amortization. Amortization is the same concept as depreciation, but it's only used for intangibles. Amortization spreads out the cost of the asset each year as it is expensed on the income statement.
Types of Companies With Tangible Assets
There are various industries that have companies with a high proportion of tangible assets.
Companies involved in producing goods have tangible assets, including the automobile and steel industries. The factory equipment, computers, and buildings would all be tangible assets.
Technology companies that are involved in producing smartphones, computers, and other electronic devices use tangible assets to produce their goods.
Oil & Gas Industry
Companies within the oil and gas industry also own a large number of fixed assets that are tangible. For example, companies that drill oil own oil rigs and drilling equipment. Oil producers are extremely capital intensive companies, meaning they require significant amounts of capital or money to finance the purchase of their tangible assets.
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 future benefits.
Intangible assets are intellectual property that include:
- Patents, which provide property rights to an inventor
- Trademarks, which are a recognizable phrase or symbol that denotes a specific product and differentiates a company
- Franchises, which are a type of license that a party (franchisee) buys to allow them to have access to a company's brand and sell goods under their name
- Goodwill, which represents the value above and beyond a target company's assets that another company pays to acquire them
- Copyrights, which represents intellectual property that's protected from being duplicated by non-authorized parties
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.
A brand is an identifying symbol, logo, or name that companies use to distinguish their product from competitors. 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 contributes 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.
Types of Companies with 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. Intangible assets in the music industry, for example, involve the copyrights to all of a musical artist's songs. Musicians and singers can also have brand recognition associated with them. The music production company might own the rights to the songs, which means that whenever a song is played or sold, revenue is earned. Although these assets have no physical properties, they provide a future financial benefit for the music company and the musical artist.
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 "Ferrari" are worth billions.
Real World Example of Tangible and Intangible Assets
Below is a portion of the balance sheet for Exxon Mobil Corporation (XOM) as of December 31, 2019, as reported on the company's annual 10-K filing.
Current assets are recorded at the top of the statement and reflect the short-term assets for the company. The long-term assets are recorded below "Total Current Assets."
- The company's tangible assets are recorded as property plant, and equipment (highlighted in blue), which totaled $253 billion as of December 31, 2019. We can see that the company increased its fixed assets in 2019 from $247 billion in 2018.
- Intangible and other assets (highlighted in green) were $16.3 billion for 2019, which was an increase from $10.3 billion as of December 31, 2018.