What Are Invisible Assets?
Invisible assets are assets (resources with economic value) that cannot be seen or touched. Also referred to as intangible assets, these resources do not have a physical, or sometimes even a paper, presence. However, they still provide financial value to the holder and, in many cases, are a key part of a company's worth.
- Invisible assets, commonly referred to as intangible assets, are resources that cannot be seen or touched but still provide value to the holder.
- Examples of invisible assets include brand recognition and intellectual property, such as trademarks, copyrights, or patents.
- Most internally developed invisible assets are absent from financial statements because they do not have a price that can be used to assign fair market value.
- An invisible asset would only appear on a balance sheet if it has an identifiable value and useful lifespan that can be amortized.
- Invisible assets' disadvantages include illiquidity and difficulty in assessing their value.
Understanding Invisible Assets
Invisible assets are the opposite of tangible assets. Invisible assets cannot be held, seen, or felt and they are often difficult to slap an accurate price tag on. Tangibles, meanwhile, usually have a physical form or at least a finite or recorded monetary value.
Examples of typical tangible assets include machinery or manufacturing plants. Additionally, financial assets such as stocks and bonds, which derive their value from contractual claims, are considered tangible.
Invisible assets, or intangibles, on the other hand, encompass brand recognition, goodwill, and intellectual property, such as trademarks, copyrights, or patents. A company's ability to license a song would be considered an invisible asset; however, royalties derived from performers buying the right to use the song would be considered tangible assets—because they have a set dollar amount.
Despite their nonphysical nature and sometimes questionable liquidity and market worth, invisible assets can prove very valuable to a company and be critical to its long-term success or failure.
Examples of Invisible Assets
Invisible assets power many of the world’s biggest companies. Consider Nike Inc.’s (NKE) "swoosh" logo. This symbol has a high degree of brand recognition, meaning that it is easily recognized and associated with Nike by the general public. Another example of an invisible asset is Geico’s talking gecko, the insurance company’s trademarked lizard that has featured in many of its commercial advertisements.
Even though the Nike swoosh and the Geico talking gecko generate no explicit revenue or income, they are valuable to these firms because they drive consumers to their products.
Recording Invisible Assets
These assets are also called invisible because they generally do not appear in financial statements. Most internally developed invisible assets are absent from company balance sheets because they do not have a price that can be used to assign fair market value.
An invisible asset would only appear on a balance sheet if it has an identifiable value and useful lifespan that can be amortized. That criterion is usually only met when these assets are acquired from another company.
When invisible assets do have an identifiable value and lifespan, they appear on a company's balance sheet as long-term assets valued according to their purchase prices and amortization schedules.
For instance, if a company spent $15,000 to purchase the right to use another company's customer list for a period of 10 years, then $1,500 of the purchase price would be expensed each year, and the value of the customer list license would appear on the balance sheet in year three as $10,500.
Advantages and Disadvantages of Invisible Assets
The importance of invisible assets is reflected in their rapid growth as opposed to the growth of their tangible peers.
The percentage of the total value of the S&P 500 index derived from intangible assets as of July 2020, according to a "Study of Intangible Asset Market Value" by management consultants Ocean Tomo.
Currently, companies are investing more in intangibles because they are aware that they can help them build protective moats, boost productivity, and deliver higher returns.
However, there are some drawbacks to owning lots of invisible assets. One of the biggest ones is that it is not always easy to convince banks to accept them for collateral against loans. A plot of land and a building can be easily valued and sold when a borrower defaults. In contrast, it can be harder to put a price tag on things like software code, recipes, and other invisible assets that don't trade on an open market.
This difficulty in valuing invisible assets makes them somewhat illiquid: How can you convert to cash something that has no set, measurable market price? And, while some invisible assets can be transferred or sold (such as a copyright or a software operating system), others—like goodwill and brand recognition—are not so fungible: They're unique to a particular company. "Coke" may be synonymous with "soft drink" around the world, but only the Coca-Cola Company (KO) benefits from that.