Hidden Assets

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21 Aug, 2024

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Hidden assets or hidden values refer to undervalued assets appearing on an organization’s balance sheet, and hence the company’s current share price might not reflect it. Identifying these assets is crucial to improve the overall financial performance of a business.

Businesses can leverage such assets to improve their profitability, revenue, and shareholders’ return on investment. Moreover, investors who can uncover such assets can earn capital gains because hidden values eventually entice new investors, improve profits, and drive up the share price. A few common types of such assets are natural resources, real estate, and customer loyalty.

Hidden Assets Definition

Hidden assets refer to assets that are not apparent or easily visible to investors and the general public. Such assets can unlock significant value for a company. Moreover, they can help investors earn substantial capital gains.
There are various kinds of hidden assets in a business. Real estate, customer loyalty, and natural resources are a few of them.
Certain risks are associated with such assets. For example, they make tracking a company’s financial performance difficult. Moreover, hidden values can mislead stakeholders.
These assets can help maintain financial stability in difficult economic scenarios.

Hidden Assets or Values Explained

Hidden assets refer to the assets that are either understated or not stated on the reporting entity’s balance sheet. Organizations may hide their assets for different purposes, for example, hiding them from bankruptcy trustees, avoiding taxation or probate, protection from legal judgments or creditors, etc. Investors who identify hidden values can earn significant capital gains as the assets would appeal to new investors. Moreover, such assets can positively impact the business’s profits.

That said, one must remember that hidden assets are also common in divorce-related matters. One of the parties may hide their assets to save them illegally.

As the name suggests, finding such assets can be challenging as the values might be missing or understated on an organization’s balance sheet. In other words, people cannot find these values by utilizing analysis programs or analyzing a balance sheet. Investors need to put in a lot of effort, spend significant time, and understand every aspect of a company to uncover hidden values.

A key reason why a company hides its assets is the accounting standards influencing how organizations report such assets. One noteworthy example, in this case, is real estate. Businesses must list their real estate properties at historical cost per the GAAP or Generally Accepted Accounting Standards.

Intangible assets, like patents and trademarks, could have hidden values. In a few instances, if an organization holds assets for a long period on its books at a cost basis, the actual worth of the assets could be significantly higher than the value the balance sheet reflects. Likewise, if an asset's depreciation occurs for accounting, the asset could have a higher market value than the amount appearing on the corporation's balance sheet. This especially happens when utilizing accelerated depreciation.

Types

Let us look at some common types of hidden values.

#1 - Natural Resources

Companies operating in commodities like gold may have exclusive rights to different mines, which can help them earn future profits. These mines have inherent value. However, an organization’s balance sheet may not fully account for the entire earning potential. With significant levels of investment, the company might be able to realize the resources available in different sites fully. This would help them entice more investors and increase profitability.

#2 - Customer Loyalty

Organizations having a large customer base often have an undervalued asset, i.e., customer loyalty. When consumers have positive interactions with an organization consistently, they begin to trust the company more. This increases the probability of them being receptive to new offerings, improving the future growth potential. Since building customer loyalty takes a lot of time, organizations with a strong customer base comprising long-term customers build assets that their balance sheet does not accurately reflect.

#3 - Real Estate

These assets are a common kind of hidden asset because they are often understated on an organization’s balance sheet. When a business purchases real estate assets properties, its balance sheet shows the purchase price. That said, with time, that asset’s market value can rise above its historical value.

Examples

Let us look at a few hidden assets examples to understand the concept better.

Example #1

In 2016, Robert Peck, a SunTrust analyst, said that Yahoo had three hidden assets — Yahoo Japan patents, royalties, and real estate properties that could increase the business’s value significantly. According to him, investors did not understand these assets well. At that time, Yahoo sought offers for some parts of its organization, including a share of ownership in Yahoo Japan and core internet properties. Although Peck attached a price tag of $6 billion - 8 billion to it, he believed the hidden values could further raise the value.

Example #2

According to Needham analyst Laura Martin, Amazon’s media assets, including Twitch, Prime Music, and Prime Video, are worth roughly $500 billion. This makes them as valuable as the organization’s mammoth cloud-computing business. Initiating Amazon’s coverage using a ‘buy’ rating, the analyst wrote that the organization’s multiple media products have hidden asset values.

Per Martin’s estimates, the Prime subscriptions’ media portion is worth $187 billion on the basis of the revenue recorded in 2020, while the music business and Twitch are $3.8 billion and $15 billion, respectively. Moreover, she said that advertising encompasses $127 billion, and the ‘hidden value’ covers the rest.

Example #3

Suppose a business, ABC, makes investments in its brand image over a long period. However, the accounting rules and regulations require the organization to charge all the expenses related to it to its expense account as incurred. The brand asset could become the highest asset value in the organization. That said, this amount will not appear on the balance sheet.

How To Find?

To find hidden values, investors must carry out adequate due diligence to determine an organization’s inherent market value before comparing the same to the current market value. In the case of publicly-traded organizations, one can compare the inherent market value with a business’s market capitalization. The potential to earn gains in the future exists if the inherent value exceeds the market value because the market participants currently undervalue the organization.

When one allocates the funds to an undervalued organization, the shares trade at a discount. Hence, one can capture the value. If the company’s hidden assets can increase the profits, more investors will put their money into the business, and the existing shareholders can earn capital gains when the fair market value of the business goes up.

Individuals must remember that they must discover hidden assets before the remaining market participants do to enjoy the benefits offered by such assets. Thus, timing is vital. Although investing in an undervalued organization can generate substantial returns, one must remember that there remains a possibility that the asset stays hidden for a long time before positively impacting profits.

Some of the places where one might find hidden assets in a business are as follows:

Offshore accounts
Employee benefit plans
Undeclared business entities
Personal accounts of business owners

Importance

One can go through the following points to understand the importance of hidden assets.

It can offer a source of funding in difficult times.
The assets can help a business maintain financial stability by letting business owners avoid offloading valuable assets when economic conditions are unfavorable.
Such assets help investors earn capital gains.
The assets can improve a company’s financial performance by positively impacting revenue and profitability.

Risks

Some of the risks associated with hidden values are as follows:

Hiding assets may lead to the violation of accounting standards.
Such assets may mislead stakeholders.
The existence of these assets may reduce trust in a company as individuals may feel the organization must be more honest and transparent regarding its financial reporting.
Hidden values may make monitoring a business’s financial performance challenging.
The existence of such assets can be deemed unethical or fraudulent.

Frequently Asked Questions (FAQs)

1. Are hidden assets illegal?

These assets may have major consequences and are often illegal. For instance, hiding assets to evade tax is a crime, per federal law. It can lead to penalties, fines, and even jail time for business owners. Moreover, hiding assets in a legal dispute or from creditors could be considered fraud, which may result in serious consequences.

2. What is one common method of keeping assets hidden?

There are different ways to keep assets hidden. A common technique involves business owners transferring assets like savings or shares in their name to the names of their family members and friends.

3. Can a forensic accountant find hidden assets?

Forensic accountants can find hidden values. Such accountants utilize auditing, accounting, and investigative skills to determine whether businesses have committed fraud, embezzlement, or other financial misconduct.

4. Is the intellectual property a hidden asset?

Yes, one may consider intellectual property an example of a hidden asset.