Tangible assets possess physical form, have measurable value, and provide direct utility. On the other hand, intangible assets, lack physical presence, derive value from legal or intellectual rights, and offer intangible advantages.
In this article on difference between tangible and intangible asset we will also be discussing these two assets in detail.
Table of Contents
- Difference between tangible and intangible asset
- What are Tangible Assets?
- Characteristics of Tangible Assets
- What are intangible assets?
- Characteristics of Intangible Assets
Difference between tangible and intangible asset
The following table provides a brief of the difference between tangible and intangible asset.
|Can be seen, touched, and measured
|Lacks physical presence
|Potential for value appreciation
|Value driven by rights and advantages
|Provides tangible utility in operations
|Offers intangible benefits, such as brand recognition
|Subject to wear and tear, requires maintenance
|Not subject to physical wear, but may face obsolescence
|Measurable and quantifiable
|Subjective valuation methods
|Real estate, machinery, inventory, cash
|Patents, trademarks, copyrights, brand names
What are Tangible Assets?
Tangible assets are physical assets that possess a physical form and can be seen, touched, and measured. These assets have a tangible presence and are typically utilized in day-to-day operations. Examples of tangible assets include real estate, machinery, inventory, vehicles, and cash.
Characteristics of Tangible Assets
The following are the characteristics of tangible assets:
- Physical Existence: Tangible assets have a physical presence and can be observed or touched. They have a distinct form and can be measured or quantified.
- Value Appreciation: Some tangible assets, such as real estate or collectables, have the potential to appreciate in value over time. Market demand, scarcity, and other factors can influence their value.
- Utility: Tangible assets provide direct utility and are utilised in the production of goods or delivery of services. They contribute to operational processes, enabling businesses to generate revenue.
- Maintenance and Depreciation: Tangible assets require maintenance to preserve their value and functionality. They may depreciate over time due to wear and tear, technological advancements, or changing market preferences.
Here are some advantages of tangible assets:
- Value: One of the primary advantages of tangible assets is that they possess inherent value. They can be bought, sold, and traded based on their physical characteristics, such as condition, quality, and scarcity. This tangible value provides stability and serves as a foundation for assessing the worth of an asset.
- Tangible Presence: Physical assets can have a tangible presence, which can be beneficial in many situations. For businesses, tangible assets like real estate, machinery, and equipment can enhance their operational capabilities and provide a physical infrastructure to support their operations. In personal finance, tangible assets like a house or a car provide utility and convenience.
- Appreciation: Certain tangible assets, such as real estate or collectibles, have the potential to appreciate in value over time. As demand increases or scarcity rises, the price of these assets may rise as well. This potential for appreciation can be advantageous for investors and individuals looking to build wealth.
- Collateral: Tangible assets can be used as collateral for securing loans or financing. Banks and lenders often accept tangible assets, such as property or vehicles, as collateral, providing borrowers with access to capital. This collateral can reduce the risk for lenders, potentially leading to lower interest rates for borrowers.
- Physical Control: Tangible assets offer a sense of physical control and ownership. Unlike intangible assets, such as stocks or intellectual property, which rely on legal documentation, tangible assets can be physically possessed, stored, and managed. This control can provide a sense of security and ease of management.
- Utility and Functionality: Many tangible assets serve a practical purpose and offer utility and functionality. For example, a manufacturing company relies on machinery and equipment to produce goods efficiently. Similarly, owning a home provides shelter and a place to live. These practical applications contribute to the advantages of tangible assets.
- Diversification: Tangible assets can be an essential component of a well-diversified investment portfolio. Including a mix of tangible and intangible assets can help spread risk and potentially enhance returns. Tangible assets often have a different risk profile than financial assets, providing a hedge against market fluctuations.
Disadvantages of Tangible Assets
The following points explain the disadvantages of tangible assets:
- Depreciation: Tangible assets like machinery and equipment can depreciate over time, reducing their book value and potential resale value.
- Maintenance Costs: They often require ongoing maintenance and repair expenses.
- Storage Costs: Physical space is needed to store tangible assets, incurring storage costs.
- Risk of Obsolescence: They can become obsolete due to technological advancements.
- Limited Mobility: Tangible assets are typically location-bound.
- Capital Intensity: Acquiring and maintaining tangible assets can be capital-intensive.
- Liquidity Issues: Selling tangible assets may take time and effort, impacting liquidity.
What are intangible assets?
Intangible assets, in contrast, lack a physical form and represent non-physical rights or claims. They derive their value from legal or intellectual property rights and are typically not visible or measurable. Examples of intangible assets include brand names, patents, copyrights, trademarks, goodwill, and intellectual property.
