What is a Fixed Asset?
A fixed asset is anything that has commercial or exchange value, generates revenue, has a life longer than one year and has a physical form.
Example of a Fixed Asset
Let’s assume XYZ Company intends to purchase an office building for $10 million. The building has a physical form, will last longer than a year and generates revenue, making it a fixed asset. When the company executes a legal purchase agreement with the seller, XYZ Company will have a place from which to conduct its business operations, and it will control what happens to the building from that point forward. Thus, XYZ Company acquired a $10 million asset and should reflect this fixed asset on its balance sheet.
According to the Financial Accounting Standards Board, all assets must provide reasonably estimable future economic benefits, must be controlled by the owner and must be the result of a prior event or transaction (such as a purchase).
Companies often record fixed assets on their balance sheets as property, plant and equipment. Like most assets, fixed assets usually lose value as they age, that is, they depreciate (amortization is the term used when referring to intangible assets). The rate at which a company chooses to depreciate its assets may result in a book value that differs from the current market value of the assets.
Why do Fixed Assets matter?
Although fixed assets commonly come to mind when one thinks of assets, not all assets are fixed. Trademarks, patents and goodwill are examples of intangible assets.
Regardless of their physical form, however, information about a company’s assets is a key component of accurate financial reporting, business valuation and thorough financial analysis. Although the Financial Accounting Standards Board, the Securities and Exchange Commission and other regulatory bodies define how and when a company’s assets are reported, companies may employ a variety of accepted methods for recording, depreciating and disposing of assets, which is why analysts must also carefully study the notes to a company’s financial statements.
For more detail about how the Financial Accounting Standards Board defines and governs accounting for assets, go here.
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