Tangible Assets vs. Intangible Assets: What's the Difference? (2024)

Tangible Assets vs. Intangible Assets: An Overview

There are two types of asset categories: tangible and intangible. Tangible assets are physical items owned by a company, such as a building, land, or computer equipment. Tangible assets are the main type of asset that companies use to produce their products and services.

Intangible assets don't physically exist, yet they have a monetary value because they represent potential revenue. A type of intangible asset is a copyright to a song. The record company that owns the copyright would get paid a royalty each time the song is played.

Various types of assets could be considered tangible or intangible, some of which are short-term or long-term assets.

Tangible Assets

Tangible assets are physical and measurable assets that are used in a company's operations. Assets such as property, plant, and equipment are tangible assets. Tangible assets form the backbone of a company's business by providing the means by which companies produce their goods and services. Tangible assets can be damaged by naturally-occurring events.

These assets include:

• Land
• Vehicles
• Equipment
• Machinery
• Furniture
• Inventory
• Securities like stocks, bonds, and cash

There are two types of tangible assets:current and fixed.

Current Assets

Current assets include items such as cash, inventory, and marketable securities. These items can be readily sold to raise cash for emergencies and are typically used within a year.

Fixed Assets

Fixed assets are non-current assets that a company uses in its business operations for more than a year. They are recorded on the balance sheet as. They include assets such as trucks, machinery, office furniture, buildings, etc. The money that a company generates using tangible assets is recorded on theincome statementas revenue.Fixedassetsare needed to run a business continually.

Types of Companies With Tangible Assets

Various industries have companies with a high proportion of tangible assets.

Manufacturing: Companies involved in producing goods have tangible assets. Examples include the automobile and steel industries. The required factory equipment, computers, and buildings would all be tangible assets.

Technology: Technology companies that are involved in producing smartphones, computers, and other electronic devices use tangible assets to produce their goods.

Oil & Gas: Companies within the oil and gas industry also own a large number of fixed assets that are tangible. For example, companies that drill oil own oil rigs and drilling equipment. Oil producers are extremely capital-intensive companies, meaning they require significant amounts of money to finance the purchase of their tangible assets.

Intangible Assets

Intangible assets are nonphysical assets used over the long term.Intangible assets are often intellectual assets, and as a result, it'sdifficult to assign a value to them because of the uncertainty offuture benefits.

Intangible assets add to a company's future worth and can be far more valuable than tangible assets. Both of these types of assets are initially recorded on the balance sheet, which helps investors, creditors, and banks assess the value of the company.

Intangible assets are intellectual property thatincludes:

• Patents, which provide property rights to an inventor
• Trademarks, which are a recognizable phrase or symbol that denotes a specific product and differentiates a company
• Franchises, which are a type of license that a party (franchisee) buys to allow them to have access to a company's brand and sell goods under its name
• Goodwill, which represents the value above and beyond a target company's assets that another company pays when acquiring the target company
• Copyrights, which represent intellectual property that's protected from being used or duplicated by non-authorized parties

Depending on the type of business, intangible assets may also include internet domain names, performance events, licensing agreements, service contracts, computer software, blueprints, manuscripts, joint ventures, medical records, permits, and trade secrets. Intangible assets add to a company's possible future worth and can be much more valuable than its tangible assets.

Brand Equity

A brand is an identifying symbol, logo, or name that companies use to distinguish their products in the marketplace and from competitors. Brand equityis considered to be an intangible assetbecause the value of a brand is not a physical asset and is ultimately determined by consumers' perceptions of the brand. A brand's equity contributes to the overall valuationof a company's assets as a whole.

Positive brand equityoccurs when favorable associations exist with a given product or company that contribute to a brand's value. It'sachieved when consumers are willing to pay more for a product with a recognizable brand name than they would pay for a generic version.

For example, aconsumer might bewilling to pay $4.99 for a tube of Sensodyne toothpaste rather than to purchase the store brand's sensitivity toothpaste for $3.59 despite it being the same and cheaper. The Sensodyne brand has positive equity that translates to a value premium for the manufacturer.

