Tangible Assets
Tangible assets are physical and measurable assets that are used in a company’s operations. Assets like property, plant, and equipment, are tangible assets. These assets include:
- Land
- Vehicles
- Equipment
- Machinery
- Furniture
- Inventory
- Securities like stocks, bonds, and cash
There are two types of tangible assets:
Current assets include items such as cash, inventory, and marketable securities. These items are typically used within a year and, thus, can be more readily sold to raise cash for emergencies.
Fixed assets are noncurrent assets which a company uses in its business operations for more than a year. They are recorded on the balance sheet as Property, Plant, and Equipment (PP&E), and include assets such as trucks, machinery, office furniture, buildings, etc. The money that a company generates using tangible assets is recorded on the income statement as revenue. Fixed assets are needed to run the business continually.
Intangible Assets
Intangible assets are typically nonphysical assets used over the long-term. Intangible assets are often intellectual assets, and as a result, it’s difficult to assign a value to them because of the uncertainty of the future benefits.
Intangible assets are intellectual property that include:
- Patents
- Trademarks
- Franchises
- Goodwill
- Copyrights
- A company’s brand
Other Types of Intangible Assets
Depending on the type of business, intangible assets may 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 is considered to be an intangible asset because the value of a brand is not a physical asset and is ultimately determined by consumers’ perception of the brand. A brand’s equity contributes to the overall valuation of the company’s assets as a whole.
Positive brand equity occurs when favorable associations exist with a given product or company that contribute to a brand’s equity, which is achieved 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, a consumer might be willing to pay $4.99 for a tube of Sensodyne toothpaste rather than purchasing the store brand’s sensitivity toothpaste for $3.59 despite being 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. (For more information, see <...