Tangible vs Intangible Assets

What are Tangible Assets?

"; Tangible assets can be recorded on a company's balance sheet and are usually easy to price, making them a critical part of gauging a company's net worth. They can be correlated and assessed directly with a depreciation formula, which takes into account the asset’s initial cost, its useful life, and its salvage value at the end of its useful life. The mathematical model for this is: \[ \text{{Depreciation}} = \frac{{\text{{Initial Cost}} - \text{{Salvage Value}}}}{{\text{{Useful life in years}}}} \]

Examples of Current Tangible Assets

Tangible assets can further be subdivided into current and non-current (long-term) assets. Here are examples of current tangible assets:

• Cash
• Accounts Receivable
• Inventory

What are Intangible Assets?

Examples of intangible assets include goodwill, brand recognition, copyrights, patents, trademarks, trade names, customer lists, and proprietary technology. They provide the company a competitive edge in the marketplace and contribute substantially to a company’s long-term success. However, unlike tangible assets, intangible assets are sometimes difficult to value because of the uncertainty of their future benefits.

Examples of Current Intangible Assets

Examples of current intangible assets include:

• Patents
• Copyrights
• Goodwill
• Trademarks

Understanding the difference between tangible and intangible assets helps businesses and investors evaluate a company's value and make informed decisions.

Roles and Differences: Tangible vs Intangible Assets

In the realm of business studies, assets play an integral role in the performance and value of a company. A deeper understanding of both tangible and intangible assets, as well as their roles and differences, can provide valuable insight into a company's financial health and future prospects.

Importance of Tangible vs Intangible Assets in Business Studies

Tangible assets, such as property, plant, equipment (PPE), and inventories, are physical resources that a company utilizes in its operations to generate revenue. They are crucial for companies in manufacturing and retail industries where production and sales of physical goods are the main source of revenue. Tangible assets also provide an immediate liquidity source, as they can be sold off or pledged as collateral for loans during financial hardships. On the other hand, intangible assets like brand recognition, patents, and proprietary knowledge are assets that lack physical existence. However, they hold significant value and play a beautiful role in growing and supporting a business. Companies in service, technology, and creative industries heavily rely on intangible assets. For instance, tech companies often have numerous patents, which, despite their intangible nature, are crucial to their business models, preventing competitors from duplicating their technology. In the modern business environment, intangible assets increasingly provide companies with their competitive advantage. The shift towards a digital and knowledge-based economy has elevated the importance of such intangible assets. A suitable example is the software industry where coding knowledge, patented algorithms, and brand reputation far outweigh any physical assets they might possess.

Key Differences between Tangible and Intangible Assets

Understanding the key differences between tangible and intangible assets allows you to comprehend their roles better and how they contribute to a company's overall value. Primarily, the differences lie in their physical existence, measurability, ease of conversion to cash, and their depreciation and amortisation methods. Tangible assets are physical, can often be easily valued and converted to cash, and depreciate over time. Conversely, intangible assets lack physical presence, making their valuation and monetisation challenging and they are amortised over their useful lives. In accounting terms, the depreciation of tangible assets follows various models such as: \[ \text{{Straight Line Depreciation}} = \frac{{\text{{Cost of Asset}} - \text{{Salvage Value}}}}{{\text{{Useful life}}}} \] Yet, the amortisation of intangible assets follows the straight-line method, which evenly distributes their cost over their estimated useful life. Another difference lies in the durability of these assets. Tangible assets tend to wear down over time, but many intangible assets have the potential to always provide economic benefits if maintained correctly.

