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Fixed asset, also known as a non-current asset or as property, plant, and equipment
(PP&E), is a term used in accounting for assets and property which cannot easily be
converted into cash. This can be compared with current assets such as cash or bank
accounts, which are described as liquid assets. In most cases, only tangible assets are
referred to as fixed.
Moreover, a fixed/non-current asset can also be defined as an asset not directly sold to a
firm's consumers/end-users. As an example, a baking firm's current assets would be its
inventory (in this case, flour, yeast, etc.), the value of sales owed to the firm via credit
(i.e. debtors or accounts receivable), cash held in the bank, etc. Its non-current assets
would be the oven used to bake bread, motor vehicles used to transport deliveries, cash
registers used to handle cash payments, etc. Each aforementioned non-current asset is not
sold directly to consumers.
These are items of value which the organization has bought and will use for an extended
period of time; fixed assets normally include items such as land and buildings, motor
vehicles, furniture, office equipment, computers, fixtures and fittings, and plant and
machinery. These often receive favorable tax treatment (depreciation allowance) over
short-term assets. According to International Accounting Standard (IAS) 16, Fixed Assets
are assets whose future economic benefit is probable to flow into the entity, whose cost
can be measured reliably.
It is pertinent to note that the cost of a fixed asset is its purchase price, including import
duties and other deductible trade discounts and rebates. In addition, cost attributable to
bringing and installing the asset in its needed location and the initial estimate of
dismantling and removing the item if they are eventually no longer needed on the
location.
The primary objective of a business entity is to make profit and increase the wealth of its
owners. In the attainment of this objective it is required that the management will
exercise due care and diligence in applying the basic accounting concept of “Matching
Concept”. Matching concept is simply matching the expenses of a period against the
revenues of the same period.
The use of assets in the generation of revenue is usually more than a year- that is long
term. It is therefore obligatory that in order to accurately determine the net income or
profit for a period depreciation is charged on the total value of asset that contributed to
the revenue for the period in consideration and charge against the same revenue of the
same period. This is essential in the prudent reporting of the net revenue for the entity in
the period.
Net book value of an asset is basically the difference between the historical cost of that
asset and it associated depreciation. From the foregoing, it is apparent that in order to
report a true and fair position of the financial jurisprudence of an entity it is relatable to
record and report the value of fixed assets at its net book value. Apart from the fact that it
is enshrined in Standard Accounting Statement (SAS) 3 and IAS 16 that value of asset
should be carried at the net book value, it is the best way of consciously presenting the
value of assets to the owners of the business and potential investor.
It is worth noting that not all fixed assets depreciate in value year-over-year. Land and
buildings, for example, may often increase in value depending on local real-estate
conditions.[1]
A Fixed Asset Register (FAR) is an accounting method used for major resources of a
business.
Fixed Assets are assets such as land, machines, office equipments, buildings, patents,
trademarks, copyrights, etc. held for the purpose of production of goods or rendering of
services and are not held for the purpose of sale in the ordinary course of business.
Fixed assets constitute a major chunk of the total assets in the case of all manufacturing
entities. Even in the case of service entities such as hotels, banks, financial institutions,
insurers, mobile / telephone service providers etc. it has become imperative to invest
heavily in furnishing, equipment, and technology to attract, and retain customers.
Just as it is important for a person investing on the NASDAQ to know those investments,
so it is important for a business entity to have a list of its fixed assets. A Fixed Asset
Register is that list of assets.
Objectives in maintaining a Fixed Asset Register (FAR)
A FAR must be kept in order to be in compliance with legislation governing
corporations, companies, etc. It allows a company to keep track of details of each fixed
asset, ensuring control and preventing misappropriation of assets. It also keeps track of
the correct value of assets, which allows for computation of depreciation and for tax and
insurance purposes. The FAR generates accurate, complete, and customized reports that
suits the needs of management.
A FAR also allows a company to keep track of fixed assets that are not under simple,
direct control of the company. This means owned and leased assets, assets under
construction, and imported assets.
The FAR can also be used to aid in capital budgeting and to keep track of amount
provided for Asset Retirement Obligation (ARO) in respect of each asset as required by
US GAAP (FAS – 143).
