Fixed Assets

Prepared by
Nermen Mansour
CMA,DIPIFR
Introduction to Fixed Assets

• Definition:
• Fixed assets, also known as tangible assets or property, plant, and
equipment (PP&E), are long-term assets that a business uses in its
operations to generate income.
• Importance:
• Essential for production processes.
• Significant investment for businesses.
Characteristics of Fixed Assets
• Key Characteristics:
• Long-term use.
• Not intended for sale.
• Depreciable (except land).
• Significant value.
Types of Fixed Assets
• Categories:
• Land.
• Buildings.
• Machinery and Equipment.
• Vehicles.
• Furniture and Fixtures.
• Examples:
• Factory building, delivery trucks, office desks.
Acquisition of Fixed Assets
• Methods of Acquisition:
• Purchase.
• Lease.
• Self-construction.
• Trade-ins.
• Example:
• Purchasing new machinery for $50,000.
Cost of Fixed Assets
• Components of Cost:
• Purchase price.
• Installation costs.
• Freight and handling.
• Insurance during transit.
• Example: Total cost of a machine includes its purchase price of
$10,000, installation cost of $2,000, and freight charges of $500.
Capitalization vs. Expense
• Capitalization:
• Recording a cost as an asset.
• Expense:
• Recording a cost as an expense.
• Criteria for Capitalization:
• Extends useful life.
• Enhances efficiency or capacity.
Depreciation Overview
• Definition:
• The systematic allocation of the cost of a fixed asset over its useful
life.
• Importance:
• Reflects the wear and tear of the asset.
• Impacts financial statements.
Depreciation Methods

• Straight-Line Method:
• Equal expense each year.
• Formula:
• (Cost - Residual Value) / Useful Life.
• Example:
• Machine cost: $10,000, Residual value: $1,000, Useful life: 5 years.
• Annual Depreciation: ($10,000 - $1,000) / 5 = $1,800.
Numerical Example of Straight-Line
Depreciation
• Example:
• Asset cost: $20,000.
• Residual value: $2,000.
• Useful life: 4 years.
• Calculation:
• Annual Depreciation = ($20,000 - $2,000) / 4 = $4,500.
Depreciation Methods (Continued)
• Declining Balance Method:
• Accelerated depreciation method.
• Higher expense in earlier years.
• Example: Double declining balance.
Numerical Example of Declining Balance
Method
• Example:
• Asset cost: $15,000.
• Useful life: 5 years.
• Double declining rate: 40%.
• Calculation:
• Year 1: $15,000 * 40% = $6,000.
• Year 2: ($15,000 - $6,000) * 40% = $3,600.
Depreciation Methods (Continued)
• Units of Production Method:
• Based on usage or output.
• Formula:
• (Cost - Residual Value) / Total Units of Production.
• Example:

• Machine cost: $30,000, Residual value: $5,000, Total units: 10,000 hours.
• Depreciation per hour: ($30,000 - $5,000) / 10,000 = $2.50.
Numerical Example of Units of Production
Method
• Example:
• Asset cost: $40,000.
• Residual value: $4,000.
• Total units: 20,000 hours.
• Usage in Year 1: 5,000 hours.
• Calculation:
• Depreciation per hour: ($40,000 - $4,000) / 20,000 = $1.80.
• Year 1 Depreciation: 5,000 * $1.80 = $9,000.
Depreciation Methods (Continued)
• Sum-of-the-Years'-Digits Method:
• Accelerated depreciation.
• Formula: (Remaining Life / Sum of Years) * (Cost - Residual Value).
• Example:
• Asset cost: $25,000, Residual value: $5,000, Useful life: 5 years.
• Sum of years: 5+4+3+2+1 = 15.
Numerical Example of Sum-of-the-Years'-
Digits Method
• Example:
• Asset cost: $18,000.
• Residual value: $2,000.
• Useful life: 4 years.
• Sum of years: 4+3+2+1 = 10.
• Year 1: (4/10) * ($18,000 - $2,000) = $6,400.
Impairment of Fixed Assets
• Definition:
• A reduction in the recoverable amount of a fixed asset below its
carrying amount.
• Indicators of Impairment:
• Significant decline in market value.
• Changes in technology or market conditions.
Accounting for Impairment
• Steps:
• Identify indicators of impairment.
• Measure recoverable amount.
• Recognize impairment loss if carrying amount > recoverable amount.
• Example:
• Asset carrying amount: $50,000.
• Recoverable amount: $35,000.
• Impairment loss: $50,000 - $35,000 = $15,000.
Revaluation of Fixed Assets

