What is Fixed Assets Addition?

Meaning of Fixed Assets

Fixed assets are long-term investments in the operation of entity. Long-term investments in terms of accounting conventions means the asset whose useful life is more than 12 months.

These assets are illiquid in nature unlike current assets which can be easily converted into cash in the period of twelve months from accounting period.

Fixed assets provide value over number of years. Fixed assets are not bought for resale like the trading but rather it is bought to create value in the business.

They are used in the routine business activities such as office building, warehouse, computerised equipment, machineries, office equipments as well as vehicles.

Meaning of Fixed assets addition

Fixed assets addition basically refer to assets that entity acquired during current accounting period in addition to previous year fixed assets balance in balance sheet.

If you look into the note to financial statements for fixed assets in your annual audit report or annual financial statements. You will see the note present the movement of fixed assets in gross value from previous year to current years.

The movement could be as the result of fixed assets disposal, fixed assets written-off and fixed assets addition.

Entity might add new fixed assets into the operating as the result of operational expansion, replace the old assets after written off or disposal, or introduce the new version of assets for operational efficiency.

To improve users understanding on entity’s financial situation, accounting standards required entity to present fixed assets value at the end of accounting period in gross value, fixed assets addition during the period, written off or disposal during the period.

Entity is also advice to present the accumulated depreciation and depreciation charged during the period.

Depreciation rate and useful life of fixed assets by class are also advice to disclosed with others importance accounting policies.

Fixed assets addition are also fixed assets therefore the recognition and measurement are followed the same accounting principle.

There are two methods to add the fixed assets as direct acquisition of fixed assets and exchange of one fixed asset with another.

Accounting for fixed assets addition

As we discussed two methods of fixed assets addition, now, we will talk about accounting treatment for fixed assets in these two cases as:

  • Direct Procurement from vendors

In plain language, this means making fresh investment in purchases of fixed assets after making due diligence of the vendors and making capital budgeting decision on purchase decision.

When there is purchase, there is outflow of cash now or later on if the purchases is made through credit.

For instance: Apple Inc purchases machinery A for packing its inventory and automate the process. The cost of purchase is $ 40,000.

Here, the principle of double entry system of bookkeeping comes into play while the fixed asset is purchased, there is outflow of cash in case of payment or liability is created when the purchase is made on credit. Assuming the purchase has been made by cash payment, the journal entry would be as:

DescriptionDebit Credit
Fixed Assets$ 40,000
To cash
(Being assets purchased for cash)
$ 40,000
  • Fixed assets added in exchange

In this scenario, new fixed assets are added to the list of existing fixed assets in exchange for fixed assets which is not needed now. This can be due to reason of simple exchange.

This may be also due to strategic acquisition. For example: the company wants to foray into manufacture of sweet candy and stop production of lollipop as it has been non-performer for years.

Such exchange of assets is difficult to record and recognize the amount in the books of accounts.

So, there has been guidelines issued with respect to accounting of such exchanges. There are two situations when the assets are exchange. The transaction can have commercial substance or not. This is discussed below:

Exchange involving commercial substance:

When the business exchanges fixed assets with another and transaction has commercial substance, the business records the asset acquired at its fair value or fair value of assets given up, whichever is more readily available.

In such case, the journal entry is the new asset is debited alongside accumulated depreciation and the old asset is credit. The difference is due to profit/loss on exchange.

DateDescriptionDrCr
XXNew Fixed Assets
Accumulated Depreciation
XX  
XXOld Fixed assets given up (Being assets exchanged)XX
XX Profit/Loss on exchangeXXXX

Exchange involving no commercial substance:

When no commercial substance exists, the asset swap has no accounting impact as there is no significant change. However, this may result in profit and loss.

Further, if cash is paid in part, it shall be credit. A sample journal entry in a case of exchange of fixed assets where there is no commercial substance is as:

DateDescriptionDrCr
XXNew Fixed Assets
Accumulated Depreciation
XX
XXTo Old Fixed assets given up           
To cash
(Being assets exchanged)
  XX
XX Profit/Loss on exchangeXXXX

What is biological assets?

Overview:

Biological assets are assets which are living in nature. It includes trees, animals and nowadays cannabis too as it has been made legal. The company’s management breaks down assets side of balance sheet and classifies them by type and attributing a value to them.

