Tangible Assets vs. Intangible Assets: What’s the Difference?

Tangible Assets vs. Intangible Assets: An Overview

Tangible assets are items you can physically touch, while intangible assets are items you can’t physically touch. Both types of assets can be owned by a company and can hold monetary value.

Various types of assets could be considered tangible or intangible, some of which are short-term or long-term assets. In this article, we’ll define each in more depth as well as provide contrasting examples.

Key Takeaways

• Tangible assets are physical items owned by a company, such as equipment, buildings, and inventory.
• Tangible assets are the main type of asset that companies use to produce their products and services.
• Intangible assets are nonphysical items that have a monetary value because they represent potential revenue.
• Intangible assets include patents, copyrights, and a company’s brand.

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 primary types of tangible assets: current and fixed. Note that there may be exceptions that reside outside of these two main types of tangible assets.

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. The idea behind a current asset is that the main benefit of that asset can be received within the next 12 months.

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, usually as property, plant, or equipment. They 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 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’s difficult to assign a value to them because of the uncertainty of future 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 that includes:

• 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 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’ perceptions of the brand. A brand’s equity contributes to the overall valuation of a 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 value. It’s achieved when consumers are willing to pay more for a product with a recognizable brand name than they would pay for a generic version.

Important

Companies can experience diminishing brand equity if their reputation is hurt by any negative actions.

For example, a consumer might be willing 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 have intangible assets such as publishing rights and 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 like patents 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 its highly recognized brand name. The value of its name is virtually inestimable and is a critical driver in 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 industry also 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.

Companies must also periodically review their intangible asset values for impairment. For example, consider a fictitious acquisition in which one company buys another. The company being sold may have had strong brand recognition, thus fostering a goodwill intangible asset. If the buying company blunders the handling of the new company, that goodwill value may get lost if it does not capitalize on the asset it acquired. In this case, the goodwill may need to be written down.

Key Differences

Unlike tangible assets, which depreciate over time, intangible assets can appreciate in value or remain stable. This makes them perhaps more susceptible to market demand and technological advancements, whereas a tangible asset’s value may also be tied to it’s physical nature (i.e. how run down a piece of machinery may be).

As touched on above, the valuation and accounting treatment of tangible and intangible assets also differ. Tangible assets are usually recorded on a company’s balance sheet at their historical cost less accumulated depreciation. Intangible assets, however, are typically recorded at their acquisition cost if purchased, or at fair value if acquired through a business combination. Unlike tangible assets, which are subject to depreciation, intangible assets are often subject to amortization.

Tangible assets are generally easier to buy, sell, and liquidate. Tangible assets can more often be readily sold in the market or used as collateral for loans. For example, consider the used car market compared to the “customer loyalty market”.

The transferability and marketability of intangible assets can vary significantly depending on factors such as market demand, legal protections, and the uniqueness of the asset. This naturally means that intangible assets tend to be more unique, possibly making them harder to value.

Additionally, while tangible assets are subject to physical risks such as damage, theft, or natural disasters, intangible assets face risks related to obsolescence, infringement, or changes in market conditions. Both tangible and intangible assets can lose their value but for very different reasons.

Associated Costs for Tangible and Intangible Assets

Tangible assets incur costs related to their maintenance. These costs include general maintenance and repair expenses, insurance premiums, or property taxes. Companies that invest in tangible assets like buildings, machinery, and inventory recognize depreciation expenses over the asset’s useful life to reflect its diminishing value.

In contrast, intangible assets involve costs associated with their acquisition, legal protection, and research and development. Intangible assets may result in costs such as acquisition costs for patents or copyrights, legal and registration fees to establish ownership rights, or R&D expenses for creating or enhancing intellectual property and innovative products.

Example

Below is a portion of the balance sheet for Exxon Mobil Corporation (XOM) as of Dec. 31, 2023, 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 $214 billion as of Dec. 31 2023. Note that this total is the total cost of the tangible assets less any accumulated depreciation to date.
• Intangible and other assets were $17.1 billion at the end of 2023. Note that this is a slight increase from the year prior, meaning Exxon Mobil may have acquired companies with goodwill or acquired physical assets with associated intangible benefit (i.e. a customer list, for example).

What Is The Difference Between Tangible Assets and Intangible Assets?

Tangible assets are items you can touch, while intangible assets can not be touched. Both assets may have future economic value for a company in the future.

Is a Tangible Asset Better Than an Intangible Asset?

Tangible assets are simply assets that take a different form that intangible assets. A manufacturing company may find great value in having a manufacturing line it can touch. However, it also needs a strong customer list which it can’t necessarily touch. Items like brand loyalty and name recognition are still vitally important to a company, so each type of asset simply has a different type of value.

Is Goodwill an Intangible Asset?

Yes. Goodwill is noted when one company acquires another company. Goodwill is the portion of the purchase price that is greater than the fair market value of the assets and liabilities of the company that was bought. Goodwill is meant to capture the value of a company’s brand name, customer base, relationships with stakeholders, and employee relations.

What Are the Main Types of Intangible Assets?

The main types of intangible assets include goodwill, brand equity, intellectual property such as patents, research and development (R&D), and licensing.

Are Fixed Assets Considered Intangible or Tangible Assets?

Fixed assets are always considered tangible assets as they have physical dimensions and presence. They include items such as property, plant, and equipment. Fixed assets are long-term assets that can be sold for cash and are depreciated over their useful life.

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.

Read the original article on Investopedia.