Title: What Is a Fixed Asset — A Practical Guide for Accounting, Investors, and Business Managers
Key Takeaways
– Fixed assets (also called capital assets or property, plant, and equipment — PP&E) are long-lived tangible assets a company uses to produce goods or deliver services and are not expected to be sold within a year. Examples: buildings, machinery, vehicles, land, and computer equipment.
– Fixed assets are capitalized on the balance sheet at cost and depreciated over their useful lives (except land). Depreciation spreads the asset’s cost to match revenue periods; impairment write-downs adjust value when recoverable amount falls below book value.
– Acquisition and disposal affect the investing section of the cash-flow statement. Tax reporting of depreciation uses rules often different from accounting depreciation (see IRS Form 4562).
– Investors watch PP&E, capital expenditure (capex), depreciation, impairments, and asset turnover to assess capital intensity, growth investments, and operational efficiency.
What is a Fixed Asset?
A fixed asset is a tangible, long-term resource owned by a business and used in the production of income over multiple reporting periods. Because of its physical nature and multi-period utility, a fixed asset is recorded on the balance sheet as part of PP&E and is not classified as a current asset.
Common examples of fixed assets:
– Buildings and facilities (manufacturing plants, retail stores)
– Machinery and production equipment
– Vehicles used in operations (delivery trucks, service vans)
– Office furniture and computers
– Land (not depreciated)
Example companies with significant fixed assets
– Manufacturing firms (e.g., auto makers, heavy equipment producers) — large plants and production lines.
– Airlines — aircraft and ground-support equipment.
– Utilities and energy companies — power plants, pipelines.
– Retail chains — store properties and distribution centers.
These capital-intensive industries typically have large PP&E balances and high capex.
Understanding Fixed Asset Accounting
Recognition and initial measurement
– Capitalize the purchase if the asset will provide future economic benefits beyond one year and meets the company’s capitalization threshold.
– Initial cost generally includes purchase price, import duties, delivery and installation costs, and costs to bring the asset to usable condition. Financing costs may be capitalized for qualifying assets under accounting standards.
Capitalization threshold
– Companies often set a dollar threshold (e.g., $500 or $5,000) below which items are expensed immediately for administrative practicality.
Subsequent measurement
– After recognition, fixed assets are carried at cost less accumulated depreciation and any impairment losses (under US GAAP). Under IFRS, revaluation to fair value is permitted for classes of assets (IAS 16).
Depreciation: what you need to know
Why depreciate?
– Depreciation allocates the cost of a tangible fixed asset to the periods that benefit from its use, matching expense with revenue.
Key inputs for depreciation
– Cost (less any residual/salvage value)
– Useful life (estimate of service period)
– Depreciation method
Common depreciation methods
– Straight-line: (Cost − Salvage) / Useful life. Easiest and most common.
– Declining-balance (e.g., double-declining): accelerated methods that expense more in earlier years.
– Units-of-production: expense based on usage (e.g., hours, miles, units produced).
– Sum-of-the-years’-digits: another accelerated method.
Simple example (straight-line)
– Cost: $50,000; Salvage value: $5,000; Useful life: 5 years.
– Annual depreciation = (50,000 − 5,000) / 5 = $9,000 per year.
Important points
– Land is not depreciated because it typically does not wear out.
– Book value (cost − accumulated depreciation) often differs from market (fair) value.
– Component accounting: significant parts of an asset with different useful lives may be recorded and depreciated separately (common under IFRS; allowed under US GAAP).
– Depreciation for financial reporting vs tax depreciation: rules and lives often differ (affects deferred tax accounting).
Impairment
– If events or changes indicate the carrying amount may not be recoverable, perform an impairment test. Under US GAAP (ASC 360) you first test recoverability (undiscounted cash flows) and, if impaired, measure loss as the difference between carrying amount and fair value. IFRS uses a different approach and allows revaluation in some cases (IAS 36, IAS 16).
– Impairments are recorded as a loss on the income statement and reduce the asset’s carrying value.
How Fixed Assets Are Acquired and Disposed
Acquisition
– Record capital expenditures (capex) at cost. Capitalizing increases PP&E and is reflected as a cash outflow in cash flow from investing activities.
– Example entries: Debit PP&E (asset) and credit Cash/Accounts Payable.
Disposal
– When an asset is sold or retired, remove cost and accumulated depreciation from the books; recognize gain or loss (proceeds − net book value).
– Example entries: Debit Cash (proceeds) and Accumulated Depreciation; credit PP&E and record Gain/Loss on disposal.
– If assets are retired with no proceeds, write off the net book value as a loss.
Impairment and write-off
– Record impairment losses as needed; if the asset becomes obsolete or reaches the end of useful life with no salvage, write it off.
