What Is a Tangible Asset?
A tangible asset is an asset that has a finite monetary value and usually a physical form. Tangible assets can typically always be transacted for some monetary value though the liquidity of different markets will vary. Tangible assets are the opposite of intangible assets which have a theorized value rather than a transactional exchange value.
Key Takeaways
- Tangible assets are items with a real physical form that may depreciate in value over time.
- Tangible assets are recorded on the balance sheet, usually as a long-term asset.
- Tangible assets are usually less liquid than intangible assets, items that you can't touch.
- Though tangible assets usually have real world value, they are also associated with potentially higher expenses or risks such as storage, insurance, and obsolescence.
- Examples of tangible assets include land, buildings, machinery, or inventory.
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Understanding Tangible Assets
A business’s net worth and core operations are highly dependent on its assets. Management of assets and asset implications is one key reason why companies maintain a balance sheet. Assets are recorded on the balance sheet and must balance in the simple equations assets minus liabilities equals shareholders’ equity which governs the balance sheet.
Companies have two types of assets: tangible and intangible. Tangible assets are assets with a finite or discrete value and usually a physical form. These are items a company uses in its operations that it can touch and utilize in the real world. There are several common characteristics that most tangible assets have:
- Tangible assets have a physical form that can be touched, altered, or seen.
- Tangible assets are used to drive future economic benefits for a company.
- Tangible assets may depreciate over time as their physical form begins to deteriorate.
- Tangible assets can often be used as collateral for securing loans and debt.
- Tangible assets may hold residual value after their useful life has been fully depleted.
Types of Tangible Assets
Tangible assets can be either current assets or long-term assets. Current assets may or may not have a physical onsite presence but they will have a finite transaction value.
Long-term assets, sometimes called fixed assets, comprise the second portion of the asset section on the balance sheet. These long-term assets have less liquidity and are often more capital-intensive in nature. Long-term assets are usually tangible assets much larger in size.
Tangible assets are recorded on the balance sheet at the cost incurred to acquire them. Long-term tangible assets are reduced in value over time through depreciation. Depreciation is a noncash balance sheet notation that reduces the value of assets by a scheduled amount over time. Current assets are converted to cash within one year and therefore do not need to be devalued over time. For example, inventory is a current asset that is usually sold within one year.
Inventory
If you can physically touch a product, it is tangible. Therefore, many types of inventory are tangible assets. Be mindful that very similar products may have different characteristics. For example, a CD from your favorite artist could be physical inventory, though digital mp3 files of the same songs are intangible.
Tangible inventory assets cover the entire spectrum of manufacturing. This begins with sourced raw materials and continues to goods in process that the company has begun manufacturing. Last, tangible assets also includes finish products that the company has not yet sold that are being reported as inventory.
Equipment/Machinery
When considering a manufacturing company, all of the pieces of heavy equipment used to process inventory items are tangible assets. This includes any part of the production line that works physically interact with during the preparation, manufacturing, assembly, or quality control.
Furnishing and Fixtures
When looking around an office, essentially everything in view is a tangible asset. Whether its desks, cubicles, computer set-ups, office furniture for visitors, components of meeting rooms, supplies, or other furnishings, almost every aspect of a workplace can be touched and interacted with.
Land
Regardless of how it is intended to be used, land is a tangible asset. This is true whether the land is being held for speculative growth, future redevelopment, or the long-term plans are not yet known. This is also true of all types of land; whether rural or city, physical land is a tangible asset. This is counter to digital plots of ownership emerging in metaverse platforms. Because the section of real estate can not be touched, digital land is not a tangible asset.
Buildings
Physical structures are often the largest and most obvious type of tangible asset. This may include offices, warehouses, manufacturing plants or other types of commercial real estate. Whether or not a company has shifted to remote work, any existing office (even not being utilized) is a tangible asset. Improvements to that building are often tangible assets as well.
"Tangible assets" is not a category reported on financial statements. Instead, these assets are spread across current and long-term assets.
How to Value Tangible Assets
There's three primary ways a tangible asset can be valued. the uniqueness, location, and condition of the tangible asset will drive the ideal valuation method mentioned below.
Specific Appraisal
When the most precise tangible asset value is needed, a company often hires an external, independent appraiser. The appraiser is often an expert in a given field (i.e. an expert in a specific type of collectible or an expert in real estate). The appraiser evaluates the condition of the tangible asset as well as incorporating external factors impacting the value.
At the end of an appraisal, the appraiser often issues an appraisal report. That report outlines the conditions of the asset; for properties, specific sections will often exist for the interior and exterior conditions. The report will note modernization efforts, construction quality, market conditions, and any notable impairments to recognize for the asset.
Liquidation Price
One could argue that the value of a tangible is the money it is able to fetch for it in the open market. With this reasoning, the value of a tangible asset is the liquidation price it would receive should it brought to market. Regardless of an external appraisal or insurance report, a company may treat a tangible asset only worth whatever they can immediately sell it for.
Liquidation price will often be less than an appraiser's value for several reasons. First, there are usually significant costs that a company may incorporate into the liquidation price. Second, some tangible assets are illiquid and may be difficult to move. For this reason, a company may be forced to incentivize buyers with substantial pricing discounts that do not property reflect the true value of the building when sold in a normal, careful sale process.
