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 seriously the entity invested in the assets to improve its operation and performance. Investors and potential acquirers always want to know this before investing or acquiring.

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 entity’s balance sheet that you calculate for and find the gross amount of fixed assets at the reporting date. Sometimes you can find it here, and sometimes you can find it in the notes to fixed assets. Remember, this is the gross amount.
  • They accumulated depreciation expenses at the reporting date. Similar to 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 depends on the 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 on this date. Then you don’t need to add fixed assets addition. But if the gross value is taken on 31 December 2017, you must add the additional amount during 2018.
  • The liabilities that an entity incurs as the result of purchasing fixed assets. These liabilities could be a bank loan the entity borrows to purchase fixed assets or the entity’s payables to suppliers due to purchasing fixed assets on credit. All the liabilities due to the purchase of fixed assets need to be eliminated 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 using its own money.
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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 include office buildings, warehouses, and other similar kinds. Their useful life is normally longer compared to other fixed assets.
  2. Computer equipment: Laptops, desktops, servers, printers, and other similar equipment. Useful life is around three to five years, depending on the type of equipment.
  3. Computer software: This is the software that an entity purchases or business processing, or it could be the software that an entity build by its team.
  4. Furniture and fixtures: Tables, chairs, closets, cabinets, and others.
  5. Intangible assets: These are 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 a 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 the entity just assessed in 2018 is 1,000K. ABC borrowed from a local bank to purchase fixed assets amounting to $100,000,000.

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

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Based on the example above, we have the following:

  • The total gross amount of fixed assets on 31 December 2018 amounted to $350,000K
  • Accumulated depreciation as of 31 December 2018 amounts to $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 the net fixed assets of ABC on 31 December 2018 as $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, we will get $299,000K.

These two figures might provide insight into 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, the entity injects its own money into 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.

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

Are fixed assets net or gross in the balance sheet?

Fixed assets are recorded as net carrying amounts on a balance sheet. This means that the full purchase value of the asset is listed and then takes into account any depreciation or impairment of the asset over time.

The value of a fixed asset can be calculated by considering its original cost, any additions, and any deductions from it (such as depreciation) since its acquisition.

Each of these components is listed separately on the balance sheet. The net value is then calculated by subtracting all deductions from the total cost.

In summary, fixed assets are typically reported at their net value on a balance sheet, not their gross value.

What is the Different between a net of fixed assets and a gross of fixed assets?

The difference between a net of fixed assets and a gross of fixed assets is that net fixed asset value is the amount after depreciation. In contrast, gross fixed asset value is the original cost before depreciation.

Net fixed asset value is calculated by subtracting the accumulated depreciation of an asset from its original cost. This means that if an asset were purchased for $1,000 but depreciated to $500, its net fixed asset value would be $500.

Gross fixed asset value, on the other hand, refers to the initial purchase price or acquisition cost (the market value at the time of purchase).

So in this example, the gross fixed asset value would still be $1,000.

This article is written by Sinra