Negative brand equity occurs when consumers are not willing to pay extra for a brand-name version of a product.For example,producers of commodity products, such as milk and eggs, may experience negative brand equity because many consumers are not concerned with the specific brands of the milk and eggs they purchase.

Since brand equity is an intangible asset, as is a company's intellectual property and goodwill, it cannot be easily accounted for on a company's financial statements. However, a recognizable brand name can still create significant value for a company. Investing in the quality of the product and a creative marketing plan can have a positive impact on the brand's equity and the company's overall viability.

Types of Companies With Intangible Assets

Several industries have companies with a high proportion of intangible assets.

Technology: Technology companies, particularly within the area of computer companies, have key intangible assets such as copyrights, patents, critical employees, and research and development. For example, Apple Inc. (AAPL) would have such intangible assets.

Entertainment: Entertainment and media companies haveintangible assets such as publishing rightsand essential talent personnel. Intangible assets in the music industry, for example, involve the copyrights to all of a musical artist's songs. Musicians and singers can also have brand recognition associated with them.

A music production company might own the rights to songs, which means that whenever a song is played or sold, revenue is earned. Although these assets have no physical properties, they provide a future financial benefit for the music company and the musical artist.

Consumer: Consumer products and services companies have intangibles likepatents for formulas and recipes, along with brand name recognition. These are essential intangible assets in highly competitive markets. Coca-Cola Company (KO)provides an example of intangible assets with itshighly recognized brand name. The value of its name is virtually inestimable and is acritical driverin the Coca-Cola Company's success and earnings.

Healthcare: The healthcare industry tends to have a high proportion of intangible assets, including brand names, valuable employees, and the research and development of medicines and methods of care.

Automobile: The automobile industryalso relies heavily on intangible assets, primarily patented technologies and brand names. For example, brand names like "Ferrari" are worth billions.

Accounting for Tangible and Intangible Assets

Tangible Assets

Tangible assets are the easier to account for because they normally have a finite value and life span. Tangible assets are recorded on the balance sheet initially. As they are used up, an expense representing this use gets carried over to the income statement.

Inventory, for example, is a tangible asset that when used in the production process, becomes included in the cost of goods sold for a company. Cost of goods sold represents the costs directly involved with the production of a good.

Tangible fixed assets, such as plant and equipment, are also recorded on the balance sheet but as their useful life is reduced, that portion is expensed on the income statement as depreciation.

Depreciation is the process of allocating a portion of the cost of an asset over the years as it is used to generate revenue for the company.Depreciation helps to reflect the wear and tear on tangible assets during their lifetime.

Intangible Assets

Intangible assets can be more challenging to value from an accounting standpoint. Some intangible assets have an initial purchase price, such as a patent or license. Similar to fixed assets, intangible assets are initially recorded on the balance sheet as long-term assets.

The cost of some intangible assets can be spread out over the years for which the asset generates value for the company or throughout its useful life. However, whereas tangible assets are depreciated, intangible assets are amortized.

Amortization is the same concept as depreciation, but it's only used for intangibles. Amortization spreads out the cost of the asset each year as it is expensed on the income statement.

Example

Below is a portion of the balance sheet for Exxon Mobil Corporation (XOM) as of Dec. 31, 2021, as reported on the company's annual 10-K filing.

Current assets are recorded at the top of the statement and reflect the short-term assets of the company. The long-term assets are recorded below "Total Current Assets."

• The company's tangible assets are recorded as property, plant, and equipment, which totaled $217 billion as of Dec. 31, 2021. We can see that the company decreased its fixed assets in 2021 from $227 billion in 2020.
• Intangible and other assets were $18 billion for 2021, which was an increase from $16.8 billion as of Dec. 31, 2020.

The Bottom Line

The possessions of value owned by companies can include tangible assets and intangible assets. While the first type of asset has physical properties, the second normally does not. But both types of assets can represent great value to a company. Therefore, they are recorded on a company's books accordingly.