Fictitious assets can be defined as assets that are fake. They do not have a physical presence, and hence, these assets are not really assets in the true sense, but in fact, they are defined as assets that are mainly categorized as huge expenses or losses that occur within the company over the course of time, and tend to be unclaimed in the year in which they take place.
The main reason as to why these expense heads are treated as assets, and then expensed across several different years is the fact that this is considered to be a major expense for the business, and hence they are then spread across a number of years, as opposed to being treated as such during the course of one year only. Therefore, they are categorized as assets using journal entries that just convert expenses with a considerable value into assets.
Therefore, it can be seen that fictitious assets are intangible assets, with no physical existence. They are expenses that are treated as assets. Since they are not purchased by the company (with an intention of keeping them as assets), they have no realizable value.
They are continually amortized over the course of time, across a span of more than one financial year. The main reason for this particular categorization is the fact that these expenses, like assets, are expected to give returns over the course of more than one year.
However, since it is a considerable amount of money, recording them in one year altogether might have an adverse repercussion on the financials. Therefore, they are categorized as assets first, and then continually amortized over the course of time, as soon as the company is making profits, and it is certain that the company is generating a positive return.
Fictitious assets may, or may not exist on the balance sheet of a particular company. However, the following illustration shows how fictitious assets work, and in what circumstances do companies treat expenses at fictitious assets.
Newton Co. got incorporated on 1st January, 2020. Upon incorporation, they paid $60,000 as incorporation charges. However, during the first year of operations, they were not able to make substantial profit.
They also incurred marketing promotional expenses of $40,000, in addition to a discount at which they issued shared. The total discount amount was $55,000. End of the year, Newton Co. decided to categorize all three expenses as fictitious assets. They are expected to earn profits from the next year, so they decided to amortize these fixed assets as soon as they are able to generate profits.
Difference between Fictitious Assets and Fixed Assets
The main difference between fictitious assets and fixed assets is the fact that fixed assets are mostly tangible in nature (except for goodwill). They normally have a realizable value, and they are subsequently expected to generate returns over the useful life of the assets. In the same manner, fictitious assets have no realizable value.
They are only placed on the balance sheet as per the amount that has already been paid. It cannot be depreciated, or sold once it is paid for. It carries forward from one year to the next, unless the amount is fully amortized over the course of time.
In the same manner, it can also be seen that fictitious assets do not drive a tangible value. Estimating the amount of value addition as a result of this particular transaction is questionable. However, in the case of fixed assets, the returns that are expected to be generated can be estimated and calculated well in advance.
List of Fictitious Assets
There are numerous different examples of fictitious assets. Some of the examples of fictitious assets are as follows:
- Promotional Marketing Expenditures: Professional and promotional marketing is considered to be a significant investment for the company. For organizations that have considerable marketing budgets (mainly in the case of ATL Marketing), the benefits of such marketing campaigns are rendered over a period of more than one year. Therefore, they are categorized as fictitious assets, and then amortized over the period with which it is expected to return considerable value.
- Preliminary Expenditures: Preliminary expenditures are expenses that occur in the initial stages of the business. This might include costs associated with incorporation, legal and licensing fees, as well as other expenses that are associated to bring the business in a running condition. These expenses are considered significant in nature, and therefore, they are often treated as fictitious assets, and then amortized over the forthcoming years.
- Discount allowed on the issue of shares: In the case where the company issues shares at a discount, the discount amount is not considered as an expense (or a loss). Instead, it is considered to be a fictitious asset, and then it is expensed over the course of the year.