The charge of depreciation can impact the net profit in the income statement, so the
methods of calculating depreciation is very important. Adopting different methods of
calculation, the result will be different. And it'll refer to the expense and tax in the income
statement. Choosing the fit methods of calculating depreciation, it need to be faced by the
finance staff.
It's the simplest amd most popular methods of calcuating depreciation. Under this method
the depreciation charge is constant over the life of the asset. And we need know three
pieces of information:
For example, a company purchased a car on 1 January at a cost of $24,000. The company
estimates that its useful life is four years, after which he will trade it in for $4,000. The
annual depreciation charge is to be calculated using the straight line method.
Under this method the depreciation charge will be higher in the earlier years of the life of
the asset. Here needs a percentage to apply. And in the first year the percentage is applied
to cost but in subsequent years it's applied to the asset's net book value (alternatively
known as written down value).
The aim of this method is to show a higher depreciation charge in the early years of the
life of an asset.
Revaluation method
When a non-current asset has been revalues, the charge fro depreciation should be based
on the revalued amount and the remaining useful economic life of the asset.
Useful life = 5 years --> Straight line depreciation rate = 1/5 = 20% per year
Book Value
Depreciation Depreciation Book Value at
Year at the
Rate Expense the year-end
beginning
2011 $140,000 40% $42,000 (*1) $98,000
2012 $98,000 40% $39,200 (*2) $58,800
2013 $58,800 40% $23,520 (*3) $35,280
2014 $35,280 40% $14,112 (*4) $21,168
2015 $21,168 40% $1,168 (*5) $20,000
--> Depreciation for 2015 is $1,168 to keep book value same as salvage
value.
--> $21,168 - $20,000 = $1,168 (At this point, depreciation stops.)
Useful life = 5 years --> Straight line depreciation rate = 1/5 = 20% per year
Book Value
Depreciation Depreciation Book Value at
Year at the
Rate Expense the year-end
beginning
2011 $140,000 30% $31,500 (*1) $108,500
2012 $108,500 30% $32,550 (*2) $75,950
2013 $75.950 30% $22,785 (*3) $53,165
2014 $53,165 30% $15,950 (*4) $37,216
2015 $37,216 30% $11,165 (*5) $26,051
2016 $26,051 30% $6,051 (*6) $20,000
(*1) $140,000 x 30% x 9/12 = $31,500
(*2) $108,500 x 30% x 12/12 = $32,550
(*3) $75,950 x 30% x 12/12 = $22,785
(*4) $53,165 x 30% x 12/12 = $15,950
(*5) $37,216 x 30% x 12/12 = $11,165
(*6) $26,051 x 30% x 12/12 = $7,815
--> Depreciation for 2016 is $6,051 to keep book value same as salvage
value.
--> $26,051 - $20,000 = $6,051 (At this point, depreciation stops.)
The required variables for calculating depreciation are the cost and the expected life of
the fixed asset. Salvage value may also be considered. Examples of depreciation
calculations for both straight line and accelerated methods are provided below.
SL = Cost / Life
Example: A desk is purchased for $487.65. The expected life is 5 years. Calculate the
annual depreciation as follows:
487.65 / 5 = 97.53
Each year for 5 years $97.53 would be expensed.
The factor is the percentage of the asset that would be depreciated each year under
straight line depreciation times the accelerator. For example, an asset with a four year life
would have 25% of the cost depreciated each year. Using double declining balance or
200%, which is the most common, would mean that depreciation expense in the first year
would be twice that or 50%. So to calculate the depreciation expense each year the
depreciable basis would be multiplied by 50%.
Example: A copy machine is purchased for $3,217.89. The expected life is 4 years. Using
double declining balance the depreciation would be calculated as follows:
factor = 2 * (1/4) = 0.50
Year 1 5 / 15 = 33.34%
Year 2 4 / 15 = 26.67%
Year 3 3 / 15 = 20 %
Year 4 2 / 15 = 13.33 %
Year 5 1/ 15 = 6.67%
Example: A conference table is purchase for 1,467.89. The expected life is 5 years. Since
this is a 5 year asset the yearly factors have been calculated above.
Depreciation Depreciation
Year
Calculation Expense
1 1,467.89 * 33.34 % 489.40
2 1,467.89 * 26.67 % 391.49
3 1,467.89 * 20 % 293.58
4 1,467.89 * 13.33 % 195.67
5 1,467.89 * 6.67 % 97.91