Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Physical Asset

What it is:

Although physical assets commonly come to mind when one thinks of assets, not all assets are tangible. Trademarks, patents, and goodwill are examples of intangible assets.

Regardless of their physical form, however, information about a company’s assets is a key component of accurate financial reporting, business valuation, and thorough financial analysis. Although the Financial Accounting Standards Board, the Securities and Exchange Commission, and other regulatory bodies define how and when a company’s assets are reported, companies may employ a variety of accepted methods for recording, depreciating, and disposing of assets, which is why analysts must also carefully study the notes to a company’s financial statements.

How it works (Example):

For example, let’s assume that XYZ Company intends to purchase an office building for $10,000,000. The building has a physical form; it is a physical asset. When the company executes a legal purchase agreement with the seller, XYZ Company will have a place from which to conduct its business operations, and it will control what happens to the building from that point forward. Thus, XYZ Company acquired a $10,000,000 asset and should reflect this physical asset on its balance sheet.

According to the Financial Accounting Standards Board, a physical asset, like all assets, must provide reasonably estimable future economic benefits, must be controlled by the owner, and must be the result of a prior event or transaction (such as a purchase).

Companies often record physical assets on their balance sheets as property, plant, and equipment. Like most assets, tangible assets usually lose value as they age, that is, they depreciate (amortization is the term used when referring to intangible assets). The rate at which a company chooses to depreciate its assets may result in a book value that differs from the current market value of the assets.

Why it Matters:

A physical asset is anything that has commercial or exchange value and has a physical form.