Components of fixed assets
Fixed assets are divided into three sub-categories:
Tangible fixed assets
Tangible fixed assets refer to the physical assets of the company: buildings, land, furniture, vehicles, equipment, etc. It also includes all the material investments necessary to create a structure, to optimize and improve production.
As soon as they become part of the company's assets, these physical assets will be depreciated at a rate based on their durability.
This can range from 3 to 10 years. The depreciation rate depends on the nature of the asset. In addition, the representation of fixed assets is crucial for the company's balance sheet. It is therefore important to carry out an inventory and periodic updates of fixed assets.
Intangible fixed assets
These are non-monetary and non-palpable assets. Intangible fixed assets correspond, in this case, to goodwill, leasehold rights and research and development costs. Patents, software, licenses, trademarks and websites are also included in intangible fixed assets.
Amortization of intangible fixed assets lasts on average 5 years. However, the amortization period on goodwill can be up to 10 years since the accounting standard of January 1, 2016.
Financial fixed assets
As the name implies, financial fixed assets are monetary assets. It involves financial holdings, such as shares, bonds and company stock. It also involves the company's debt claims, deposits and guarantees.
Loans granted to employees and collaborators are also included in financial fixed assets. Financial real estate assets do not involve any depreciation, unless they are subject to impairment.
What is its usefulness?
The fixed asset balance sheet is an essential part of the accounting balance sheet that describes what the company owns. It enables the working capital of fixed assets to be accurately evaluated and the balance of the company's financial structure to be determined. Nevertheless, it is important to note that fixed assets vary according to the company's activity.
In production companies, for example, fixed assets represent a significant portion of overall assets, whereas in service companies, fixed assets will not be significant. In addition, the financial fixed asset item occupies an important place in holding companies.
How to calculate fixed assets?
To do the accounting of fixed assets, the total amount of each fixed asset must be determined: intangible, tangible and financial. The fixed assets are calculated by adding these sums together. For example, simply adding up the total of each fixed asset is sufficient to determine the gross fixed assets.
On the other hand, the total fixed assets must be subtracted from the total depreciation and amortization of tangible and intangible assets to determine the net fixed assets. To avoid errors, it is advisable to use dedicated accounting software or to call in a chartered accountant. This way, you can be sure that the calculations are correct.
Is it possible to calculate financial ratios with fixed assets?
When fixed asset data is obtained, it is possible to calculate fixed asset ratios. Among these are:
- Wear rate: this allows you to determine the degree of wear of the equipment and to anticipate possible renewals;
- the financing of fixed assets: highlighting the rate of coverage of fixed assets, this rate gives you the opportunity to check the financial balance of investments;
- capital intensity: it informs you of the importance of the fixed asset item in the balance sheet.
How to control fixed assets?
The control of fixed assets is essential to ensure the sustainability of the company. In this sense, it is important to understand how to evaluate and analyze the fixed assets in order to find the strong points and the weaknesses. In this way, it will be easier to determine the appropriate improvement measures.
The analysis of fixed assets can be established by comparing them with current assets. This will allow you to determine your investment needs. If the current assets are less than the fixed assets, the company may need major investments. On the other hand, it is interesting to compare the evolution of fixed assets over several years. This will help you avoid continued depreciation.
What are the sources of capital funding?
The acquisition of capital assets and the renewal of investments must be financed with stable and sustainable resources.
The first option is to finance fixed assets with the company's own capital. This is done by drawing on the initial contribution or by launching a capital increase.
Bank loans are also part of the options. You can repay the loan either in blocks once the agreed deadline has passed or in fractions. Interest depends on the total amount of the loan.
Leasing can also be an interesting alternative for financing fixed assets. Note that there are real estate leasing and equipment leasing.
What is the difference between current assets and fixed assets?
Fixed assets differ from current assets. Although they are among the elements necessary for the accounting management of a company, these assets have quite distinct specific data. Their differences lie, among other things, in their components as well as in their method of calculation.
In fact, current assets include the company's liquid assets, in this case inventories, trade receivables and prepaid expenses. Fixed assets are assets that are useful to the company over the long term.
Unlike current assets, fixed assets are intended to remain in the company on a long-term basis. Fixed assets will be valued according to their purchase and production costs, as well as their durability.
Some may be subject to amortization, such as tangible and intangible assets. In the event of a disposal of fixed assets, the original value of the items sold is deducted at the accumulated depreciation rates.