What is a Tangible Asset?
Tangible assets are resources with a physical form and an objective market value that generates a benefit for an entity in the future.
🤔 Understanding a tangible asset
A tangible asset is an asset that has physical form like a building or a concrete market value like a stock. Most tangible assets have a physical form and may be subject to damage in a natural disaster, fire, or accident. Examples of tangible assets are cash, accounts receivable, property, equipment, and marketable securities. Unlike an intangible asset (a noncurrent asset without physical form), a tangible asset can be either a current asset (convertible to cash within a year) or a long-term asset (convertible to cash or useful life greater than a year). A company records its tangible assets on its balance sheet — a snapshot of a company’s assets, liabilities, and shareholders’ equity.
Let's review some of the tangible assets on Amazon's balance sheet for the quarter that ended Mar. 31, 2020.
Cash and cash equivalents $36.09B Marketable securities $18.93B Inventories $20.50B Accounts receivable, net and other $20.82B Property and equipment, net $72.71B Operating leases $25.14B
The sum of the tangible assets of Amazon is $194.19B for that quarter.
(Source: Amazon’s Quarterly Filings)
A tangible asset is like the equipment used by a soccer team…
A soccer team needs a field and equipment to practice. These are all items that the soccer team can see, feel, and touch. Some of these items have a long useful life like the stadium and others, a shorter one like a ball. However, all of these items generate a benefit to the soccer team. Likewise, tangible assets are resources that you can see and touch and that provide you a benefit either in the short- or long-run.
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- What is a tangible asset?
- Where can I find a company’s tangible assets?
- What is included in tangible assets?
- Is cash a tangible asset?
- What is the difference between tangible and intangible assets?
- How do you calculate net tangible assets?
- What are the methods for valuing tangible assets?
- What is the importance of tangible and intangible resources?
What is a tangible asset?
A tangible asset is an item with a physical form or an objective market value that provides value to its owner. Examples of tangible assets are cash, accounts receivable, vehicles, and investments (e.g., stocks, mutual funds, and marketable securities).
Typical features from tangible assets include:
- Physical existence: You can feel, see or touch a tangible asset. For example, you can move manufacturing equipment or see a stock certificate.
- Readily available value: The value of a tangible asset is relatively easy to determine from the physical asset’s original cost, book value, or market value. The value of tangible assets isn’t a theoretical value like that of an intangible asset — an asset without physical existence, such as a patent, computer software, or research and development.
- Potential collateral: Due to their ready market value, a tangible asset may serve as a loan’s collateral — an asset that a company agrees to give up in case defaulting on the loan.
- Subject to depreciation: A company records the loss in value of a long-term tangible asset as depreciation on its financial statements.
Where can I find a company’s tangible assets?
A company records its tangible assets on the assets section of its balance sheet — a financial statement that consolidates all company assets, liabilities, and shareholders’ equity.
Unlike intangible assets, tangible assets may be current assets or noncurrent assets.
- Current assets: Also known as liquid assets, resources with a useful life of under a year or that turn into cash within a year.
- Noncurrent assets: Also referred to as fixed assets, resources with a useful life higher than a year or that the company plans to keep or turn into cash in over a year.
On a company’s balance sheet, you can find the tangible assets under the current assets and noncurrent assets sections of the balance sheet. While all current assets are tangible assets, some noncurrent assets (e.g., goodwill, intellectual property, permits, licenses) aren’t tangible assets.
What is included in tangible assets?
Tangible resources include all current assets and tangible noncurrent assets.
A current asset is one that a company expects to fully consume in less than a year or turns it into cash within a year. All current assets (aka liquid assets) are tangible assets because they have finite and established value and useful life.
- Cash and cash equivalents
- Short-term investments
- Marketable securities
- Accounts receivable
- Prepaid expenses
Tangible noncurrent assets
Also known as fixed assets or long-term assets, noncurrent assets are resources with a useful life or required holding period to generate a benefit greater than a year. Only noncurrent assets with a physical form are tangible assets.
Tangible noncurrent assets include:
- Long term investments
- Equity investments
- Operating leases
Is cash a tangible asset?
Cash is a tangible asset in both of its forms.
- Physical bills and coins: Cash can take physical form like a one-dollar bill in the United States or a 20-peso coin in Mexico. You can see, touch, and feel cash when using physical bills and coins.
