Debt Dictionary

Asset

Investment Dictionary -> Asset

Assets represent physical and non-physical items that are owned by individuals or companies. They are objects of value which can be converted into cash. Moreover, they are relevant for the purposes of debt payment. In essence, assets equal to liabilities plus capital.

There are two main categories: tangible and intangible assets. The first type of assets has physical existence. Examples of tangible assets are cash, machinery, real estate, and buildings. Furthermore, this category is divided into current and fixed assets. The current assets fund the daily operations of the company. They represent cash or items convertible into cash that can be sold or utilized in the business activities. The current assets include cash and cash equivalents such as currency and bank drafts, short-term investments, inventory, receivables, and prepaid expenses. They are consumed or converted into cash within one year or one operating cycle. Fixed investments, commonly called ‘property, plant, and equipment’ (PPE), include real estate, equipment, machinery, tools, and buildings. They are used continuously for the purpose of profit earning.

The second type, intangible assets, has non-physical existence. This means that the intangible assets cannot be measured. There are two main subcategories: legal intangibles and competitive intangibles. The first type consists of copyrights, patents, design rights, data bases, and others. In general, they represent intangibles that entitle to legal property rights. The competitive intangibles refer to knowledge and knowhow, collaboration and structural activities, leverage activities, etc. They have an impact on the productivity, costs, revenues, and market values.

The intangible assets are generally expensed in view of their life expectancy. Assets such as copyrights and patents have identifiable useful life. They are amortized through the Straight-Line Method. Other assets such as trademarks have indefinite useful life. They are assessed for impairment or damages annually. If there are recognizable damages, loss is recognized in the income statement. The loss is calculated by subtracting the fair value of the asset from its book value.

Some intangible assets have either identifiable or indefinite useful life depending on the circumstances. For instance, a company name is considered an indefinite asset. However, if the company starts to operate under a second company`s patent, its name will have an identifiable useful life.


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