Fictitious asset

From CEOpedia | Management online

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, p. 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, p. 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, p. 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, p. 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, p. 7).

Examples of Fictitious asset

  • Start-up Costs: These are the costs associated with setting up a business. Examples include legal fees, accounting fees, advertising and marketing costs, website design costs, and any other costs related to launching a business.
  • Goodwill: Goodwill is an intangible asset that is created when one company purchases another company for more than the fair market value of its assets.
  • Organizational Costs: These are the costs associated with the formation of a new business entity, such as legal fees, accounting fees, and any other costs related to setting up the business.
  • Capitalized Interest: This is the interest that is capitalized on a loan and recorded as an asset on the balance sheet.
  • Deferred Tax Assets: This is the amount of taxes a company has paid in advance, but has not yet been used to offset taxes due in the future.
  • Research and Development Costs: This is the cost of research and development efforts that have yet to be completed.
  • Patents: These are exclusive rights to a certain invention or technology that is granted by the government.

Advantages of Fictitious asset

Fictitious assets provide certain advantages to businesses:

  • Fictitious assets provide businesses with a way to allocate expenses that do not fit into traditional accounting categories. This helps businesses to accurately capture their financial situation and make better decisions.
  • Fictitious assets can also be used to track expenses that are expected to be recovered in the future, such as loan payments or legal fees. This allows businesses to track the progress of their investments and plan more effectively.
  • Fictitious assets also allow businesses to track expenses that are related to the start-up phase of the business. This can help businesses to understand their financial situation and plan more effectively.
  • Lastly, fictitious assets also provide businesses with a way to capture expenses that are not easily tracked in traditional accounting categories. This helps businesses to ensure that all expenses are properly accounted for and accurately reflected in their financial statements.

Limitations of Fictitious asset

Fictitious assets have several limitations that need to be considered when using them. These include:

  • Increased complexity of bookkeeping: Fictitious assets complicate the bookkeeping process and can lead to a more complicated balance sheet.
  • Difficulty tracking progress: Fictitious assets cannot be tracked easily, and this may lead to inaccurate assessment of the company's progress.
  • Lack of tangible value: Fictitious assets have no tangible value and, thus, cannot be exchanged for cash or used as collateral.
  • Uncertainty of future worth: Fictitious assets are not always easy to assign a future worth, and this can lead to an uncertain financial future.
  • Difficulties with taxation: Fictitious assets can be difficult to assess for taxation purposes and this can lead to inaccurate taxation payments.

Other approaches related to Fictitious asset

One approach to dealing with fictitious asset is to create a separate account for tracking it. This allows the company to monitor and track the costs associated with the asset, and to make any necessary adjustments to the balance sheet. Other approaches include:

  • Depreciation: Depreciating the asset over its useful life provides the company with a tax benefit and helps to reduce the amount of income tax paid.
  • Amortization: This is similar to depreciation, but it is used for intangible assets, such as patents or trademarks, which have a finite lifespan.
  • Writing off: This is when the asset is written off completely, reducing the overall value of the asset to zero.

In summary, there are several approaches to dealing with fictitious asset, such as creating a separate account, depreciating the asset, amortizing the asset, and writing off the asset. Each approach has its own advantages and disadvantages, and should be carefully evaluated before implementation.


Fictitious asset — recommended articles
Non-operating expense — Preliminary expenses — Disposal of fixed assets — Revenue expenditure — Matching principle — Prepaid income — Asset based approach — Asset sales — General reserve

References

Author: Karolina Knapik

Retrieved from "https://ceopedia.org/index.php?title=Fictitious_asset&oldid=92283"