- Bank accounts: A bank account is a tangible asset because it gives you direct access to your cash. Checking accounts, savings accounts, and other types of bank accounts are forms of deposit — a transfer of cash to a financial institution for safekeeping until you withdraw that cash.
All liquid assets are tangible assets, and cash is the most liquid type of asset as it’s already in a form you can easily spend.
What is the difference between tangible and intangible assets?
There are three main differences between tangible and intangible assets: physical form, asset value, and accounting treatment of loss in value.
Most tangible assets have a physical form, while intangible assets don't.
For instance, you can feel and see a vehicle, manufacturing plant, or inventory. Alternatively, you can’t touch and see a patent (legal protection to an inventor’s creation that prevents other parties from copying that creation) or goodwill (the amount above a company’s book value when that company is sold to another party).
Another difference between tangible assets and intangible assets is that intangible assets have a theoretical asset value. For example, a trademark is a legal procedure to protect your brand’s name. While a trademark helps a company carry on its business activities, it’s difficult to assess the actual value of that intangible asset.
The cost of an intangible asset (e.g., license, permit, trademark) isn't a good point of reference for an intangible asset's actual value. For example, the cost of renewing the trademark of a world-renowned soft drink doesn’t represent the trademark’s ability to generate sales. However, the purchase price of a tangible asset like a car or home is often a useful point of reference to determine the asset's value.
Accounting treatment of value loss
Additionally, the accounting treatment of value loss is different for tangible and intangible assets.
A company uses depreciation to record the loss in value or use of a long-term tangible asset over a period. Alternatively, a company uses amortization to spread the loss in value or expense of intangible assets over a period.
How do you calculate net tangible assets?
Net Tangible Assets = [Total Assets - Intangible Assets] – Total Liabilities
- Total assets is the sum of tangible assets and intangible assets. If you subtract the value of intangible assets from total assets, you find the tangible assets.
- Net assets are assets minus liabilities.
- Tangible assets minus liabilities [(Total Assets – Intangible Assets) – Total Liabilities] provides you with the net tangible assets.
Let's calculate Amazon's net tangible assets using the company’s balance sheet for the quarter that ended Mar. 31, 2020.
Net Tangible Assets = [Total Assets – Intangible Assets] – Total Liabilities = [$225.25B – $31.06B] – $163.49B = $30.70B
Amazon had over $30B in net tangible assets for the quarter that ended Mar. 31, 2020.
What are the methods for valuing tangible assets?
The methods for valuing tangible assets include the appraisal method, liquidation method, and replacement cost method.
An appraisal is an approximated valuation of a resource by a certified professional. For example, the Appraisal Institute sets the requirements to become a certified real property appraiser in the United States.
If a company wanted to figure out the value of a building or another type of real estate property, it could hire a commercial real estate appraiser. The appraiser would determine the property's value by inspecting the property, comparing it to similar properties, and using other methods approved by the Appraisal Institute.
One of the tangible assets' features is that it can turn into cash due to its readily available market value. The liquidation method sets the value of a tangible asset through a liquidation — the remainder value of the asset after the asset’s sale and the repayment to all creditors.
Replacement cost method
Often used in the insurance industry, the replacement cost method sets the value of a tangible asset at the cost of replacing the asset for a new one. The replacement cost method includes not only the acquisition cost of the tangible asset but also the cost of making the asset fully operational.
What is the importance of tangible and intangible resources?
Tangible and intangible resources are important for valuation and debt-repayment purposes.
Total Assets = Tangible Assets + Intangible Assets
Tangible and intangible resources are important because together, they provide a full picture of the value of a company.
Historically, companies relied mostly on their tangible assets to determine their value in financial statements and in the eyes of owners, investors, creditors, and other stakeholders. However, more companies rely on their intangible assets (e.g., intellectual property, patents, trademarks, technologies) to support their valuations.
Keeping track of tangible and intangible resources is essential to develop an accurate value of a company over time.
Additionally, it’s important to track the difference between tangible and intangible assets to estimate a company’s liquidity (a company’s ability to pay debts due within a year) and solvency (a company’s ability to pay debts due in over a year).
Due to reduced liquidity of intangible assets, a company may not turn intangible assets into cash on time to pay back debts.
Some intangible assets like goodwill and reputation are unidentifiable assets — resources that can’t be separated from the company and can’t be sold to pay a debt.
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