essay : Fixed Assets

Abstract

Fixed assets are currently under different guidelines for the Financial Accounting Standards Board (FASB) and for Generally Accepted Accounting Principles (GAAP). Differing provisions are in place to deal with topics such as the continued recording of an asset, the possible revaluing of an asset, reversal of impairment charges, and the usage of nonmonetary transactions. The usage of the revaluation process for fixed assets would allow for the reporting of assets at their fair value and allows for a smooth transition from the historical cost method.

A fixed asset is known as a long-term tangible piece of property, land, equipment, furniture, vehicles, or any other item used within a business that can not be converted into cash within the year. These items are used by firms in order to generate income and are determined based off their value and how long it would take to convert into cash. Also being referred to as capital assets, these assets can not be converted into cash within a year, which is why they are a fixed part of a firms balance sheet. These types of assets are not sold by companies, they are usually upgraded and withheld.

In accounting, assets show up on a firm’s balance sheet, based on a company’s assets, liabilities, and shareholder equity. Fixed assets work in balance sheets based off current and noncurrent assets. Current assets are inventory or company product that can be turned into cash within the year. Noncurrent assets are more fixed assets, assets that are owned by the company, such as property or investment assets owned by a firm. The different categories in assets that are noncurrent are fixed assets, intangible assets, long-term investments, or fixed charges. In a business sense, fixed assets are usually physical product, and not services. They are equipment used by companies used for production, or for companies to rent out. They can be anything from a building being rented out, computer software, land, machinery, vehicles and so on. The term “fixed” is used in order to describe the asset as not being able to be turned over into cash by a business within a year. Fixed assets will usually show up on a business balance sheet as property, plant, and equipment(PP&E). Fixed assets also tend to lose value as they exist longer within a business. When acquiring a fixed asset, this transaction is recorded within cash flow statements under cash flow from investing activities. Fixed asset purchases are cash outflow for a company, while the sale of a product is considered the opposite, cash inflow. If the value of the purchase’s asset is below book value, then it is subject to an impairment, which it would state that it is overvalued on a balance sheet to the company. When a fixed asset has reached the end of its useful life within a firm, it is then deemed for salvage value. This value is calculated based off the probability that a company’s asset was broken down and sold for parts. In some cases, assets will be obsolete, and retain no monetary value, even if sold for parts. Fixed assets are in every firm or business, whether they be in small or large amounts. Fixed assets are extremely important to capital-intensive industries such as manufacturing businesses, due to the large amount of cash outflow invested in PP&E. The amount of fixed asset used is very essential within manufacturing because the constant growth or need of space will show an increase in fixed assets, which shows an interest in growth or expansion.

Some may misunderstand the difference between a fixed asset and inventory. They may seem the same when dealing with journal entries but the two are different in some ways. Business inventory is defined as any current asset in the financial database of your firm. Goods that fall under inventory signify the company’s worth. Moreover, a firm can easily cash them out to cover up any existing debts. For simplicity, we can divide inventory into four categories. Raw materials, goods, and services in progress, finished goods and maintenance, repair and operating supplies. All of this greatly differs from what a fixed asset is. A fixed asset is long-term investment also fixed assets do not have to be ‘fixed’. This means that a fixed asset does not necessarily have to be stationary or immobile. They can be easily moved around from one location to another. Examples include vehicles and computer equipment. Fixed asset accounting relates to the accurate logging of financial data regarding fixed assets. For this purpose, companies require details on a fixed asset’s procurement, depreciation, audits, disposal, and more. Since fixed assets form a substantial part of a company’s investments, it is imperative to record its specifications correctly. As per financial processes, fixed assets are listed under cash flow statements. This is why a purchased fixed asset is a cash inflow, while one that is sold is a cash outflow. Next comes the question about how fixed assets are valued. Due to their continuous usage, fixed assets are subject to constant devaluation. As a result, these assets decline in value each year. A fixed asset, therefore, appears in accounting books at its net value. The net value is its original cost depreciated according to a specific rate over the years. When you are first adding a fixed asset to your financial records, you need to carry out the following transactions: Periodic depreciation (applicable to tangible assets), Amortization (applicable to intangible assets) and Disposal. For reliable accounting procedures, it is always best to calculate specific depreciation rates for all your fixed assets. Once the asset’s value entirely depreciates and it completes its useful life, the last step is its disposal. Recording disposal is as important as entering data about a new purchase.

The IFRS and GAAP have different guidelines for the recording the purchase of assets and the continued recording of assets. In accordance with GAAP, there is only one way to record the initial acquisition of an asset. This is done via the cost method which includes the amount to acquire the asset, the cost of bringing the asset to a usable state, and the cost of bringing the asset to the location it will be used at. GAAP has guidelines in place to provide for the acquisition of assets via a monetary exchange while IFRS does not have such guidelines in place. IFRS allows for the reversal of impairment charges on a fixed asset, while impairment charges under GAAP are permanent. Impairment charges usually occur as the result of a changing of hands of the asset or unforeseen changes in the economy and legal environment and reduce the recoverable value of the fixed asset.

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