Biological assets are dealt in International Accounting standards 41 (IAS 41). As per IAS 41, biological assets are any living plant or animal owned by the business. These are typically measured at fair values less selling costs.

Examples of biological assets include goats, fish, vegetables, corn, tomatoes, apples and so on. Biological assets are generally perishable and are in the nature of current assets in the balance sheet.

Nature of Biological assets:

Biological assets are held and can be accounted only by the business owners. These assets are important to farmers and individuals whose primary source of profit comes from growing, selling and shipping biological goods.

They are active component in environment; hence, they are always difficult to maintain. They are always under the radar of qualitative and quantitative threats.

Importance of Biological Assets:

Biological assets generate substantial revenue or income for businesses in industries such as vineyards, floriculture, silviculture, and paper products.

Biological assets are typically seen in the balance sheet of these companies in industries. The only distinguished feature for biological assets are that it is a living thing.

The major difference of biological assets is that biological assets change naturally and depreciate naturally and more rapidly than other types of goods.

Various biological assets like other goods can be in high or low demand depending on the season of the product. Recently there has been surge in demand of cannabis as it has been made legal in United states of America.

The threats suffered by biological assets include drought, cold weather, inconsistent rain, or forms of diseases. Biological asset is unique to the field of accounting for the purpose of clearly categorizing and identifying assets owned by businesses.

Recognition of Biological assets as per IFRS:

An entity recognizes biological asset when the entity controls the asset as result of past events. It is fairly reliable to say that benefit will flow to the entity and fair value can be measured reliably.

Measurement of Biological asset:

Biological assets come within the scope of IAS 41. Initial recognition is done and at subsequent reporting dates, the biological assets are recognized at fair value less estimated costs to sell, unless fair value cannot be reliably estimated.

The gain on initial recognition of biological assets at fair value less costs to sell and changes in fair value less costs to sell of biological assets during a period are included in profit or loss.

All other costs related to biological assets which can be measured at fair value are recognized as expenses when incurred, other than costs to purchase biological assets.

Tips to manage fixed assets effectively

Overview:

Fixed assets management is an effective process of tracking and maintaining the organization’s physical assets to prevent any kind of loses.

It enables the organization to track equipment, vehicles, machinery, buildings, assess their condition, and keep them in good working order. The process of managing the assets gets complicated along with the size of the organization.

Small organizations use excel spreadsheets or manuals for asset tracking and help them manage fixed assets in terms of their physical controls and as well as their performance.

This is sometime prone to human error as it is manually done. In case of large organizations, automated solutions are in line and offers a reliable way to oversee fixed assets.

Automated solutions or ERP may have various additional features like location tracking, work order processing and audit trails. The following fixed assets management tips will help these organizations to effectively manage their fixed assets:

Tagging Physical Assets:

Tagging means labelling the asset by its nature and classification. Tracking fixed assets gets simplified when they are tagged with unique identifiers such as asset IDs.

Bar codes are also helpful when the assets are tracked with the help of fixed asset management software. When an entity holds multiple assets like computer desktops, it can be easy to make mistakes by creating duplicate assets records and failing to dispose of the correct assets when there is an identical asset installed in the enterprise.

Hence, the organization should tag each of their physical asset by tagging them with physical label like Serial number containing date of purchase.

Tagging fixed assets is not the one time task. It is an ongoing control. That mean entity should making sure that the tages are stick with fixed assets correctly and stay with assets as it should be.

This is probably could be fixed by verifying the correctness of fixed assets tagged and replace them immediately at the time entity performs the physical count of fixed assets. Tagging fixed assets correctly could also help the entity to speed up the counting and verifying process correctly and effectively.

Safeguarding and accountability of assets

Safeguarding physical assets is important function in fixed asset management. Safeguarding can be achieved by hiring responsible person as custodian. Making sure that no one could use or take the fixed assets out from office, site or their they are being too without proper authorization.

Creating accountability increases the levels of security and help reduce the incidences of theft and misuse of cash to purchase and maintain these fixed assets.

The organization should maintain high standards of data integrity and documents custody as proper risk management measures.

Asset Life cycle management with audit trail

Life cycle management of asset means process of monitoring the assets throughout its existence in the business organization. It means making a log of all the activities of fixed assets from the date of acquisition through the date of disposal.

In nutshell, it means preserving the history of fixed assets. The process of documentations creates robust audit trail which helps to meet compliance norms and detect and correct significant errors and omissions before the impact on financials of the organization.

