The term 'Fixed Assets' is included in the Accounting edition of the Financial Dictionary. Get your copy on Amazon in Kindle, Paperback or Audio edition. Choose your edition here...
Fixed Assets refers to tangible property which are longer term holdings by their very nature. Companies and corporations both own and utilize them in their normal everyday business operations to produce their revenues and profits. They do not typically become converted back to cash or consumed any quicker than in under minimally a year time frame. Many corporations refer to their collective fixed assets as “the plant.” Classic examples of these types of assets include real estate, factories, office space and buildings, furniture, computer equipment, and other operating equipment.
There are longer term assets that do not typically qualify as fixed assets though. Among these are patents and trademarks. They are generally considered to be simply intangible assets on company balance sheets.
Such assets also go by the names of property, plant, and equipment (PP&E). Corporations purchase fixed assets to create and supply services and goods. They might also rent them out to third parties to generate a revenue stream. They could simply deploy them within the company’s own internal organization as well. These often include such tangible assets as office equipment, computers, and laptops, as well as manufacturing equipment and factories. Copyrights, goodwill, patents, and trademark could fall into either the fixed or intangible assets categories, depending on the accounting method favored by the firm.
There are many different types of equipment that fall under the classification of fixed assets. Among these are office buildings and plants, software and computer equipment, land, furniture, vehicles, and machinery. It often helps to consider a real tangible example when discussing difficult concepts like this one. Think about the company Amazing Fruits and Vegetables. They sell and even deliver fresh produce. This makes their delivery vehicles a fixed asset. The firm’s distribution center would also be such a fixed type of asset. Even the parking lot where customers park while they shop the fruits and vegetables stand would be considered a fixed asset.
There are several reasons why it is helpful (and often times even essential) to have reliable information on the assets of a given company. The most important is that it leads to concise and precise financial reporting, as well as a better valuation of a going concern via financial analysis. Investors rely on such reports in order to ascertain the true financial health and real value of a given company. It enables them to make well- informed choices as to whether they should trust the firm enough to loan it money or instead invest in the equity of the corporation. One thing that makes it more confusing for investors is that firms have a choice of acceptable means of recording, depreciating, and disposing of their own assets. It requires qualified analysts who are willing to read the fine print and notes on the financial statements of the company in question in order to accurately determine on what basis the numbers were compiled.
It is an inevitable fact of life that fixed assets will gradually decline in value terminally as they grow older. They do offer long term income generation, which explains why they become expensed differently than do other company items. While tangible assets become subjected to occasional depreciation, intangible assets are subjected instead to amortization. A specific portion of the costs for the asset will be expensed out yearly. The value of the asset will correspondingly diminish alongside the amount of depreciation on the balance sheet of the corporation. The firm is then allowed to match up the cost of the asset in question with the longer term value of the item.
The method that a given firm utilizes to depreciate its assets will change the book value of the firm which is based on the amount they paid for the asset. This will make the equity book value different from the current market value of the asset in question. An exception to all of this depreciation and book value discussion concerns raw real estate. Land cannot be depreciated since it does not become depleted. The exception is when it is natural resource land, as with oil land, gold or silver mining land, or timber lands. These resources are finite and become expended over time and culling.