If you are going to invest, you should understand the definition of assets and their types. One of the classifications divides them into two groups – tangible and intangible assets – and that’s what we will discuss right now. First, let’s discuss each of the types and then highlight a few critical differences.
About tangible assets
What is a tangible asset? Generally, these are physically measurable assets of a company that are actively used in business activities. They, in turn, are divided into:
- working capital (cash, inventories, securities traded on the market);
- fixed capital (non-current assets that are used in business activities for at least a year — for example, a car park, office furniture, office buildings).
These tangible assets examples provide a clear sense of the term for a beginner: these are assets that can be physically seen or touched. They are closely intertwined with intangibles, though – did you know that since 2010 the CME has offered rainfall futures based on the CME Rainfall Index to hedge against potential weather-related losses in the tourist, agricultural and energy production spheres?
About intangible assets
Now let’s move on to intangible assets examples and its definition. Typically, these are long-term resources that do not have a “physical shell”, but are also owned by the company and may have some commercial value. This group can include:
- trademark and copyright of the company;
- logos, corporate fonts and brand themes;
- proprietary software;
- any product patents.
In addition, this category also often includes the firm’s goodwill, domain names on the Internet, databases, works of science and art, breeding achievements, topologies of integrated circuits, and other assets depending on the industry. However, in comparison, the professional qualities of employees or financial investments are not included in this category.
So how does one understand what can be defined as an intangible asset? Since all these things are quite abstract, in order to fall into the category of “intangible”, it is necessary that the object be fully identified, that it could bring economic benefits for a period of at least 12 months. Also, the organization should have full control over such an object, and its initial cost could be easily determined.
It is important to remember that tangible assets are easy to evaluate because they have a specific life cycle and end value. They are always reflected in the balance sheet, but when they wear out and fail, they can be transferred to profit and loss statements.
However, intangible assets are a little more difficult to value, even if they have an initial purchase price (such as patents or licenses). In general, they appear on the balance sheet as long-term assets, and their value is spread out over the years in which the asset is valuable to the company.
As experts say, when defining tangible or intangible assets, it is worth remembering that the first group can be easily converted into cash if the business requires it. But the second group is much more difficult to sell and extract real funds.
The key differences
After we have discussed intangible and tangible assets meaning, let’s summarize and compare the two concepts:
|Basics||Assets that exist in the physical sense, they can be seen/touched.||Assets that do not physically exist but have commercial value.|
|Values||They have a material value being materially existing.||They also have some material value; economic efficiency is incorporeal.|
|Value reduction||They can depreciate.||They can be amortized.|
|Form||Physical presence.||Abstract presence.|
|Scrap value||Can be sold in scrap.||Do not have any scrap value.|
|Liquidation||Can be liquidated easily.||Do not allow liquidation.|
|External usage||Can be accepted as collateral.||Cannot be accepted as collateral.|
Let’s summarize and highlight the most important things. Tangible assets are things that can be seen and touched, have a physical form and can be easily converted into cash. Well-defined examples are buildings, machines, office equipment that belong to the company.
On the other hand, intangible assets are something that does not have a physical form – they also have value, but they are harder to convert into cash. For example, copyright, proprietary software or patents.And if you want to delve deeper into the topic of accounting, then be sure to read about other types of assets, including the fictitious assets examples and other terms.