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This is always the case, but what constitutes an asset is sometimes a little more complex.
The assets of a business are technically described as ‘resources owned or controlled by a business due to past events, from which future economic benefits are expected to flow to the entity’ Frankly, that isn’t the clearest of definitions but, in fairness, this is a catch all statement covering a lot of circumstances.
The easiest way to think of it is that an asset is anything the company owns that can be used to make money or benefit the business in some way. So, if you are pipe making business and you own an industrial bending machine, the machine, and any stock of bent and unbent, pipes are all assets because they have a monetary value. If you repair computers then any stock you have, tools purchased by the company and so on, will all be assets, but not anything you are currently in the process of repairing for a customer is not because it isn’t the company’s property.
The first thought people usually have is about stock and similar, but you will notice that the legal description does not say only things that are ‘physical’. As a few examples of other things that could be considered to have value. If your business has active contracts that can be fulfilled or sold to another company, outstanding invoices, or it owns the intellectual property rights to something and similar circumstances, they will also probably be considered assets.
Before we move on, let’s be clear about something. We are only talking about the company here not directors. A limited company will own things. The directors will own things. These are different under UK law, and it is unlikely that the directors’ assets will be considered as company assets. However, remember that anything purchased by the company that the directors hold in their possession (common things are cars and computers for example), will likely be a company asset.
As we just mentioned, there are essentially three core ‘types’ of assets.
Tangible assets – If you can touch or see it and it belongs to the company, it’s probably a tangible asset. Everything that it owns, desks, a delivery truck, the products it sells and, even the building everything is in, are all potentially tangible assets. They can be thought of as the ‘stuff’ that helps the company do its thing. It doesn’t matter what the ‘thing’ your company does is, manufacturing, services, goods, retail sales or whatever, if it belongs to the company, it’s likely to be an asset.
Intangible assets – You can't necessarily touch or see these, but they could still have a value. If your company has a software program it created perhaps, the intellectual property rights to a device, maybe, is it a particularly well-known brand? and even existing business relationships and repeat business, then these are all potential examples of intangible assets. Intangibles are hard to assess sometimes (see later in the article for why) but they can still be very valuable.
Financial assets – Again, these can be worth a considerable sum of money. Speaking of money, the obvious financial asset is cash in hand and what’s in the bank accounts. Money owed to the company, any investments, long term savings, stocks, bonds, and any other financial interest the company owns, are also in the mix as possible financial assets.
Well, the first issue is that they all need to be found and valued. That can sometimes be more complex than it would initially seem.
Tangible, physical, assets are relatively straightforward most of the time, but there are some common difficulties with this area. Over time assets that appear in the records can go missing quite innocently. Laptops, mobile phones and similar can easily disappear without any malicious intent. Machinery may not be in good repair or need to be written off without that being on the books yet. Depreciation is a big factor and some equipment, computers are a good example, may have little or no value due to age. Stock is usually very clearly defined but in the case of perishable items such as foodstuffs or even livestock, quick action is often needed to dispose of it. Other common issues include assets subject to finance. Does the finance agreement allow you to sell the asset on behalf of creditors or in fact is it actually a leasing arrangement? Another area is stock because the supplier may have a ‘retention of title’ clause which means they may be able to recover the stock in terms of money due.
Intangible assets are clearly going to be more difficult. Who decides the value of a brand or what the potential sale of a piece of software code will be in cold, hard, cash? Well, the insolvency practitioner will assess this with advice from suitable experts if needed. Perhaps one of the more common and most difficult things to value is intellectual property rights. If you are facing insolvency and have IP to consider, in fact, if you have any intangibles to work through, be prepared for it to take some time to get them assessed correctly Another area which can be difficult is that of Goodwill. We can all appreciate that a well know brand will have value to a third party but does a small SME have any goodwill? For example, take John Smith Limited which perhaps provides decorating services. Do customers go to John Smith Limited or in truth is the ‘Goodwill’ that of John Smith (the director) who meets the customer and does the work?
Financial assets are often simple to find, but more difficult to release. For example, companies sometimes own property that is rented to tenants under a lease. Clearly, this is a difficult situation. Some investments may be long-term, or it could currently not be favourable to liquidate them for the cash value. Again, it can take some time to work all these out.
The other area that can sometimes be a little bit difficult to untangle is ownership. A company may have stock on the shelves but also hold paid orders against that stock for example. Products are sometimes partially manufactured overseas using company assets. Service companies may use subcontractors that bring their own equipment, but use stock from the company as well, and so on. There are always grey areas to be dealt with.
In overview, (and please remember I am oversimplifying here), if it has value and it belongs to the company, it is an asset. These will all be considered and used to raise the money to pay creditors as part of the insolvency process.
If you are facing insolvency and need advice on what to do next, your first consultation is free. Call us or book online and we can take the first steps towards getting you the solution you need.
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