What are Tangible Assets – Its Calculation, Example and Difference with Intangible Asset
Tangible assets or fixed assets is a term used in accounting to denote assets that have a physical form. These assets also have a certain monetary value and form a core component of business operations. Companies can use these assets as collateral for obtaining loans from a financial institution.
However, businesses need to spend a portion of their total income on continuous repair and maintenance of tangible assets so that they continue functioning to their full potential. These assets are also susceptible to various natural and man-made disasters, and it can lead to loss of value in the long run.
What Is the Importance of Tangible Assets?
Tangible assets play a crucial role in forming the capital structure of a company. Businesses with more tangible assets tend to handle debt financing more efficiently. To understand the meaning of overall tangible assets, consider reading through their importance as follows:
- Depreciation on such assets is a non-cash expenditure. This refers to an expenditure that allows a company to receive tax benefits. Thus, businesses experience no cash outflow.
- Current tangible assets can be converted to cash. Thus, they provide liquidity to businesses, which reduces risk. A company tends to remain solvent and safe if the value of the tangible assets is greater than the money risked to acquire them.
- Moreover, tangible assets can be used as collateral security to avail loans.
Also Read: Asset Turnover Ratio: Meaning, Formula and How to Calculate
What Is Included in Tangible Assets?
Tangible assets feature a defined purchase value and cost of acquisition. That said, tangible assets can be divided into the following categories:
1. Current assets
Current assets can be defined as assets that are useful for a business for a short time frame. They are highly liquid in nature. In simple words, such assets have a short life span, which can be easily converted into cash during an accounting period.
They may or may not have a physical presence but are extremely useful, as they have a definite value. Businesses can utilise current assets to pay off small loans, improve the cash flow among other purposes. A few examples of current tangible assets are:
- Short-term investments
- Cash and cash equivalents
- Inventories
- Marketable securities
- Prepaid expenses
- Accounts receivables
2. Fixed assets
Tangible fixed assets are extremely useful for a business as they help in the functioning of its day-to-day operations. However, they cannot be converted to cash readily towards the end of an accounting period.
Since these assets cannot be readily converted to cash, businesses need to account for them in the current accounting period. This can be achieved through the means of depreciation. A few examples of fixed assets include:
- Equipment
- Property
- Plant
- Furniture
- Fixtures
- Equity investments
- Operating leases
- Long-term investments
How to Calculate Net Tangible Asset?
Net Tangible Asset, or NTA, is the value of all tangible assets minus all present liabilities in a company. In other words, NTA is simply the value of the total assets in a company minus the intangible assets.
That said, the total net tangible asset value is sometimes referred to as a company’s book value or net asset value.
You can calculate NTA by applying this formula:
NTA = Total Assets – (Intangible Assets + Total Liabilities)
Example:
Suppose Company X reports total assets worth Rs. 50 lakh and total liabilities worth Rs. 5 lakh. It has intangible assets of Rs. 3 lakh. The company’s NTA will be:
NTA = Rs. 50,00,000 – (Rs. 5,00,000 + Rs. 3,00,000) = Rs. 42,00,000
Types of Companies with Tangible Assets
Here is a list of companies that operate by using tangible assets:
1. Manufacturing
Enterprises involved in manufacturing consumer and capital goods have tangible assets for their daily operations. These include the factory premises, factory equipment, weight-carrying vehicles, etc.
2. Technology
Companies that are involved in manufacturing technology-related products like computers, mobile phones, tablets, television, etc., require a number of tangible assets to efficiently carry out their day-to-day operations.
3. Oil and Gas
All oil and gas companies have a number of tangible assets at their disposal for carrying out their daily activities. Entities operating in the drilling and exploration segment have several tangible assets like drilling equipment and oil rigs.
Similarly, enterprises operating in the refinery and production segment also own a number of tangible assets for efficiently carrying out their operations.
Types of Companies with Intangible Assets
The companies which mostly use intangible assets for their operation are as follows:
1. Entertainment
The entertainment and media industry has several intangible assets like publishing and copyrights, brand recognition, etc. Whenever an artist sings or pens a song, the production house receives copyright for that particular song. Any future use of that song by a third party would earn passive income for the company.
Singers, actors and lyricists have a brand value that determines their worth. You cannot see or touch these intangible assets, but they ensure fame and recurring monetary benefit for artists and companies.
2. Technology
Every technology company has certain intangible assets like patents and licenses, which form the core of their operations. The innovative research and development they carry out and new products that these companies launch revolve around intangible assets mentioned above.
3. Healthcare
Every healthcare company has some intangible assets like goodwill, brand recognition, research and development of medicines and methods. All these play a vital role in carrying out its day-to-day activities.
