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Both tangible and intangible assets are considered to be assets. Physical objects make up tangible assets. Land, structures, automobiles, furnishings, and equipment are some examples. A non-financial item that cannot be seen or handled is an intangible asset. Examples of tangible intangible assets include goodwill and patents.
Assets are listed as current and long-term assets (non-current assets) on the balance sheet. Any assets that the entity holds for trading and anticipates realising within a year of the reporting date are considered current assets, along with any cash that is readily available. These assets include those that the entity anticipates realising, selling, or consuming in its normal operational cycle. Every other asset is listed as a long-term asset.
While long-term assets can be either tangible or intangible, current assets are typically tangible assets.
What are Tangible Assets v/s Intangible Assets?
A tangible asset is an item or structure with physical substance. Examples of tangible assets include plant, machinery, property, equipment, office furniture, and inventory.
There are two types of tangible assets - inventory and fixed assets.
Intangible assets are opposite to tangible assets. It is a non-monetary asset without any physical substance. For example, goodwill, brand recognition, and intellectual property such as trademarks, patents, and copyrights.
Difference between tangible and intangible assets
1. Physical Existence
An intangible asset holds a monetary value but does not have a physical existence. It appears in the company's balance sheet and can bolster its overall net worth in the long term. Contrarily, a tangible asset has a physical existence and a defined value.
A company may purchase or sell tangible assets in the secondary market for some monetary consideration. A tangible asset is relatively straightforward to trade compared to an intangible asset. The tradability of an intangible asset is lower since it does not have a physical form.
The valuation of tangible assets depends on the cost and is subject to depreciation amount (if applicable). It is relatively easy to value tangible assets compared to intangible assets.
The value of an intangible asset is its cost or fair market value, whichever is lower. The valuation of intangible assets will require the services of a business valuation specialist.
The ease of liquidating or disposing of a tangible asset is more than an intangible asset. Intangible assets lack physical presence and involve complex valuation techniques. Therefore, an entity may face challenges in selling its intangible assets.
5. Cash Convertibility
It is relatively straightforward to convert intangible assets to cash in contrast to tangible assets.
Calculating Tangible and Intangible Assets
The net worth of an entity is directly proportional to the value of assets. Thus, analysts strive to value assets accurately and with utmost precision. The valuation of tangible assets varies from intangible assets.
Generally, tangible assets have a finite life, whereas that is not always the case for intangible assets.
Valuation of Tangible Assets
An entity holds tangible assets for long-term use. Tangible assets have a finite useful life, and the acquisition cost is subject to amortization. There are two methods to amortize the cost of tangible assets - the straight-line or declining balance. However, amortization does not apply to tangible assets with infinite useful life.
The valuation of tangible assets affects the balance sheet and the income statement. The balance sheet reports the asset's net carrying cost, i.e., the acquisition cost less accumulated amortization. The income statement comprises annual amortization expenses. Retained earnings include amortization expense for the previous year under shareholders' equity.
Valuation of Intangible Assets
Unlike tangible assets, the useful life of an intangible asset is dependent on variable parameters. Therefore, a company cannot amortize the acquisition cost over a period. The valuation of an intangible asset is subject to impairment.
Let's consider the example of a trademark. The lifespan of a trademark is as long as the company. Hence, it is complex to amortize the trademark's cost to reflect its use. Initially, the intangible asset cost reflects in the balance sheet as long-term assets. Eventually, the company distributes intangible assets' cost over some time. Amortization calculates the cost of intangible assets attributable to a financial year and appears in the income statement.
Difference between tangible and intangible benefits
In financial terms, tangible benefits are measurable, whereas intangible benefits are not quantifiable. Tangible and intangible benefits have a direct impact on business.
Tangible benefits represent positive results that an entity can measure accurately and quantify with standard measurements. In economics, the tangible benefit includes any outcome directly associated with financial gain or loss. Therefore, tangible benefits carry a monetary value relative to other types of capital spending or procedures in the organization. Tangible benefits are physical and may represent long-term or short-term benefits.
Businesses value tangible benefits to measure improvement. Companies use tangible benefits to formulate strategies and develop emergency plans. There is a direct link between prediction, valuation, and control, so business leaders emphasize tangible benefits. The ability to quantify benefits from different outcomes is essential for comparative analysis.
