The Everlasting Assets: Why Some Items Defy Depreciation
Written by Bindi Gethen
Assets, those critical parts of a business you thought were always a safe bet, aren’t necessarily the golden ticket we often assume them to be. Some items might look and feel like investments, but many of these actually depreciate, losing value over time. I guess you can say they can be a real pain in the assets.
So which assets cannot be depreciated? These non-depreciable assets typically include land, goodwill, trademarks and brands, copyrights, patents with indefinite lives, perpetual licenses, art and antiques, as well as investments in equity securities. In the context of business, understanding which assets are non-depreciable can be a critical factor in investment decisions and long-term financial planning.
Which assets cannot be depreciated?
Some items defy depreciation due to their unique characteristics, intrinsic value, and the way they are perceived in the market. These factors interact to create a sustained demand and perceived value, allowing the asset to stand the test of time, as well as be protected from the usual wear and tear (a.k.a. market fluctuations) that causes value to fade away.
Here are some assets that are everlasting, like time capsules preserving value, culture, and identity:
1. Land
Unlike many other assets, land never wears out or depreciates in the traditional sense. It is, in its essence, timeless. While machinery might wear down and technology may become obsolete, land remains, steadfast and constant, ready for new endeavors.
In a business sense, land’s value isn’t only measured by its square footage. Its location, surrounding infrastructure, and potential for development are critical determinants of its worth.
Investing in land provides stability to a company’s asset base. Unlike stocks or other volatile assets, the value of land tends to grow steadily over time, sometimes even outpacing inflation. This makes land an attractive investment option, particularly for businesses looking to fortify their financial position and set a strong foundation for the future.
Pro tip
An acre in a thriving business district carries a different value proposition than a similar piece in a remote area.
2. Goodwill
You know when you walk into a store and it just feels right? That’s goodwill. It’s not something you can touch or see, but it’s as real as any physical asset. Goodwill is the reputation, customer loyalty, and overall positive perception that a brand builds over time.
Building goodwill isn’t about quick wins. It grows every time a customer leaves satisfied, every time a product exceeds expectations, and every time your business does right by the community. Nurture it, and it will pay you back in spades.
Let’s get into the numbers. When Kraft bought Cadbury for $19 billion in 2010, the tangible assets were worth just $7 billion. The rest? You guessed it: goodwill. That’s the power of a strong brand and loyal customer base.
3. Trademarks and brands
Trademarks and brands are more than just logos and catchy slogans; they’re the face of your business. They tell customers who you are, what you stand for, and why they should choose you over the competition. It’s a crowded market out there, and your trademark helps you stand out.
Think of your trademark as a precious heirloom. It needs protection. Registering trademarks and actively defending them against infringement ensures that they remain uniquely yours, preserving their value and importance.
Numbers talk, and the value of a strong brand is well-documented. Brands like Apple, Google, and Coca-Cola have brand valuations in the hundreds of billions. Your brand might not be quite that big, but it’s no less valuable to you and your customers.
For example, in Australia, Vegemite is more than a product; it’s a national icon. This brand has become synonymous with Australian culture. Its trademarked name and logo are instantly recognizable, contributing to its lasting success and market dominance.
4. Copyrights
Think of copyrights as a fortress around your creative work. Whether it’s a software code, a book, a song, or a piece of art, copyrights protect what you’ve created, ensuring that others can’t just take it and run.
While copyrights don’t last forever, they endure for a long time (generally the creator’s lifetime plus 70 years). That’s a significant period where this intangible asset can generate income and add value to your business. This is a process known as amortisation of copyrights.
Protected works also tend to be more profitable. In a world full of imitators, copyrights can give you a competitive edge, allowing you to monopolise your idea or innovation.
Take the Australian film industry, for instance. By protecting original scripts, music, and other creative content, filmmakers can maintain control and reap the rewards of their creativity. This has led to the international success of films like “Mad Max” and “The Great Gatsby.”
5. Patents with indefinite lives
Unlike typical patents that expire after a certain period, these patents never expire. They protect inventions, ideas, or processes for an indefinite duration, making them an everlasting asset.
