What is Net of Fixed Asset? (Definition, Formula, List, and Example)

Definition:

Net of fixed assets is the net of the gross value of fixed assets in the balance sheet after eliminating 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 associated with fixed assets from the 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 its operation and performance. Investors and potential acquirers always want to know this before deciding to invest or acquire.

This calculation is not for financial reporting purposes, but it is mainly for assessing the value of assets during mergers and acquisitions by analysts.

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

Let’s see the explanation in the formula below, it might help you get a better understanding of 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 of 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 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.
  • They accumulated depreciation expenses at the reporting date. Same as total fixed assets, the accumulation expenses could also find in the balance sheet or noted as 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 taking 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 if 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 purchasing fixed assets. These liabilities could be a bank loan that the entity borrows to purchase fixed assets or the payables that the entity owns to suppliers as the result of purchasing fixed assets on credit. All the liabilities that occurred as the result of the purchase of 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.
Related article  Adjusting Entries for Depreciation Expense

List of Fixed Assets:

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

The following are the general list categories of fixed assets:

  1. Buildings: These include an office building, warehouse, and another similar kinds. Their useful life is normally longer compared to other fixed assets.
  2. Computer equipment: These include a laptop, desktop, servers, printers, and another similar kinds of equipment. Useful life is around three to five years depending on the type of equipment.
  3. Computer software: These are the software that an entity purchases or business processing, or it could be the software that an entity build by its own team.
  4. Furniture and fixtures: These are tables, chairs, closets, cabinets, and similar others.
  5. Intangible assets: These are a franchise, copyright, trademark, and sometimes software also included here.
  6. Land: Land is classed separately from building and land improvement. Land could not be depreciated.
  7. Leasehold improvements 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 from a local bank to purchase fixed assets amounting to $100,000,000.

Related article  How to Calculate Depreciation Expense Using Units of Production Method?

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

Based on the example above, we have:

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

The 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 a bank loan from the net book value of assets.

If we don’t eliminate bank loans from book value, then we will get $299,000K.

These two figures might provide insight information about an entity investing in new assets and 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’s net assets are USD 100,000, that means the entity injects its own money USD 99,000K. We can say that

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

Related article  Land Improvements: Depreciation, and How To Account For It

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

This article is written by Sinra