Tangible vs Intangible Assets Examples to Illustrate Differences

A closer look at tangible and intangible assets examples will further solidify their differences. Consider a manufacturing company. It will have tangible assets in the form of buildings, machinery, vehicles, inventory, and cash. These can be identified, valued, and quantified with relative ease. However, this company might also have a good reputation (goodwill), a recognised logo or brand name (trademark), and possibly patented manufacturing processes (patents) - all of which are intangible assets. The business grows not only by increasing its tangible assets but also by improving or acquiring new intangible assets. For example, a newly developed and patented manufacturing process might be more efficient, resulting in cost savings, increased production, and eventually, increased profits. These examples show that while the roles and expressions of tangible and intangible assets can vary greatly, both types are instrumental and complementary in contributing to a company's success.

How to Evaluate Tangible vs Intangible Assets

Within the business and financial world, the ability to accurately evaluate both tangible and intangible assets is essential to understanding an organisation's true value. Whilst tangible assets are typically more straightforward to assess, intangible assets can offer a nuanced perspective of a company's competitive edge and prospective growth.

Ways to Determine the Value of Tangible Assets

Tangible assets can often be valued using their book values, or the values reflected in the company's balance sheet. These are typically based on the assets' original purchase prices, less any depreciation for assets like property, plant, and equipment. Depreciation is a method of allocating the cost of a tangible asset over its useful life. It essentially represents how much of an asset's value has been used up. To calculate depreciation, businesses use formulas such as the straight-line method, declining balance method, or the units of production method. One of the simplest and most commonly used methods of calculating depreciation is the straight-line method. Under the straight-line method: \[ \text{{Depreciation}} = \frac{{\text{{Cost of Asset}} - \text{{Salvage Value}}}}{{\text{{Useful life}}}} \] Yet, each method has its advantages, depending on the asset's unique characteristics and how it's used by the company. However, certain types of tangible assets may need to be re-evaluated to market values, especially in the case of property or artworks, where the demand and supply in the market greatly influence their price. In such cases, companies might employ professional appraisers to determine the market value of these assets. Moreover, for financial tangible assets like stocks and bonds, evaluating their worth is usually straightforward as their value is determined by the market.

Real-World Scenarios of Evaluating Tangible Assets

To illustrate the diverse ways in which tangible assets are evaluated, consider two wildly different examples - a delivery van for a small business, and a piece of land owned by a property development company. For the delivery van, the value could initially be based on the purchase price. However, as the van is used and its condition deteriorates, its value would be reduced over time due to depreciation. For the piece of land, the value could drastically change, driven by factors such as changes in local property prices, potential for development, or changes to town planning rules. Here, the market value, rather than the original purchase price or book value, would be most relevant.

Methods used in Estimating the Worth of Intangible Assets

Estimating the worth of intangible assets is more complex and abstract than tangible assets. Because of their non-physical nature, it is difficult to assign a specific value. Yet, there are several methods for estimating the value of intangible assets, including the cost, market, income, and relief-from-royalties methods. The cost method values an intangible asset based on the sum of its creation or replacement costs. It considers the expense required for research, development, and registration of the asset. This method is commonly used in valuing intellectual property like patents and copyrights. The market method values an asset based on what similar assets have been sold for in the market. It's mostly used conceptually, given the uniqueness and scarcity of intangible assets, which makes market comparisons difficult. The income method, which includes the discounted cash flow method, estimates the present value of the future income expected to be generated from the intangible asset. Finally, the relief-from-royalties method values an intangible asset based on the royalties the company saves by owning the asset. This method is commonly used for brand names, trademarks, and licensing agreements.

Real-World Examples of Valuing Intangible Assets

Let's consider a few examples to better understand the process of valuing intangible assets. For a patented technology developed by a tech company, the cost method could be applied to include the cost of research and development, testing, and patent registration. However, if the technology provides the company with a high-margin, exclusive product, the income or relief-from-royalty method might assign a much higher value to the patent, reflecting its future income generation or cost-saving potential. Meanwhile, a well-established brand name like Coca-Cola or Apple has immense value, even though it's an intangible asset. The value is derived from the customer loyalty, brand recognition, and premium pricing power the brand name enables, which can be gauged using the income or market method.