Gross fixed assets
| Gross fixed assets |
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| See also |
Gross fixed assets, also known as historical cost of an asset or gross book value is a term used in accounting and refers to the amount of money the company had to pay in order to possess all of the fixed assets. The calculation does not consider depreciation or consumption during the fixed asset's lifespan. Gross fixed asset is often used in different formulas, which help to calculate profitability ratio of a company. Such ratio helps the management to assess if the business is able to generate profit corresponding to its income, expenses, assets from the balance sheet and owner's equity over a period of time[1].
Fixed assets
Fixed assets are permanent objects which last for more than one accounting period and a company is not willing to sell them in the nearest future. This position in the balance sheet, in the section of non-current assets, is also called “Property, plant and equipment” (PP&E). They are mainly used in the process of storage, delivery or production. As a firm might have multiple of such items, the accounting law describes fixed assets as objects which purchase value passes a particular level. Any other way, the purchased object can be recognized as an expense. The amount of fixed assets is presented on the balance sheet as an acquire amount subtracted by the value of cumulated depreciation. The main difference between an object, which has to be capitalized or expensed is its lifespan assumption and value. If the purchased, permanent item, is not going to last one accounting period or its value is lower than a certain threshold, it must be considered as an expense in the year of acquisition. Any object which will be used longer than one accounting period and its value is bigger than the level established by the accounting law must be depreciated. Fixed assets are divided into subcategories, such as[2]:
- Buildings
- Fixture and fittings
- Intangible assets
- Land
- Leasehold improvements
- Machinery
- Vehicles
Buildings, fixture and fittings, machinery and vehicles are very similar in terms of depreciation. All of them undergo yearly loss of value throughout their lifespan (from a few years in case of fixture and fittings, up to several dozens in case of buildings). As intangible assets are non-physical assets, which represent entity's legal interest, they undergo the process of amortization, which is the same as process of depreciation, but it refers to intangible assets only. Land is the only type of fixed assets, which is not depreciated due to its unlimited useful life[3].
Leasehold improvements
A leasehold improvement is a redecoration implemented in the rental property in order to adjust it to the particular needs of a tenant. Such improvements include painting, changing the flooring, removing or adding new walls, customizing the lighting etc. The changes may be covered by the landlord, in order to increase the potential of the real estate or by the tenant. In most cases, the useful economic life of the improvements is estimated at 5-10 years[4].
Examples of Gross fixed assets
- Land and buildings: Land and buildings are one of the most common forms of gross fixed asset. These are tangible assets that are held by a business for either use in the production of goods or services, or for the purpose of generating income. Examples include office buildings, factories, warehouses, and retail stores.
- Machinery and equipment: Machinery and equipment are also a form of gross fixed asset. This type of asset is used to produce goods and services, or to generate income. Examples include manufacturing equipment, computers, office equipment, and vehicles.
- Intangible assets: Intangible assets can also be considered as a form of gross fixed asset. These are non-physical assets that are held by a business for either use in the production of goods or services, or for the purpose of generating income. Examples include patents, trademarks, copyrights, and goodwill.
Advantages of Gross fixed assets
Gross fixed assets offer various advantages for companies. These include:
- Increased liquidity: Gross fixed assets are relatively easy to convert into cash, which can provide a company with increased liquidity. This can be beneficial in times of economic hardship, when cash is needed to pay off debts or cover operating expenses.
- Higher returns: Gross fixed assets can generate higher returns than other investments, such as stocks or bonds. This can be especially beneficial for companies looking to maximize their profits.
- Tax benefits: Some fixed assets can generate tax benefits for companies, such as depreciation deductions. This can help to reduce tax liabilities and increase net income.
- Asset protection: Gross fixed assets can provide a level of protection against downturns in the economy. For example, if the market value of a company’s assets falls, their fixed assets can provide a cushion against losses.
Limitations of Gross fixed assets
Gross fixed assets have certain limitations that need to be taken into account when assessing the profitability of a company. These limitations include:
- Inaccurate measurement of cost: Since gross fixed assets are calculated based on the original cost of the asset, it does not take into account changes in the market value of the asset. This means that the value of the asset can be significantly different from the original cost, making it difficult to accurately measure the cost of the asset.
- Depreciation: Gross fixed assets do not consider the amount of depreciation that has occurred on the asset during its lifespan. This means that the asset could be undervalued if it has depreciated significantly and overvalued if it has not.
- Ignores inflation: Gross fixed assets do not take into account the effect of inflation over the life of the asset. This means that the asset can be overvalued if it has not appreciated in value to keep up with inflation.
- Inability to track changes in usage: Gross fixed assets do not track the changes in the usage of the asset over time. This means that the asset may be overvalued if it is not being used as much as it was originally intended.
- Net Fixed Assets: This refers to the book value of a company's fixed assets minus the accumulated depreciation. This number is usually lower than gross fixed assets since it takes into account the depreciation on the assets.
- Replacement Cost: This is the cost of replacing a fixed asset with a similar asset of equivalent usefulness. It is a more accurate measure of the real value of an asset, as opposed to the historical cost.
- Market Value: This is the current market value of the fixed asset, which may be higher or lower than the replacement cost.
- Salvage Value: This is the estimated value of the asset at the end of its useful life, after all depreciations have been taken into account.
In summary, there are four other approaches to Gross Fixed Assets. These include Net Fixed Assets, Replacement Cost, Market Value, and Salvage Value. Each of these approaches provides a different view of the real value of an asset, which can be used to help assess profitability and make decisions about the future.
Footnotes
- ↑ R. H. Peterson 2002,Accounting for Fixed Assets Second Edition, John Wiley&Sons,Inc., New York, p. 13
- ↑ N. Faussett 2013, Fixed Asset Management: What You Need To Know, SAGE, p. 4
- ↑ N. Faussett 2013, Fixed Asset Management: What You Need To Know, SAGE, p. 4.
- ↑ T. Goodspeed 2014, Accounting for Leasehold Improvements, Seattle, p. 6
References
- Balmer M. J. (2009), Fundamentals of Fixed Asset Accounting, SAGE, p. 9
- Faussett N. (2013), Fixed Asset Management: What You Need To Know, SAGE, p. 4
- Goodspeed T. (2014), Accounting for Leasehold Improvements, Seattle, p. 6
- Irrinki P. (2012), A Study On Fixed Assets ManagementT At Kesoram Cement, Department of Management Studies Gokaraju Rangaraju Institute of Engineering & Technology, p. 3
- Peterson R. H. (2002),Accounting for Fixed Assets Second Edition, John Wiley&Sons,Inc., New York, p. 13
Author: Justyna Piekorz