Where these flows show up in financial statements
– Balance sheet: PP&E (gross), accumulated depreciation (contra-asset), net PP&E.
– Income statement: Depreciation expense and impairment losses.
– Cash flow statement: Capex and proceeds from sale appear in cash flows from investing activities.
Practical Steps — Accounting Checklist for Fixed Assets
A. Before acquisition
1. Decide treatment: capitalize vs expense (apply capitalization policy).
2. Estimate useful life and residual value ranges.
3. Determine whether componentization applies.
B. At acquisition
1. Record initial cost: purchase price + direct costs to bring into use.
2. Assign asset category and useful life.
3. Tag asset (physical asset tagging and register entry).
4. Record capex in accounting system and note cash outflow (investing activities).
C. Ongoing accounting
1. Select and apply depreciation method. Be consistent; disclose changes.
2. Record periodic depreciation entries.
3. Maintain asset register with cost, accumulated depreciation, useful life, location, and custodian.
4. Monitor for indicators of impairment (market drops, technological obsolescence, physical damage).
5. Reconcile fixed asset ledger to general ledger and financial statement PP&E balances each period.
D. Disposal and impairment
1. Calculate net book value (cost − accumulated depreciation − impairment).
2. Record sale/retirement and recognize gain or loss.
3. Remove asset from register and update disposals log.
E. Tax and disclosure
1. Prepare tax depreciation entries per tax rules (IRS Form 4562 in the U.S.).
2. Disclose accounting policies, useful lives, depreciation methods, and impairment losses in financial statement notes.
Fast Fact
– Land is a fixed asset that is not depreciated. Improvements to land (paving, fencing) may be depreciable.
Why Investors Should Care About a Company’s Fixed Assets
– Capital intensity and growth: Large capex can indicate expansion and future revenue growth, but also larger cash outflows and financing needs.
– Profitability and efficiency: Ratios such as asset turnover (Revenue / Average PP&E) and return on assets (ROA) help assess how effectively assets are used.
– Earnings quality: High depreciation or impairment charges can materially affect earnings. Changes in useful lives or revaluations can change reported profit.
– Maintenance vs growth capex: Distinguish spending to maintain operations from spending to grow capacity — the latter supports revenue expansion.
– Risks: Aging assets, inadequate maintenance, or technological obsolescence can lead to higher future costs or impairments.
Practical analysis steps for investors
1. Review trend in gross PP&E and net PP&E over several years.
2. Compare capex and depreciation: a rising gap (capex > depreciation) suggests growth investment.
3. Check cash flows: look at cash used for investing activities and how capex is financed.
4. Watch impairment charges and changes in asset useful lives or salvage values.
5. Calculate asset turnover and compare to peers/industry norms.
6. Read footnotes for accounting policies, capital commitments, and impairment details.
Other Types of Noncurrent Assets
– Long-term investments (equity stakes, bonds held to maturity)
– Intangible assets (goodwill, patents, trademarks) — amortized if finite-lived; tested for impairment if indefinite-lived
– Deferred tax assets and deferred charges
– Right-of-use assets (leased assets recognized under lease accounting standards like ASC 842 / IFRS 16)
Is a Car a Fixed Asset?
– It depends on use. A car owned by the business and used to generate business income (delivery truck, sales rep vehicle) is a fixed asset and capitalized and depreciated. A personal vehicle used by an employee for commuting is not a company fixed asset and should not be on the corporate balance sheet.
– For tax purposes, business use percentage and deductible depreciation may be subject to rules, limits, and documentation requirements (e.g., mileage logs, Form 4562 in the U.S.).
The Bottom Line
Fixed assets are long-lived tangible assets central to many companies’ operations. Proper accounting—capitalization, depreciation, impairment testing, and disposal—ensures financial statements reflect the economic use and decline in value of these assets. Investors and managers should track capex, depreciation, impairments, and asset efficiency metrics to evaluate financial health, growth strategy, and operational performance.
Primary sources and further reading
– Investopedia: Fixed Asset overview (source material)
– Internal Revenue Service: About Form 4562, Depreciation and Amortization (IRS.gov)
– RSM US LLP: “US GAAP vs. IFRS: Impairment of Long-Lived Assets”
– FASB ASC 360 — Property, Plant, and Equipment (impairment guidance under US GAAP)
– IAS 16 — Property, Plant and Equipment; IAS 36 — Impairment of Assets (IFRS guidance)
If you’d like, I can:
– Create a ready-to-use fixed-asset register template (Excel-friendly) with depreciation schedules.
– Walk through a worked example journal entry set for acquisition, depreciation entries, and disposal.
– Help you calculate asset turnover, capex-to-sales, and other KPIs for a specific company using its financial statements.