The valuation of tangible benefits changes as per the details of the situation. For example, a missed sale's value is the transaction's monetary gain. The valuation of other benefits is more intricate and demands technical know-how, industry practice, and detailed data analysis.
The intangible benefits, also called soft benefits, are the profits attributable to the project improvement but excluded from formal accounting purposes. An entity does not include these benefits in financial calculations due to its non-monetary nature. Also, it isn't easy to quantify and calculate intangible benefits.
Intangible benefits correspond to long-term assets that are not physical assets but instead an organization's intellectual property. It may have an extensive or long-term effect that can alter the organization's path. Without a direct cause-effect connection, intangible benefits can have major financial implications.
Businesses develop soft metrics to measure financial gain from intangible benefits. For example, ad hoc public surveys, evaluating employee morale, customer satisfaction discussions, etc.
Every company should actively track both types of benefits. Each business action must corroborate with either tangible or intangible benefits. Often, tangible benefits are the main concern since it is data-driven. However, the business must allocate equal weightage to intangible assets.
Industries that mainly use Intangible assets
● Healthcare – Innovation is key in the healthcare sector, so intangible assets are widespread. For example, pharmaceutical companies such as Novartis and Cipla have a dominant brand value and top the sales chart in India.
● Consumer sector – The FMCS sector is a highly driven marketplace with cut-throat competition. Intangible assets include patents on preparations and recipes and brand name awareness. For example, the brand name Britannia is well-known and practically unmeasurable.
● Technology Sector – Intangible assets are important in the technology sector, especially for companies engaged in extensive research and development, patents, and copyrights. Examples include Microsoft and Apple, renowned worldwide for impeccable technology.
● Media and Entertainment – Entertainment and media firms hold intangible assets such as copyrights, distribution rights, and key talented individuals. For instance, the copyrights to a musical artist's songs in the music industry are intangible assets. Similarly, musicians and vocalists may boost brand recognition.
● Automobile Sector - Patented logos, brand names, and technologies are also vital in the automobile sector. The brand name of Jaguar or Rolls-Royce is worth billions of dollars.
Importance of tangible and intangible resources
The current pace of innovation and the use of technology is phenomenal. In such a fast-paced environment, a company's assets are pillars of its success. Therefore, tangible and intangible resources are equally important for financial growth and development.
Tangible resources allow a company to generate revenue and cash flow essential for business continuity. Also, it optimizes company operations and minimizes challenges. It allows a company to withstand competition. A company may even liquidate tangible resources in case of an emergency. Over time, the valuation of a tangible resource may increase exponentially and yield revaluation benefits to the company. Ancillary benefits of tangible resources include enhancement of an entity's borrowing capacity, control over the company structure, maintenance of raw materials, and promotion of strategic planning.
The intangible resource allows an entity to gain knowledge not accessible to other companies. Therefore, it increases the ease of management. Intangible resources provide a distinguishing factor and a competitive advantage to the company. Intangible resources also help develop a brand name through customer and employee satisfaction. Moreover, early mover advantage provided by some intangible resources can disrupt an industry and a company's growth trajectory. Furthermore, intangible assets allow a company to handle competition effectively.
An entity must dedicate time, effort, and resources for both intangible and tangible assets to operate without any difficulties. Both asset types have distinct purposes within a company, and analysts or investors evaluate them using multiple methods. They also have peculiar benefits that benefit any company in the long run.
Thus, each business in the world requires intangible and tangible assets to maintain its operations in the long run, maintain profitability and create a niche in the industry.
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Frequently Asked Questions
Tangible costs are predictable or foreseeable costs. For example, the employee salary, operational expenses, etc. Intangible costs are specific values assigned to quantify the effect of a situation or scenario. For example, a reduction in employee morale or customer dissatisfaction.
Intangible result refers to a result without a monetary value since it would be worthless and challenge the accuracy of results.
In this respect, businesses use two basic accounting ratios: current and quick ratios.
1. Tangible assets have physical existence.
2. These assets lose value over time or depreciate. However, these assets have a scrap value.
3. Companies may use tangible assets for regular business operations or as collateral for loans.
A company's assets are a sum of its liabilities and shareholders' funds.
1. Intangible assets lack any physical existence.
2. These assets do not lose value over time or depreciate. Moreover, the scrap value for these assets is zero.
3. Even though intangible assets are riskier than tangible assets, it creates potential value for a firm.
4. It is challenging to trade in intangible assets compared to tangible assets.