In many cases, a company’s intangible assets are more valuable than their tangible assets. Think of companies whose work involves the development of intangible products such as computer software and technology solutions. Think also of technology-based, social, and community platforms whose value resides mainly in the value of the network, the brand, and the user base.
What’s the Difference Between Tangible and Intangible Assets?
The difference between tangible and intangible assets may seem obvious: if you can touch it, it’s tangible; if you can’t, it isn’t. However, in an era when apps and influence can be more valuable than spark plugs or apples, the difference isn’t always so clear-cut. Here are some of the key distinctions between the two: Like tangible assets, there are two distinct groups of intangible assets: definite and indefinite. Definite intangible assets are time-limited while indefinite intangibles are not. Here are examples of both types of assets. But as digital transactions have become the norm, it can become trickier to distinguish between physical and nonphysical property. For example:
Streaming music and videos are considered to be intangible property, but of course they are valued, bought, and sold every day. Stock investments are considered to be tangible assets, but they have no physical form; they are simply listed and managed as digital assets. Cryptocurrencies, like Bitcoin, behave like other investments but for the purposes of Generally Accepted Accounting Principles (GAAP), do not meet the test for being tangible assets.
Depreciation vs. Amortization
The value of most tangible assets decreases over time due to age, wear and tear or obsolescence. This process is known as depreciation, which allows businesses to deduct the declining value of these assets from their taxes. Amortization, meanwhile, is the process of spreading out the cost of an intangible asset (a patent, copyright, etc.) over a period of time.
How Value Is Determined
It’s usually fairly easy to value a tangible asset: it’s worth whatever the market will bear. For example, a new car in a showroom is worth an agreed-upon amount, and its value depreciates by a set amount from year to year. Of course, some values fluctuate over time: the value of a barrel of oil, for instance, changes constantly, as do the values of stocks—but those values can be researched and verified. Some intangible assets can also be easier to value by asking:
What would a buyer pay to own or use the intangible asset?What is the useful life of this asset?
For example, a pharmaceutical company can make a good estimate as to the market value of the patent for a new drug based on projected sales of the drug. In addition, because patents are time-limited, it’s relatively easy to amortize their value. A 10-year drug patent will be worth less if five of the 10 years have already passed. There are, however, intangible assets that are more difficult to value such as goodwill or branding, which are essentially subjective. For example, it’s possible to value the Coca-Cola brand simply on the basis of its secret recipe or how much money has been spent over time to design and promote the brand. But that doesn’t take into account the longevity of the brand, the goodwill of consumers, or other critical issues.
The Bottom Line
Both tangible and intangible assets have value, but tangible assets are generally physical items that can be easily turned into liquid assets while intangible assets are harder to value or sell. As a result, businesses make it a point to own both tangible and intangible assets. This is especially important if you’re thinking about taking out a loan or if you feel you might need access to cash.