Owning a patent with an indefinite life means holding an exclusive right to an idea forever. These patents are rare, often related to trade secrets or specific governmental agreements. Their endless nature adds significant value, turning an idea into an asset that can be passed down through generations.
The impact of indefinite patents can be seen in sectors like the pharmaceutical industry. While most patents expire, the few that have indefinite protection symbolise consistent revenue streams and provide a competitive edge in the global market.
So if your business is in a position to secure an indefinite patent, leverage it.
6. Perpetual licences
Unlike subscription-based licenses, once you have a perpetual licence, it’s yours forever. You’re not at the mercy of changing terms or rising costs. You’ve secured your right to use an asset for life.
Many software companies offer perpetual licenses alongside subscriptions. Businesses that choose the perpetual route enjoy the benefit of ownership and control, a vital asset that withstands market fluctuations.
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7. Art and antiques
Art and antiques are unique because they carry stories, craftsmanship, and a connection to the past. They stand apart from traditional investments, offering both aesthetic pleasure and financial potential.
That said, investing in these seemingly ornamental items require a discerning eye and understanding of history, culture, and market trends. Don’t just buy what’s popular now. You need to learn how to recognise enduring value. In fact, iconic pieces can have their value multiplied by ten or more over several decades. But even lesser-known works can prove profitable with the right insight.
Pro tip
The art market is not immune to fluctuations, but its intrinsic value often shields it from extreme volatility.
8. Investments in equity securities
Investments in equity securities are stakes in the ownership of a company. Whether through stocks, shares, or other equity instruments, these investments provide potential growth and income, and they can be held indefinitely.
Equity investments don’t have an expiration date. They can be passed down, sold, or held, making them a flexible and enduring financial asset. Unlike bonds or other fixed-income securities, the potential for growth is unlimited.
While equity investments carry risks, they also offer potentially higher rewards. The evergreen nature of these securities means that they can be part of a long-term growth strategy, adjusting to market cycles.
Historically, equity investments have provided substantial long-term growth. Over 30-year periods, equities have consistently outperformed other investment categories, despite short-term volatility.
Pro tip
Equity investments are not one-size-fits-all. Understanding your risk tolerance, goals, and market dynamics is key to making these evergreen assets work for you. You need to do your due diligence to build a portfolio that aligns with your vision and can weather the tests of time.
How does asset depreciation affect your business?
Asset depreciation is a concept that often resides in the ledgers of accountants but reaches far beyond the confines of financial statements. For business owners, understanding depreciation equips you with the knowledge to make informed decisions that can shape the success and sustainability of their business.
Budgeting and planning
When assets such as machinery or vehicles lose value over time, this depreciation must be factored into budgeting and long-term planning. Failure to account for depreciation can lead to inaccuracies in financial forecasting.
Tax implications
The Australian Taxation Office (ATO) allows businesses to claim depreciation as a tax deduction.
Cash flow management
By anticipating how assets will lose value and when replacements may be needed, businesses can plan for these expenses. This forward-thinking approach ensures that sufficient funds are available when necessary, reducing the risk of liquidity issues.
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Don’t let depreciation eat into your profits
Depreciation is like that slow leak in the tire of your business vehicle. Ignore it, and it might just leave you stranded on the highway of success. Understanding it, planning for it, and making it part of your business strategy is the equivalent of a well-timed pit stop. It keeps you rolling, ensuring that the wear and tear don’t leave you at the side of the road.
At The Bookkeeping Studio, we understand the twists and turns of the roads you need to navigate in the world of business. We’ll make sure that your financial journey is as smooth as possible. Go the distance. See how far your business can go today.
Hey, my name’s Bindi Gethen! I’m the founder of The Bookkeeping Studio in Australia. With over 15 years of experience in the industry, I have a deep understanding of the challenges that small and medium-sized business owners face when it comes to managing their finances.
I am passionate about empowering my clients with the financial information they need to succeed. My team and I pride ourselves on our commitment to exceptional value, accuracy, and confidentiality. Our virtual bookkeeping services include payroll, budgets, and management reporting, among others.
Not to toot our own horn, but we can assure you that you won’t find a bookkeeping partner like us anywhere else in the Southern Highlands.
