3JM Company Inc.

Published Articles by David Balovich

Published in: Creditworthy News
Date: 2/1/99

The third and final category of assets are known as intangibles.

Assets may be either tangible or intangible. Tangible assets have physical form and substance and are usually given a value and shown on the financial statements. Intangible assets do not have any physical form. They consist of items such as customer lists, trademarks, patents developed by the firm, skilled employees. It is difficult to measure the value of intangible assets.

True, they have value but that value is not measurable unless someone was willing to pay a price to purchase them. At that time the value could be established based on the purchase offer.

Accountants differ in opinion as to whether intangibles should be allowed on the balance sheet. Some accountants feel that intangibles should only be allowed if a clear measurable value can be established for the asset. For example, if we were to purchase a customer list from a source outside the firm, then the price we paid puts a reasonable minimum value on the asset. It may be worth more then the price paid, but it can't be worth less or we, using common sense, wouldn't have paid as much as we did. In this situation accountants generally would be willing to allow the intangible to be shown on the balance sheet for the amount we paid for it.

If we come across a financial statement that includes an asset called goodwill, it is an indication that a merger has occurred at some time in the past. The firm paid more for the company it acquired then could be justified based on the market value of the specific tangible assets.

It is important to recognize that intangible assets tend to inflate the equity section of the balance sheet. For this reason, many recommend that intangible assets be subtracted from the asset side of the balance sheet and at the same time subtracted from the equity section.

Doing this provides the analyst a clearer picture of the net worth of the firm.

I wish you well.

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