When lenders look at your net worth, they typically focus only on your tangible assets. Placing a value on intangible assets is tricky business, even using the most sophisticated valuation techniques. For instance, no one really knows the value of Coca-Cola's brand name and logo. In addition, there normally is not a readily available market for intangible assets.
An intangible asset can't be seen or touched but may have some monetary value. Examples of intangible assets include patents, trademarks, trade secrets and intellectual property rights. The term "intangible asset" is usually associated with businesses and large institutions. However, this doesn't mean that an individual can't own an intangible asset, such as a patent.
Intangible assets pose a problem for lenders or anyone looking to determine your net worth, which is why lenders focus on "hard" or tangible assets like a house, car, furniture, investments and the like. The common thread among all these items is there is an available market should the lender have to repossess and sell your tangible assets to satisfy a debt.
Valuing Intangible Assets
Unlike a stock or bond, there is no readily available market for an intangible asset. The price of a stock rises and falls, and you can easily calculate the value of your shares. If you have an intangible asset, you must determine its worth first before including it as part of your assets. Corporations hire valuation experts to value their intangible assets. Generally accepted accounting principles dictate how long a company may carry an intangible asset on its books. In the case of individuals, hiring a professional appraiser is the best way to ascertain the worth of an intangible asset that you own if you want to include it as part of your assets.
Tangible Net Worth
When ascertaining net worth, lenders and investor take a conservative approach. An intangible asset -- such as goodwill -- on a company's balance sheet receives great scrutiny because it is subject to impairment. Each year a company has to perform a test to determine whether it should take an impairment charge to reduce the value of its intangible asset. For this reason, financial analysts tend to focus on a company's tangible net worth, which excludes goodwill and other intangibles. Since your net worth is simply your assets less your liabilities, a conservative approach is to remove intangible assets from the equation: tangible net worth is the main focus of lending decisions.
- Jupiterimages/Photos.com/Getty Images
- The Advantages of Commodity Investments
- How Can I Invest in Windmill Energy Farms?
- How Do I Invest in Solar, Geothermal & Wind?
- Ten Rules for Investing in Silver
- How to Determine Weights in an Investment Portfolio
- Does Net Worth Include Intangible Assets?
- Examples of Aggressive Income Investing
- Difference Between Speculating and Investment
- How Does Investment Affect Productivity & Economic Growth?
- How to Invest in Multi-Family Homes