The balance sheet of any company consists of assets, liabilities and the shareholder capital. For the purpose of income tax, it is mandatory for all entities with a certain threshold of income to file their income tax. Assets can be classified as current and non-current assets. Current assets are those that can be liquidated easily. These are resources which a company owns and expects to convert into cast during a financial year. They usually get either sold or consumed during the ordinary course of business. Cash is typically a current asset. Fixed assets and non-current assets are assets of an enterprise that cannot be disposed off quickly in exchange for cash. Usually, fixed assets are assets that a company does not intend to sell over a period of time. There are two types of fixed assets – tangible and intangible. Assets like land, vehicles, furniture, computers, etc. fall under the category of tangible fixed assets. You can physically see them. Assets like copyrights, patents, trademark, custom software, etc. come under the head of intangible fixed assets. Though are fixed assets, you cannot physically pinpoint them. Fixed assets range in size, useful life and purpose. An office chair that costs Rs. 4000.00 is as much a fixed asset as the land a company owns and costs cores of rupees. And a custom software may cost anywhere from a few hundred rupees to lakhs of rupees. Whether they are tangible or intangible, fixed assets can be termed as those assets that an enterprise plans to retain for a long time in order to produce revenues.
While evaluating fixed asset costs, the following terms come in handy.
Acquisition Cost: The total cost of obtaining a fixed asset and putting it in place and in condition for use. This cost represents the value of the asset when it was acquired. The acquisition cost is generally the historical or original cost but may be based on a different valuation for certain types of transactions.
Book Value: The portion of an asset’s historical or original cost not yet depreciated or used. Book value can be calculated by subtracting accumulated depreciation from the historical or original cost of the asset.
Depreciation: An amount charged against the historical cost of an asset representing the loss in value of the original asset as it is used and ages. Depreciation reduces the accounting value of an asset and is accumulated over the estimated life of the asset.
Estimated Cost: Professional (certified) appraisals of the cost of an asset; used in those instances where historical cost records are not available. The estimated cost is determined by inventorying existing assets. When required, the estimated cost will be used as the acquisition cost.
Fair Market Value: The price at which a willing seller would sell something to a willing buyer, neither being under any compulsion to buy or sell. This is the price that would be paid for an item in a condemnation proceeding.
Historical Cost (or Original Cost): The actual amount paid for an asset at the date of acquisition, including any normal costs associated with preparing the asset for use. In the case of most new assets, particularly machinery and equipment, this is the acquisition cost.
Replacement Cost: The estimated cost of acquiring a new equivalent asset. Replacement cost may be approximated through the use of a specific price index. For example, a building constructed in 1970 for Rs. 200,0000 would cost considerably more to rebuild today. Therefore, replacement cost will usually be higher than the original cost. Of course, there are a few examples that are exception to this - notably the price of computers and laptops typically drop year-on-year.
Assigning proper values to fixed assets and controlled items is critical to maintaining accurate accounting records. Depending upon the classification of the asset (land, buildings, equipment, vehicles, or infrastructure), the information required to establish and properly record asset values will come from various departments within the organization.
The Importance of Fixed Asset Management
Fixed assets play a very important part in the overall balance sheet of a company. Apart from payrolls, fixed assets like land, plants and machinery may be one of the largest investments an organization makes. Fixed assets act as the pulse of a business. It is considered as a permanent resource for the business and has a long term value. Fixed asset management is therefore an important task for the business in order to save time and money. The main objective of fixed asset management is to maximize the wealth of the company and to provide the best return to the stake holder. The process of procuring fixed assets, the valuation of fixed assets, the disposal of fixed assets, the legal basis for the disposal of fixed assets, and the security of fixed assets administratively, physically and legally all play a key role in proper management of fixed assets.
Asset Management Consultants
Today, there are quite a few asset management software available that track both fixed and current assets. Again, they range from a very simple, basic asset management solution to complicated and comprehensive software deployed on the cloud. However, they are usually suitable for small companies. Bigger companies usually need a specialist to make sense of all the fixed asset data, and translate it coherently into the balance sheet.
Mismanagement of fixed assets can prove costly. There is the risk of missed opportunities for lucrative tax deductions, as well as the possibility of income tax penalties and interest’s being assessed on the business. In addition, it can cause you to have to restate your financial statements. A good fixed asset management consultant will track and monitor fixed assets, take stock of equipment, vehicles and machinery at multiple locations, improve operational efficiency and maintain proper record of retired, sold, stolen or lost assets as needed by the law. Therefore, it is a prudent choice to outsource fixed asset management to a competent consulting firm in order to keep proper track of their fixed assets, reduce downtime and improve organizational efficiency.