• Definition:
• Adjusting the carrying amount of a fixed asset to reflect its current
fair value.
• Revaluation Model:
• Increase carrying amount when fair value > carrying amount.
• Decrease carrying amount when fair value < carrying amount.
• Example:
• Asset revalued from $60,000 to $75,000.
Accounting for Revaluation
• Increases:
• Credit revaluation surplus in equity.
• Decreases:
• Debit revaluation deficit in profit or loss.
• Example:
• Increase in asset value: $10,000 credited to revaluation surplus.
Disposal of Fixed Assets
• Reasons for Disposal:
• End of useful life.
• Obsolescence.
• Sale or exchange.
• Example:
• Selling a fully depreciated asset for scrap value.
Accounting for Disposal
• Steps:
• Remove asset and accumulated depreciation from books.
• Record proceeds from disposal.
• Recognize gain or loss on disposal.
• Example:
• Selling an asset with book value of $5,000 for $7,000.
• Gain on disposal: $7,000 - $5,000 = $2,000.
Asset Register and Record-Keeping
• Purpose:
• Track details of each fixed asset.
• Components:
• Asset description, acquisition date, cost, depreciation, location.
• Example:
• Asset register entry for a company vehicle.
Asset Tagging and Tracking
• Methods:
• Barcode tags.
• RFID tags.
• Importance:
• Efficient tracking and management of assets.
• Example:
• Using RFID tags to track machinery in a factory.
Fixed Asset Turnover Ratio

• Definition:
• Measures how efficiently a company uses its fixed assets to generate
sales.
• Formula:
• Net Sales / Average Net Fixed Assets.
• Example:
• Net sales: $500,000, Average net fixed assets: $250,000.
• Fixed Asset Turnover Ratio: $500,000 / $250,000 = 2.
Numerical Example of Fixed Asset Turnover
Ratio
• Example:
• Net sales: $1,000,000.
• Beginning net fixed assets: $400,000.
• Ending net fixed assets: $600,000.
• Average net fixed assets: ($400,000 + $600,000) / 2 = $500,000.
• Fixed Asset Turnover Ratio: $1,000,000 / $500,000 = 2.
Asset Replacement Decisions
• Factors to Consider:
• Cost of new asset.
• Operating efficiency.
• Technological advancements.
• Example:
• Replacing old machinery with new, energy-efficient models.
Lease vs. Purchase Decisions
• Lease:
• Lower initial cost.
• Flexible terms.
• Example: Leasing a company vehicle.
• Purchase:
• Ownership.
• Long-term asset.
• Example: Purchasing office equipment.
Fixed Assets in Financial Statements

• Balance Sheet:
• Listed under non-current assets.
• Income Statement:
• Depreciation expense.
• Example:
• Fixed assets on balance sheet: $1,000,000.
• Annual depreciation expense: $100,000.
Auditing Fixed Assets
• Audit Procedures:
• Verify existence and condition.
• Check valuation and depreciation.
• Inspect asset register.
• Example:
• Physical verification of machinery.
Fixed Asset Management Software
• Features:
• Tracking and management.
• Depreciation calculations.
• Reporting.
• Example:
• Using software like SAP, Oracle, or QuickBooks.
Regulatory Requirements
• Compliance:
• GAAP (Generally Accepted Accounting Principles).
• IFRS (International Financial Reporting Standards).
• Example:
• Complying with IFRS for asset revaluation.
Case Study: Successful Fixed Asset
Management
• Company X:
• Implemented comprehensive asset management system.
• Resulted in 15% reduction in maintenance costs.
• Details:
• Streamlined asset tracking and maintenance schedules.
Challenges in Fixed Asset Management
• Common Challenges:
• Accurate record-keeping.
• Depreciation accuracy.
• Asset tracking.
• Example:
• Overcoming challenges with automated tracking systems.