Definition:

Net of fixed assets is the net of the gross value of fixed assets in the balance sheet after the elimination of accumulated depreciation expenses, accumulated impairment expenses, and the debt or liabilities that the 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 netbooks 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 always 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. Sometimes you can find it here, and sometimes 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.
  • The total amount of fixed assets added during the period. This is depending on 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 are taken at this date. Then you don’t need to add fixed assets addition. But of the gross value is taken on 31 December 2017, then you need to add the additional amount during 2018.
  • The liabilities that an entity incurred as the result of purchase fixed assets. These liabilities could be a bank loan that the entity borrow to purchased fixed assets or the payables that the 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 an entity invested in purchasing fixed assets by using their own money.
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List of Fixed Assets:

Entity reports fixed assets in the 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 an office building, warehouse and another similar kind. Their useful life normally longer compared to other fixed assets.
  2. Computer equipment: These include a laptop, desktop, servers, printers and another similar kind of equipment. Useful life is around three to five years depending on the 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 a franchise, copyright, trademark and sometimes 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 incurred by the entity on the leased office or building.
  8. Machinery: This is the list of machines example cutting machines
  9. Vehicles: These are cars, trucks, and other related vehicles.

Example:

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

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

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

Based on example above, we have:

  • The total gross amount of fixed assets at 31 December 2018 amount 350,000K
  • Accumulated depreciation as of 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 the calculation, we get net fixed assets of ABC on 31 December 2018 is $199,000K. These are the net fixed assets after deducting bank loan from the net book value of assets. If we don’t eliminate bank loan from book value, then we will get $299,000K.

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

It is a good idea to calculate the net asset of the previous period with the current period. This way will help the analyst to have better information for their analysis.

For example, if the previous period net assets are USD 100,000, that means the entity inject their own money USD 99,000K. We can say that

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

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

This article is written by Sinra