The preserving of history eases the tracking, debiting depreciation, maintenance and disposal of fixed assets.

Physical verification of the assets

This means going old school method to verify each asset physically. This helps to verify the physical existence and condition the assets are maintained.

Asset managers conduct periodical physical asset verification to check existence of fixed assets. Assets that exist physically, can also be tracked and brought into books with retrospective impact.

The best practices of physical asset verification include scanning the physical assets, matching with supporting documents and attach corresponding invoices to asset records.

The independent person from the operation or the direct management of fixed assets to perform fixed assets could help to improve the integrity of fixed assets reporting as well as fixed assets management. For example, the entity might set up an internal audit team to do this or hire an audit firm to do this specific task.

Establishing Standard Operating Practices (SOPs) and internal controls

SOPs are operating guidelines which act as a benchmark to create consistent actions to manage effectively all the fixed assets in an organization.

Establishing SOPs and internal controls ensure that fixed assets have protocols with respect to acquisition, maintenance and disposals leaving little to no space for thefts, errors and misuse of fixed assets of the organization.

Log in Assets Performance

Each time the asset operates at manufacturing capacity, the output generated per particular time shall be recorded and constantly checked if it matches to benchmark performance.

And if the high fluctuation is identified for a certain class of fixed assets, then the review or investigations should be performed to fix the root cause. Maybe because of assets are idle, broken, or stolen.

The other considerations to measure the performance of the assets include the condition of fixed assets and the current year of production of the assets. Log register for performance can be maintained in Excel spreadsheets or through ERP software.

Proper classification of fixed assets

How are assets classify in financial statements?

Assets refer to the resources that own by entity such as cash, inventories, chairs, tables, cars, buildings, machineries, land etc. These assets could be used to generate future economic flow to entity.

Entity reports assets in their financial statements by classified into two main classification based on their convertibility into cash and usages.

For example, assets classified as current assets if they are using in operation with twelve months from the operating date or they are help for trading with twelve months like trading inventories, for example.

Assets are classified as fixed assets when those assets meet the following criteria:

  • Held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and
  • Are expected to be used during more than one period.

Fixed Assets Classification:

Entity reports fixed assets in balance sheet and normally assets are classified into different classification based on types of assets and their usages.

The following are the list general categories of fixed assets:

  1. Buildings: These include office building, warehouse and others similar kind of. Their useful life normally longer compared to others fixed assets.
  2. Computer equipment: These include laptop, desktop, servers, printers and others similar kind of equipment. Useful life is around three to five years depending on type of equipment.
  3. Computer software: These are the software that entity purchases or business processing or it could be the software that entity build by their own team.
  4. Furniture and fixtures: These are tables, chairs, closets, cabinets and others similar.
  5. Intangible assets: These are franchise, copyright, trademark and sometime software also including here.
  6. Land: Land is classed separately from building and land improvement. Land could not be depreciated.
  7. Leasehold improvements: They are mainly related to the decoration or interior expenses incur by entity on the leased office or building.
  8. Machinery: These are the list of machines example cutting machines
  9. Vehicles: These are the cars, trucks, and others related vehicles.

Procedure for fixed assets disposal

Overview:

Fixed assets are those long-term assets which can benefit the enterprise for more than 12 months and is above the particular threshold as defined by the enterprise as guidelines made in compliance with laws and regulations as well as align with the applicable accounting standards and frameworks.

There are certain procurement procedures when the fixed assets are purchased.

When the fixed assets are purchased, they are entered in fixed asset register and balances are added in ledger accounts too. Similarly, the disposal is treated.

Disposal of fixed means discarding the fixed asset from the performance to create any value.

Further, disposal has bit more complicated procedure than the purchases sometime. It is depending on the complexity of entity’s nature of business. We will discuss here the administrative and accounting procedure for fixed assets disposal.