Replacement Cost
The third type of valuation method is primarily used by insurance carriers as part of a policy. Insurers generally use replacement cost as the basis for determining what a building is worth. For this reason, the insurance company will set the policy so in case there is a claim, the claimant may receive proceeds to replace their asset, not necessarily receiving compensation for the actual full value.
Advantages and Disadvantages of Tangible Assets
Tangible assets hold "real" value; buildings can be occupied, land can be utilized, and machinery can be used. As opposed to investments or intangible assets, real assets hold a purpose beyond their means as an investment.
For this reason, some argue tangible assets make more sense in specific investment climates. For example, farmland is always in demand as the world continually needs agriculture and food. During uncertain investment periods, some advisors may claim that this type of tangible asset makes sense to invest in due to the stable use of such an asset. In addition, the asset class may move entirely differently than the stock market due to being a completely different type of asset.
By extension, tangible assets usually have dual investment opportunity: valuation appreciation and operating cash flow. Consider a commercial office in a favorable downtown location. Not only is the property value likely increasing, the building owner is receiving rent from tenants. Because tangible property can be used, it can generate operating income on top of increasing in value.
Government agencies often have guidance and limitations to what may be considered tangible assets. It may also choose to segregate tangible assets by category such as California's State Administrative Manual.
Not everything is perfect for tangible assets, though. Consider the risks to farmland such inclement weather or improper tilling techniques that deplete the arability of the land. In addition, consider the risk of obsolescence for the building; during COVID-19, as workers shifted to remote work, such offices were left vacated and not needed by companies.
Smaller tangible assets may be an easier target for theft as well. The theft of digital assets may require technical knowledge, and your actions may still be traceable back to your personal accounts. For tangible assets such as inventory, illegal ownership is a function of physically possession; if a thief can walk out of a store with new headphones, they claim ownership of the tangible asset even if it is not rightfully theirs. Therefore, it may cost more to protect, store, and oversee tangible assets.
Tangible Assets
Pros
May be more stable investment due to consistent underlying use
Often has real world application that increases its value
May generate cashflow if rented out for use
May have low correlation to other asset classes due to difference in underlying asset profile
Cons
May be subject to physical damage (via nature or intentional human destruction)
May become obsolete if more advanced tangible assets are introduced
May be more subject to theft due to potentially easier access
Often requires additional expenses to store, manage, and protect goods
Tangible vs. Intangible Assets
Asset values are important for managing shareholders’ equity and the return on equity ratio metric. Tangible and intangible assets are the two types of assets that makeup the full list of assets comprehensively for a firm. As such, both values are recorded on the balance sheet and analyzed in total performance management.
Intangible assets include non-physical assets that usually have a theoretical value generated by a firm’s own valuation. These assets include things like copyrights, trademarks, patents, licenses, and brand equity value. Intangible assets are recorded on a balance sheet as long-term assets.
There are some itemized values associated with intangible assets that can help form the basis of their balance sheet value such as their registration and renewal costs. Generally though, expenses associated with intangible assets will fall under general and much of intangible value must be determined by the firm itself.
Intangible assets such as goodwill cannot usually be sold individually in an open market but in some cases they may be acquired from other companies. They may also be paid for and transferred as part of an acquisition or merger deal. Intangible assets do contribute to a firm’s net worth and total value if they are recorded on the balance sheet but it is up to the firm to decide on any carrying value.
Types of Assets
Tangible Assets
Can be physically touched
May have "real world" use such as consumption or physical utilization
Are usually more difficult to store, manage, and insure
May have more stable value due to underlying need in society
May be difficult to transfer ownership if physical possession is required (i.e. shipping a delicate, rare collectible)
Intangible Assets
Can not be physically touched
Often does not have "real world" use such as consumption or physical utilization
Are usually easier to store, manage, and insure
May have less stable value due to lack of need in society
Usually easier to transfer ownership of as physical possession is not a consideration
What Is an Example of a Tangible Asset?
Consider the example of a car manufacturer preparing the assembly and distribution of a vehicle. The raw materials acquire are tangible assets, and the warehouse in which the raw materials are stored is also a tangible asset. The manufacturing building and equipment are tangible assets, and the finished vehicle to be sold is tangible inventory.
What Makes an Asset Tangible?
An item is tangible if it can be touched and has a real, physical presence. Some definitions of tangible may include the description that the asset can be seen, but this description could also be used to describe items you can’t touch (i.e. digital currency balances can be seen on a monitor).
What Is the Difference Between a Tangible Asset and Intangible Asset?
Tangible assets can be touched, while intangible assets can’t. Many intangible assets are conceptual (i.e. goodwill), while tangible assets are items that actually have a physical presence and use in the real world (i.e. a company car). While it may be easier to store, protect, and transfer intangible assets, tangible assets may have a real world application and need.
What Is the Main Benefit of Tangible Assets?
Tangible assets have inherent value because of their usefulness in life. For example, land has value because it can be used for buildings, parks, agriculture, schools, community centers, parking lots, or homes for animals.
The same can’t be said about intangible assets. The value of a single share of stock is the ownership property it represents. Although you may receive a piece of paper that states the ownership, the asset can’t be used for anything beyond its vehicle as an investment.
The Bottom Line
Companies own many different assets, and one type of asset a company may own is a tangible asset. Tangible assets are things that can be touched that also provide future economic benefit to the company. Though tangible assets have the benefit of having actual use in the real world, they also necessitate additional care for physical safeguarding and preservation.