4. Automobiles
Another area or industry that has a high proportion of intangible assets is the automobile sector. The brand recognition, as well as patented products and technologies, creates a distinct identity for each company. For example, Mercedes, Audi, Ferrari and other luxury carmakers have their own brand value and various technologies, which give each of them recognition.
What Are the Methods for Valuing Tangible Assets?
Typically, there are three methods through which you can value tangible assets. They have been discussed below:
1. Appraisal Method
Under the appraisal method, an accountant needs to hire an appraiser to assess the true fair market value of assets in a company. The asset appraiser determines the condition of assets present in the company. This assessment includes the consideration of obsolescence and regular wear and tear.
In the end, the appraiser will compare these values with the values these assets can generate if left open in the market.
2. Liquidation Method
One of the most interesting features of a tangible asset is that you can convert them to cash. Thus, a company must have clear knowledge about the minimum value an asset can fetch from a quick sale or liquidation. In this method, an assessor is hired who determines the overall value that a bulk asset-buyer would pay for the tangible asset owned by a company.
3. Replacement Cost Method
The replacement cost method is often put to use in the insurance industry. This method compares the tangible asset’s value with that of replacing it with a new one. Simply put, it determines the amount it would cost to discard an old asset and purchase a new one. This method includes the acquisition cost of tangible assets and the cost of making an asset fully operational.
What Are Some Examples of Tangible Assets?
Here are some examples of tangible assets:
- Raw materials
- Finished goods and products under progress
- Land
- Building
- Machinery
- Office Equipment
- Furniture
What Is the Difference between Tangible and Intangible Asset?
One of the primary differences between tangible assets and intangible assets is that the former is physical in nature while the latter is not. A few key areas of differences between both these asset categories are:
- An intangible asset lacks physical presence, but it holds monetary value. It also captures a crucial place in a company’s balance sheet. On the other hand, a tangible asset features a finite value and physical presence. You can buy and sell tangible assets in the market easily. However, the value of liquidation might vary.
- It is relatively difficult to trade intangible assets as compared to tangible assets.
- You can easily convert tangible assets into cash as compared to intangible assets.
- You can value tangible assets by subtracting depreciation from their total cost. On the other hand, to determine the value of intangible assets, you need to compare their cost with market value. Hence, it is harder to calculate the value of intangible assets than tangible ones.
Also Read: What are Asset Classes? 4 Different Types of Asset Classes You Should Know
What Are a Few Important Points about Tangible Assets?
A tangible asset can prove to be of immense help for a company. Here are a few crucial points to remember regarding such assets:
- Tangible assets are an important tool for a company’s valuation purposes. Many companies tend to rely on their tangible assets to derive the valuation of their company during funding rounds.
- Tangible assets are also a great tool for debt repayment. Due to their increased liquidity, businesses can easily sell them in the market to generate extra cash, which would help them repay their existing debt.
- These assets are extremely helpful in maintaining the day-to-day working of a business.
- Companies can also use tangible assets as collateral to obtain loans during times of financial crisis.
- Since tangible assets form the rock of a business, it is important for businesses to work towards the maintenance and upkeep of such assets.
Final Word
It is important to understand that a firm requires tangible assets to continue with its everyday operations. Such assets also have special features such as high liquidity, which help an organisation in the long run. Thus, companies need to maintain the performance of these assets to sustain their day-to-day operations.
FAQs
Ans. Determining the NTA helps investors assess whether a company’s share price is overvalued or undervalued. Moreover, a company with a high net asset value could have low levels of risk when it comes to liquidity. A high NTA value also ensures protection against uncertainties in the market and helps a company retain its stock price.
Ans. Cash is a tangible asset in both forms – notes/coins and bank accounts. For notes and coins, you can physically see and touch them. Thus, they are tangible. When it comes to bank accounts, they are tangible because they provide you direct access to your cash. That said, all assets providing liquidity are tangible assets.
Ans. A company records its tangible assets on the assets side of a balance sheet. The balance sheet is a financial statement comprising all company assets, its shareholder’s equity and liabilities.
An accountant records the acquiring cost of tangible assets on the balance sheet. They can be categorised as current assets or long-term assets.
Ans. Intangible assets are the ones you cannot touch or see. The most common example of an intangible asset is the intellectual property that a business owns. Some additional examples include patents, trademarks and copyrights.
Ans. Asset valuation is important due to various reasons. First, when purchasing or selling an asset, valuing it will help you know the correct price. Further, during a merger, asset valuation helps in determining the value of the business. Moreover, when you apply for a loan, the bank might ask you for collateral. In this regard, asset valuation will help determine whether an asset will fully cover the loan value or not.
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
