Fictitious asset is used to account for expenses that are no related to real, tangible assets. The most common example is situation when the company begins its operation and expenses related to that start cannot be placed under normal account headings. The fictitious assets are written off after the company obtains first earnings.
Fictitious assets are simply some fake assets put into financial statements. However, it is not illegal, its normal accounting practice. The only purpose of registering fictitious assets is to keep statements balanced at the end of period. When fictitious assets are no more necessary, they are amortized or written off in following accounting periods.
The most popular examples of fictitious assets are:
- preliminary expenses (as described earlier),
- promotional expenses,
- discount on issue of shares,
- loss related to issue of debentures.
On the balance sheet fictitious assets can be found in asset part of it, e.g. under position Miscellaneous expenditures.
Fictitious asset in tools for financial analysis
Ratio analysis is a typical and most famous used tools of financial analysis. It is distinguished classification of Types of Ratios (Y. A. Babalola, F. R. Abiola, 2013, s.134-137):
To calculate selected Ratio analysis we need to take into account fictitious asset for example:
- Debt-Equity Ratio this tool specifies stability the long-term financial position of the firm. It is relation between debt (external equities) and the equity (internal equities). Debt include long term loans, for example debentures, long-term loans from financial institution. Equity include shareholders' funds, for instant preference share capital, equity share capital, reserves fewer losses and fictitious assets like preliminary expenses (Y. A. Babalola, F. R. Abiola, 2013, s.136).
- Proprietary Ratio it means relation between proprietor's funds and total assets. This ratio proves in to what extent the shareholders own the business. Proprietors fund means share capital plus reserves plus surplus, both of capital and revenue nature. Loss and fictitious assets are deducted (Y. A. Babalola, F. R. Abiola, 2013, s.137).
Fictitious asset in continental European balance sheet theories
One of these theories is Pure static balance sheet: "the balance sheet, for the sake of creditor protection, shows liquidation values. This implies, if R&D outlays are capitalized and considered as an intangible asset, that this asset is a fictitious asset and should be expense in the income statement of the year or amortized rapidly (over 5 years)" (Y. Ding, T. Jeanjean, H. Stolowy, 2014, s.8). In special cases some stakeholders or blockholders prefer the static balance sheet for the nonrecognition of R&D outlays as capitalized R&D in the balance sheet. We can distinguish families, state, banks or employees which often represent a long-term commitment to the firm and favor the absence of “fictitious assets”(Y. Ding, T. Jeanjean, H. Stolowy, 2014, s.7).
- Babalola, Y. A., Abiola, F. R., (2013), Financial ratio analysis of firms: A tool for decision-making. “International journal of management sciences”, 1(4), 132-137.
- Barth, M. E., Landsman, W. R., & Lang, M. H. (2008). International accounting standards and accounting quality. Journal of accounting research, 46(3), 467-498.
- Ding Y., Jeanjean T., Stolowy H., (2014), Accounting for Stakeholders or Shareholders?, China-Europe International Business School, Shanghai, China ESSEC Business School, France and Singapore HEC Paris, France.
Author: Karolina Knapik