Characteristics of Intangible Assets
The following are the characteristics of intangible assets:
- Non-Physical Nature: Intangible assets do not have a physical presence and cannot be touched or seen. They exist in legal or intellectual realms.
- Intellectual Property Rights: Intangible assets are often associated with legal protections, such as patents, copyrights, or trademarks, which grant exclusive rights to the owner.
- Rights based: Intangible assets derive their value from the rights and advantages they confer to the owner, such as brand recognition, market reputation, or technological innovation.
- Subjective Valuation: Valuing intangible assets can be subjective and challenging due to their non-physical nature. Techniques like market research, cost approaches, or income approaches are used to estimate their value.
Advantages of intangible assets
Here are some advantages of intangible assets:
- Intellectual Property: Intangible assets often include IPR such as patents, trademarks, copyrights, and trade secrets. These assets provide legal protection for innovative ideas, inventions, brand identity, creative works, and confidential information. Intellectual property rights can grant a competitive advantage, exclusivity, and the ability to generate revenue through licensing or selling.
- Brand Value: Intangible assets such as brand names, logos, and reputations contribute to brand value. Building a strong brand can lead to increased customer recognition, loyalty, and trust. A well-established brand can command premium pricing, attract a larger customer base, and differentiate a business from competitors.
- Customer Relationships: Intangible assets include customer relationships, which are valuable for businesses in various industries. Customer loyalty, trust, and long-term relationships can result in recurring sales, positive word-of-mouth referrals, and a competitive edge. Strong customer relationships often lead to increased customer lifetime value and revenue growth.
- Human Capital: Intangible assets also encompass the knowledge, skills, and experience of employees, often referred to as human capital. A talented and knowledgeable workforce can drive innovation, productivity, and business success. Investing in employee training, expertise, and retention can contribute to a company’s intangible assets and create a sustainable competitive advantage.
- Goodwill: It is a type of an intangible asset that represents the reputation, customer loyalty, and positive brand image a company has built over time. Goodwill often arises from factors such as excellent customer service, ethical business practices, and a strong market presence. It can increase a company’s value during acquisitions, mergers, or when selling the business.
- Competitive Edge: Intangible assets can provide a significant competitive edge over rivals. They are not easily replicated or imitated, making it challenging for competitors to duplicate a company’s unique combination of brand value, customer relationships, intellectual property, and expertise. This advantage can lead to higher market share, increased profitability, and market dominance.
- Innovation and R&D: Intangible assets often stem from investment in innovation and R&D. Companies that invest in developing new technologies, products, and processes can create intangible assets in the form of patents, copyrights, and proprietary knowledge. These assets can enhance competitiveness, attract investors, and drive future growth.
- Transferability and Scalability: Intangible assets, such as software, digital content, or business methodologies, can be easily transferred or replicated across different markets or geographies. This transferability and scalability allow businesses to expand their operations rapidly and reach a larger customer base without significant physical infrastructure.
Disadvantages of Intangible Assets
Lack of Physical Presence: Intangible assets lack physical substance, making them challenging to assess and value accurately.
Subjectivity: Their valuation often involves subjective judgments, leading to potential disagreements over their worth.
Amortization: Intangible assets are typically amortized over their useful life, affecting financial statements.
Impairment Risk: They can become impaired if their value decreases, leading to write-downs.
Limited Collateral: Intangible assets may offer limited collateral value for securing loans.
Difficulty in Transfer: Transferring intangible assets can involve legal complexities and hurdles.
Competitive Pressure: Rapid changes in technology and markets can make intangible assets obsolete quickly.
How Do Tangible and Intangible Assets Differ in Terms of Valuation?
Valuing tangible assets is generally straightforward, as they have a clear physical presence and market value. In contrast, intangible assets are usually difficult to value due to their lack of physical form and the complex factors influencing their worth, such as brand reputation or intellectual property's potential.
Can Intangible Assets Be Amortized?
Intangible assets can be amortized, similar to how tangible assets are depreciated. However, the amortization of intangible assets depends on whether they have an identifiable or indefinite useful life. For example, copyrights and patents are amortized over their economic or legal life, while trademarks and goodwill are reassessed annually for impairment.
What is the Role of Intangible Assets in a Company's Market Value?
Intangible assets are significant in a company's market value, often contributing to the disparity between a company's value as per accounting records and its market capitalization. This is particularly true in knowledge-based or technology-driven industries.
How are Intangible Assets Treated in Financial Accounting?
Under International Accounting Standards Board (IASB) guidelines and U.S. GAAP, intangible assets are recognized differently based on whether they are purchased or internally created. For instance, legal intangibles developed internally are generally not recognized, whereas those purchased from third parties are recognized.