Financial statements can be represented in a simple form or as classified statements. Classified statements represent the assets, liabilities, expenses, and revenues of an enterprise in a more detailed way. A classified balance sheet breaks down the asset and liabilities into sub-categories, and each category corresponds to a group of assets or liabilities of similar nature.
The asset side of a classified balance sheet is sub-categorized into current assets and long-term assets. Each company’s asset is evaluated on the capitalization thresholds to categorize it as a fixed asset or current asset. The most common example of fixed assets is property, plant, and equipment(PP&E). Long-term assets are further divided into tangible(physical) and intangible assets.
The items included in PP&E are land, computers, furniture, equipment, building, machinery, vehicles, etc. Office equipment is also recognized as a long-term asset in the classified balance sheet. This article will go through office equipment and its classification, recognition, measurement, and taxation.
What Is Office Equipment In Balance Sheet?
According to IAS 16, fixed assets are defined as,
Property, plant, and equipment are fixed assets that the company uses to produce and distribute goods & services and administrative purposes for more than 12 months.
The same standard governs the office equipment, and it is defined as,
Office equipment is a tangible asset that is held for administrative purposes of any enterprise. It is recorded at the acquisition cost plus any installment charges.
The most common examples of office equipment are computers, furniture, copiers, fax machines, printers, etc. Office equipment is treated as a long-term asset and will be depreciated according to its useful life. However, there are many instances when office supplies and equipment are not classified as a long-term asset. In those cases, the amount of office supplies is treated as an expense.
Classification of Office Equipment
Office equipment is classified as fixed assets in long-term assets of the balance sheet and it is depreciated over its useful life the same as other non-current assets. But it is also important to know that what is further sub-classification of office equipment. Materiality is a vital consideration when classifying equipment as part of long-term office equipment.
Most generally following items are added to the balance sheet as office equipment.
- Portable computers(laptops, notebooks, iPads)
- Desktop computers(desktop computers along with peripherals)
- Servers(Desktop computer used as a server)
- Minicomputers and mainframes
- Terminals(connected with minicomputers and mainframes)
- Laser printers and Inkjet printers
- Fax machine
- Fingerprint sensors, eye scanners, etc.
Recognition Of Office Equipment
Recognition refers to the realization of a company’s asset as part of a particular category. The recognition principle is a vital part of the accrual-based accounting system. It works for revenues as well as for assets. The revenue recognition principle dictates recognizing proceeds as revenue if there is a certainty of receiving payment and should be recorded in the period when services were given.
Similarly, the asset recognition principle also has some criteria. Under the IAS 16.7, an item owned by a company should be recorded as an asset if:
- There is a certainty of generating economic benefits from the assets in the future.
- The accounting department can reliably measure the cost of the asset
There are some conditions for recognizing an asset as a long-term asset or current asset. An asset is considered as a long-term asset if:
- The economic benefit(conversion into cash) associated with an asset is extended to more than one operating cycle(one year).
- For the companies with an operating cycle greater than one year, an asset will be recognized as a long-term asset if it is not probable to convert that asset into cash within one operating cycle.
The criteria for recognizing office equipment as an asset and a long-term asset are also the same as described above. When the items in office equipment are expected to provide economic benefit for more than one operating cycle, and their value can be calculated with certainty and reliability, these items will be classified under the long-term assets of the balance sheet.
When Is Office Equipment Recognized As Long-Term Asset?
A part of office equipment is recognized as a part of long-term assets when a cost is incurred to acquire that particular asset. At the time of acquiring the asset, an initial measurement is made. However, in the future, if the asset requires replacement or repairs, the cost is measured as a subsequent measurement. We will discuss initial and subsequent measurements in the following sections.
What costs are included in the initial measurement?
When the asset’s cost is realized, it includes the initial cost of the asset, cost of bringing the asset on the site, or any installation charges. Any cost of replacement, repairing, and servicing is added to reevaluate asset value for subsequent costs.
Measurement Of Office Equipment
Now let’s understand the measurement of office equipment throughout the life of the asset.
Under the IAS 16.15, the initial measurement of office equipment cost, following costs are also added besides the purchase price:
- Costs of bringing asset in working
- Transportation in charges
- Site preparation costs
- Professional fees of engineers and architects
- Carrying and handling costs
- Dismantling of the asset
According to IAS 16.23,
In case of deferred payment of office equipment, the market interest rate should also be added to the costs.
Further, IAS 16.24 explains the recognition of initial costs when the office equipment is acquired by exchanging another asset. The exchanged assets can be of similar nature or different natures. The cost of the asset will be calculated at fair value always. However, it might not be calculated at fair value if,
- If the commercial substance is absent in the exchange. A commercial substance can be defined as the presence of monetary gains as a result of the exchange.
For instance, two companies might swap office equipment with each other. Company A has a large machine worth $800,000 and accumulated depreciation of $500000. The fair value of the asset is $400,000.
The value of an asset held by company B is equal to the fair value of company A’s asset. In this case, the commercial substance exists because company A will get an asset of value greater than the book value of exchanged equipment.
- If the fair value of both assets included in exchange cannot be measured reliably.
For the subsequent measurement of office equipment’s value, there are two models permitted by IAS 16.
- IAS 16.30 dictates the cost model, which explains that an asset should be valued at the cost minus accumulated depreciation and deterioration.
- IAS 16.31 defines the revaluation model, implying that assets should be valued at the fair value minus subsequent depreciation and deterioration amount. However, a condition is applied that fair value can be calculated with reliability.
Let’s suppose a company has purchased computer equipment that is worth $70,000. According to the capitalization threshold of the company, an asset having a value of $35000 or more should be treated as a capital expenditure or long-term asset. If the computer equipment is assessed on the capitalization threshold, it will b treated as a long-term fixed asset.
The second criterion for declaring an asset as a long-term asset is:
If the asset is consumed within the 12 months of its acquisition or not!
By analysis of the asset and the consequent economic benefits, it is found that the asset can be used for 4 years. According to the second criteria, the company can treat the office equipment as a long-term asset. It can be depreciated and recorded in the balance sheet.
Taxes On Office Equipment
When it comes to taxes levied on office equipment, there can be more than one way of taxation. How the office equipment will be taxed depends on the government taxation rules where the company is doing business. The office equipment can be taxed in the following ways:
- The sale of office equipment can be treated as sales, and consequently, the sales tax is applied on the sale.
- In some cases, property tax is computed on office equipment.
There are certain rules and regulations to be followed when depreciating office equipment for taxation purposes. The depreciation method must comply with the defined tax codes and rules of the taxation department.
Office Equipment Vs. Office Supplies
Confusion often exists when the difference between office equipment and office supplies is concerned. The difference between the two is materiality.
Any asset that is less material and can be consumed within 12 months is treated as office supplies. Office supplies are recognized as an expense of business and set off in full when calculating net income. Examples include staples, ink refills, uniforms, table accessories, pens, stationery, paper, etc. However, these items are used in the generation of revenues but due to the materiality principle.
On the other hand, office equipment encompasses material items having a life of more than one year. The assets meeting a company’s capital threshold are treated as office equipment.
Office equipment is classified as non-current assets in the balance of the company. It could be capitalized when the cost of assets meets the policy threshold as defined by the company and its useful life is more than 12 months. Cost of assets meed is reliable where assets need to be identifiable. The company needs to have the right to control the office equipment and is expected to receive the economic benefit from it before it could capitalize.