Administrative procedures:

The following are the procedures to be considered by administration while disposing off the asset:

  1. Try to dispose the assets within the organization after making necessary communications within the circles of businesses asking whether any other businesses would like to purchase the asset.
  2. If the asset has very little or no value, it can be recycled through e-waste, or sold as scrap.
  3. If the assets to be disposed have value below or above the particular threshold, required permission has been obtained from the authorize person in the entity to dispose of the assets. This is to make sure that the disposed assets are not take advantages by anyone in the company.
  4. Where an asset is sold, a sales invoice shall be raised to record the sales and taxes shall be added to the invoice at the standard rate of tax prevailing at the date where applicable.
  5. A form for disposal shall be filled while disposing off the assets. It shall contain the details such as:
  • Description of the asset disposed off
  • Reason for disposal
  • Financial year originally acquired
  • Method of disposal i.e. sale/scrap/part exchange/other
  • Value received for disposed asset
  • Sales invoice number and asset id

Accounting procedures:

Now,

We will discuss the accounting aspects for disposal of fixed assets as following with help of an example:

Fixed assets can be disposed through various methods as sale, scrap, part exchanges of asset and other methods.

Discarding the asset completely

Let’s say Sinra Inc purchases an asset for $100.000 and recognizes $10,000 of depreciation every year.

At the end of these 10 years, the machine becomes fully depreciated as there is no residual value decided at beginning. Sinra Inc gives the asset away and records the following journal entry as:

DateParticularsDebitCredit
xxAccumulated Depreciation100.000
xxMachineries (To record the discarding of asset)100,000

This accounting journal is try to remove the accumulated depreciation and machineries gross value from financial statements to become zero.

There is no other entries is necessary for this disposal since the company just write the assets off without any gain. You can also remove the disposed fixed assets from listing since it is easy for you to reconcile fixed assets.

Sale of an asset at gain

Let’s say Sinra Inc sells a machinery of $200,000 for $70,000 cash after having completed $140,000 of accumulated depreciation. The requisite journal entry would be:

DateParticularsDebitCredit
xxCash account70,000  
xxAccumulated depreciation140,000
xxTo Gain on asset disposal (P&L)10,000
xxTo Machinery (To record the sale of asset at gain)200,000

The entries above recognized the cash amount USD 70,000 since it is based on the assumption that customers who pay to company by cash at the time of selling.

If the sales are on credit, then you can record as receivables from customer. Gain from selling of assets compare to the net book value are charged to income statement. And both accumulation and gross value of assets are discharged from financial statements.

Sale of asset at loss

Sinra Inc sells machinery that has original cost of $80,000 for $ 50,000 in cash. Sinra Inc has made $ 20,000 of accumulated depreciation on the machinery. The required journal entry would be:

DateParticularsDebitCredit
xxCash Account50,000
xxAccumulated depreciation20,000      
xxLoss on asset disposal (P&)10,000
xxTo Machinery (To record the sale of asset at loss)80,000

Company sold the assets lower than its net books value or carrying value therefore it was making losses on disposal of this asset. This is why this entries recognized USD 10,000 charged to income statement.

Recognized cash amount USD50,000 is also based in the assumption that company made cash sales. If it was on credit, then account receivable is where it should charge to.

The same as above case, accumulated depreciation and the gross value of the disposed assets should removed from financial statements and also from listing accordingly.

Part exchange of asset

Sinra Inc replaces the asset A that has original cost of $80,000 and accumulated depreciation of $40,000 with another asset B that has fair market value of $50,000.

In such scenario, the accounting standards comes into place which says the asset which has more evident value shall be recorded at its value. The journal entry would be:

DateParticularsDebitCredit
xxAccumulated depreciation40,000
xxMachinery B50,000
xxTo Gain on replacement of asset B10,000
xxTo Machinery B (To record the exchange of asset A with Asset B)80,000

Net of Fixed Assets

Definition:

Net of fixed assets are the net of gross value of fixed assets in balance sheet after the elimination of accumulated depreciation expenses, accumulated impairment expenses, and the debt or liabilities that entity used to acquire fixed assets.

The main idea behind the calculation of net fixed assets is that we want to know what is the net value of net fixed assets after deducting the liabilities that associating with fixed assets from net books value or carrying value of assets at the reporting date. And we also want to know how serious the entity invested in the assets to improve their operation and performance is. Investors and potential acquirers alway want to know this before they decide to invest or acquire.

This calculation is not for financial reporting purpose, but it is mainly for assessing the value of assets during merger and acquisition by analyst.

After eliminating the associated liabilities, we clearly could see how much the entity actually invested in their fixed assets by using their own capital or money.

Let see the explanation in the formula below, it might help you to get better understanding about this.

