Definition: Something of value that a person or business owns. While a seemingly simple concept, assets can come in many different forms and sizes. See our examples below.
Example: Land (and things attached to it), known formally as real property, is an asset of its owner. A company’s desks and chairs, examples of personal property, are different from real property in that they are movable. The name “personal” is misleading. It doesn’t mean they are necessarily owned by a person. It means that the property is movable!
Something a person authors or creates, such as a book, a song, computer software, a brand, or an invention, is known as intellectual property. After all, to come into existence, they require use of a person’s intellect! This type of asset is also known as intangible property because you can’t reach out and touch it. Sure, you can touch the media, such as a CD or book, on which the property is stored, but don’t confuse a plastic CD or a stack of paper with the property that’s recorded on it. After all, a sheet of paper is worth a penny. The value of the song written on it could be very high!
A right is an asset. For example, a bank that has loaned out money to a person so she can purchase a home has a right to be repaid. When a company sells its products to customers on credit, meaning that the customers don’t pay at the time they receive the product, they have a right to be paid.
Another interesting way to distinguish between assets is to ask whether it generally increases in value over time (ie, an appreciating asset), or decreases in value (ie: a depreciating asset). Setting aside for a moment the impact of the economic crisis that hit in 2008, land and buildings generally increase in value as the years pass. Assets that can become outdated as technology marches forward, such as computers, are good examples of depreciating assets. Not surprisingly, companies record depreciation expense to reflect their gradual loss in value.
Yet another way to slice and dice assets is to ask whether they are useful to us (ie, productive) or not (ie, non-productive). For example, a machine that sits on a factory floor and cuts, stamps, or molds raw materials is a productive asset. Gold, a popular investment, just sits there doing nothing for us while we own it, making it non-productive.
Investeach explains: Valuing a company’s assets is an ongoing challenge. For companies to keep them “on the books” at the price they paid is easy to do, but over the years may become more and more inaccurate. To ask companies to report their assets at their current value brings its own set of problems. First, it’s a lot of work to update asset values. Second, if no similar assets have been bought and sold recently, it may be difficult to assign an accurate current value.
To better understand the difficulty in valuing assets, consider the plight of banks whose main asset is the right to receive payments from borrowers they lent money to. Let’s say that Justin borrowed $500,000 from a bank to purchase a house. After six months of paying on time, he is unable to make the next monthly payment. The next month, he catches up by making two payments. Does the fact that he had to skip a payment cause bank to reduce the value of the loan to reflect the fact that there’s a greater risk that Justin won’t repay it? Let’s say that a few months after that episode, he misses a monthly payment, and then another. He is 60 days behind on his payments. Now what? Should the loan still be valued at its original amount (minus the payments he’s made, of course), or should the bank reduce the value of the loan because it’s looking more and more like Justin won’t be able to repay it? If it decides to reduce the value of the loan, the next question would be by how much.
The rules for valuing assets is the responsibility of the Financial Accounting Standards Board (FASB), which sets the rules for what constitutes Generally Accepted Accounting Principles (GAAP).
Riddle me this:
1. What type of assets can you identify?
2. How did intellectual property get its name?
3. What is another name for intellectual property?
4. Identify one appreciating asset and one depreciating asset.
5. What is the name of the expense companies record as an asset losses value?
6. Explain the difference between a productive asset and a non-productive asset.
7. Discuss the difficulties companies have in reporting accurate asset values to investors.
8. Who or what makes the rules that companies must follow in valuing their assets?