Are Your Assets Current, Fixed or Intangible & What Are They Worth?
An asset is anything of monetary value owned by a person or business. Assets are classed as capital/fixed, current, tangible or intangible and expressed in terms of their cash value on financial statements (See examples of assets types below.) Tangible assets include money, land, buildings, investments, inventory, cars, trucks, boats, or other valuables. Intangibles such as goodwill are also considered to be assets.
Also known as Fixed Assets, capital assets are those tangible physical assets acquired to carry on the business of a company with a life exceeding one year. Examples include:
- computer hardware, mobile phones, etc.
Businesses that have a high ratio of capital costs to labor costs are known as Capital Intensive businesses; that is, they require a large financial investment in capital assets to produce goods or services. Examples of capital intensive industries include:
- transportation - airlines, railroads, trucking, etc.
- oil and gas
Aside from being used to generate income, capital assets are important for businesses in that they can be sold if the business is in financial difficulty or used as collateral for business loans. In this case the lender will normally issue a lien against the asset so it can be seized if the loan is not repaid.
Given that most capital assets decline in value over time, in financial records capital assets are usually expressed as the cost of the asset minus depreciation. Capital assets depreciate at different rates depending on the asset class (as defined by the tax authorities). The annual depreciation is a tax write off.
Non-capital intensive businesses create wealth in ways that do not require plants, machinery, or expensive equipment, rather they rely on "intellectual capital". Non-capital businesses have much lower barriers to entry given the minimal startup costs. Examples include:
Items that are currently cash or expected to be turned into cash within one year are known as current assets. This includes:
- accounts receivable
Examples of intangible assets include items such as:
- client lists
- franchise agreements
- favorable finance or lease agreements
- brand names
- distribution networks
- proprietary processes or technology (or anything protected by copyright)
- supplier contracts
- skilled employees
Intangible assets do not appear on balance sheets but (depending on the business) may make up a substantial part of the asset value of a business.
Classification of assets as tangible or intangible is not necessarily a straightforward process. For example, the oil and gas industry has special accounting rules for classifying petroleum reserves as either tangible or intangible depending on the stage of development, as does the mining industry (e.g. an oil field or ore body does not become a tangible asset until it becomes commercially viable and begins producing oil and gas or ore).
Because the underlying commodity can be subject to large fluctuations in price, the value of assets in commodity-based industries such as oil and gas and mining can vary enormously in a relatively short period of time - the huge drop in oil prices in 2015, for instance, forced many oil and gas companies to take major write downs on assets due to the decline in the value of reserves. On the other hand, a factory owned by a manufacturing business is typically a long term core asset that slowly depreciates in value over time.
Asset Turnover Ratio
The Asset Turnover ratio is commonly used as a broad measure of the efficiency of assets to generate revenue. It's calculated by dividing sales revenue by the total assets:
Return on Assets % = Revenue / Total Assets
Return on Assets Ratio (ROA)
The Return on Assets ratio differs from the Asset Turnover ratio in that the calculation uses Net Income instead of Revenue:
Return on Assets % = Net Income / Total Assets
Given that Net income is the amount earned by a company after subtracting expenses (including depreciation and taxes), the Return on Assets Ratio is a measure of the ability of assets to generate profit.
Asset Valuation - What Is a Business Worth?
Asset valuation becomes a significant issue when selling a business. It might be relatively easy to determine the value of the capital assets of the business, but intangible assets can be problematic. A business that has a client list can normally claim goodwill as an asset, but goodwill may be tied to the previous owner. For example, a dentist who sells a practice will have the client list included as an asset in the sale, but there is no guarantee that the new owner will be able to retain the clients.
For more information on selling a business see:
Examples: A trademark is an example of an intangible fixed asset.