Formula:

+ Gross amount of fixed assets at the reporting date
+ Fixed assets addition during the period
– Accumulated depreciation expenses at the reporting date
– Accumulated impairment expenses at the reporting date
– Debt or liabilities associated with the fixed assets
= Net fixed assets

Explanation to the formula above,

Now if you want to calculate the net fixed asset of an entity at the specific reporting, you need to have financial information such as

  • Total (gross before depreciation or impairment) value of fixed assets. You might need to head to the balance sheet of the entity that you to calculate for and find what is the gross amount of fixed assets at the reporting date. Sometime you can find here, and sometime you can find it in the noted to fixed assets. Remember this is the gross amount.
  • Accumulated depreciation expenses at the reporting date. Same as total fixed assets, the accumulation expenses could also find in the balance sheet or noted to fixed assets.
  • Total amount of fixed assets addition during the period. This is depending is on what date of gross fixed asset you are taken for this calculation. For example, the date you want to calculate is 31 December 2018, and the gross fixed assets is taken at this date. Then you don’t need to add fixed assets addition. But of the gross value is taken at 31 December 2017, then you need to add the addition amount during 2018.
  • The liabilities that entity incurred as the result of purchase fixed assets. These liabilities could be bank loan that entity borrow to purchased fixed assets or the payables that entity own to suppliers as the result of purchasing fixed assets on credit. All the liabilities that occurred as the result of purchase fixed assets need to eliminate from the gross fixed assets in the calculation. We eliminate this value because we want to know how much entity invested in purchasing fixed assets by using their own money.

List of Fixed Assets:

Entity reports fixed assets in balance sheet and normally assets are categories into different categories based on types of assets and their usages.

The following are the list general categories of fixed assets:

  1. Buildings: These include office building, warehouse and others similar kind of. Their useful life normally longer compared to others fixed assets.
  2. Computer equipment: These include laptop, desktop, servers, printers and others similar kind of equipment. Useful life is around three to five years depending on type of equipment.
  3. Computer software: These are the software that entity purchases or business processing or it could be the software that entity build by their own team.
  4. Furniture and fixtures: These are tables, chairs, closets, cabinets and others similar.
  5. Intangible assets: These are franchise, copyright, trademark and sometime software also including here.
  6. Land: Land is classed separately from building and land improvement. Land could not be depreciated.
  7. Leasehold improvements: They are mainly related to the decoration or interior expenses incur by entity on the leased office or building.
  8. Machinery: These are the list of machines example cutting machines
  9. Vehicles: These are the cars, trucks, and others related vehicles.

Example:

ABC is the mobile operator company and based the financial statements as at 31 December 2018 its gross fixed assets amount USD 350,000K.

The accumulated depreciation up to the reporting date is $50,000K while the impairment that entity just assessed in 2018 is 1,000K. ABC borrowed local bank to purchase fixed assets amount 100,000K.

Now let calculate the net fixed assets of ABC as at 31 December 2018.

Based on example above, we have:

  • Total gross amount of fixed assets at 31 December 2018 amount 350,000K
  • Accumulated depreciation as at 31 December 2018 amount $50,000K
  • Impairment lost 1,000K in 2018
  • Banks loan for purchased fixed assets 100,000K.

Formula to calculate net fixed assets is,

+ Gross amount of fixed assets at the reporting date
+ Fixed assets addition during the period
– Accumulated depreciation expenses at the reporting date
– Accumulated impairment expenses at the reporting date
– Debt or liabilities associated with the fixed assets
= Net fixed assets

Now we get,

+ 350,000K
+ 0
– 50,000K
– 1,000
– 100,000K

= 199,000K

Based on calculation, we get net fixed assets of ABC at 31 December 2018 is $199,000K. This is the net fixed assets after deducting bank loan from net book value of assets. If we don’t eliminate bank loan from book value, then we will get $299,000K.

These two figure might provide the insight information about entity on investing in new assets and it may change the potential investors’ perspective on the entity.

It is the good idea to calculate net asset of previous period with current period. This way will help analyst to have better information for their analysis. For example, if previous period net assets is USD 100,000, that mean entity inject their own money USD 99,000K. We can say that

For example, if previous period net assets is USD 100,000, that mean entity inject their own money USD 99,000K. We can say that entity pay more attention in improving their operation as well as improve their performance.

In this case, the potential investors could believe that entity’s business will grow substantially or potential acquire believe that they may not need to invest more on the fixed assets in term of replacement or improvement if they acquire the company.

This article is written by Sinra