When setting up an asset protection strategy, it is important to understand the classification of assets that you seek to safeguard. Assets may be divided into two general types: tangible and intangible.
What is a tangible asset?
A tangible asset is something that is owned by an individual or business, has a physical form, and holds value. Some may depreciate over time.
Typical tangible assets may include:
- Real estate
- Cash
- Jewelry
- Artwork
- Personal items inside your home (clothing, furniture, etc)
- Vehicles
- Equipment/Fixtures
- Business Inventory
- Other types of physical property
Whatever form a tangible asset takes, it may be sold or traded at some point in the future in exchange for another asset or for money.
How are tangible assets valued?
A tangible asset may be valued in several different ways. The most common are listed below:
Appraisal
If an asset is valued under the appraisal method, a professional experienced with the valuation of the specific type of property will be hired.
During the appraisal process, the appraiser will examine the property for its current condition, the degree of obsolescence, and any wear and tear that exists. Once examined, the appraiser will assign a fair market value to the property.
Liquidation
Under the liquidation method, an appraiser will inspect the property to determine how much it would receive from an auction house or bulk buyer.
Replacement Cost
The replacement cost method is used primarily for insurance purposes. When a policy is first established, an assessor will look at the property to determine how much money would be required to replace it.
What is an intangible asset?
Intangible assets do not have a physical form but are expected to generate monetary returns in the future. They can be divided into two types: identifiable and unidentifiable.
Identifiable intangible assets can be specifically identified and sold. They may also be amortized over time.
Unidentifiable intangible assets cannot be sold or physically separated from other property. These assets normally occur during a merger or acquisition when a company pays more for the business than it is appraised for. They are not typically associated with people, and they may not be amortized.
Examples of identifiable intangible assets can include any of the below:
- Stock Certificates
- Bond Certificates
- Copyrights
- Trademarks
- Intellectual property
- Patents
- Trade names
Unidentifiable intangible assets include things like goodwill or the reputation of a company.
How is an intangible asset valued?
There are three general types of valuation that may be used to assess the value of an intangible asset.
Cost Approach
Under the cost approach, the amount needed to create the asset determines its value. If the asset was obtained from someone else, the purchase price might be used.
Market Value
If the market value approach is used, a comparison is made between the asset and other similar assets sold on an open market. For this approach to work, there must be a number of similar recent transactions that have occurred. The value of the most similar recent transaction is applied to the asset under consideration.
Economic Value
The economic value approach examines future cash flows from the asset using an appropriate modeling technique. This is most common for intangible assets like copyrights or patents.
Why does the classification of an asset matter?
The classification of an asset determines the appropriate methods used to value it. If an asset is not appropriately valued, it can lead to a variety of problems for a business or an individual. A business that does not value its assets correctly may be exposed to faulty accounting that affects the validity of its financial statements.
People who choose not to value their assets can be affected when setting up asset protection strategies. It is important to select appropriate valuation techniques when identifying assets that have the most value to one’s estate. Get in touch with our team today for more information.