Case breakdown: Movie The World is not Enough:
As you can see from the scene, James Bond (played by Pierce Morgan) says “Perhaps you failed to take into account my hidden assets” and at this time he clicks his spectacles and there is an explosion that takes place. James Bond was referring to a set of glasses in his hand that was in plain sight but no one could interpret it as a weapon.
What are Hidden Assets?
Similarly, there are some hidden assets in the organizations that are undervalued on the company’s balance sheet. A hidden asset is one whose value is not shown on the balance sheet. A hidden asset can sometimes increase the net worth of the company that would be reflected on the books. The hidden asset can also be called a hidden value or hidden reserve.
There are many principles of accounting that can be misused while hiding an asset such as the historic cost principle, revenue recognition, and accrual concept as well.
Suppose a company invests in an asset such as equipment, now one needs to depreciate the asset according to its useful life i.e. let’s say the equipment has a useful life of 10 years. Now the company decides to depreciate the equipment within 7 years, so the value of the equipment becomes 0 on the balance sheet.
However, the company still has that equipment, and is usable. That means, the equipment still holds value but it is not showing on the balance sheet. This qualifies as a hidden asset of the business. Later that equipment can also be sold.
According to the historical cost concept, assets brought into the business should be reported at their original cost. Let’s say a company buys a building for Rs. 10,00,000 but after 3 years, the price of the building has appreciated to Rs.18,00,000. Even though, in the balance sheet building is reported at Rs. 10,00,000, there’s a hidden value of Rs. 8,00,000 (18,00,000-10,00,000).
The hidden asset most likely would raise the value of the business, which increases the bottom line of the company. If hidden assets are not hidden anymore, then the company would have to pay more taxes on the higher profit.
Hence, many times companies resort to hiding their assets, but they can’t be hidden for too long. Legally it is dubious. Therefore, a good auditor and a legal counsel would be the best advisor.