Assets and Asset Management
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Assets and Asset Management refers to long-lived assets and how these assets are amortized over time.
The Nature of Assets
This section is a summary of information contained in the book Accounting: Text and Cases by Anthony, Reece and Hertenstein.
The definition of what is considered an asset is based on when the benefit from its purchase will be experienced. If the benefits of an acquisition will be experienced in the current period, the costs of the goods or services are an expense. If the purchase will have benefits in future periods, the costs are considered assets in the current period and the expenditures are capitalized. Inventory and pre-paid expenses are assets since they have expected benefits in future periods. Capital Assets or Fixed Assets typically are long-lived and will provide benefits and service for several years.
A capital asset can be thought of as a bundle of services. When a company builds a building or buys a truck, the benefits of the purchase will be experienced over a number of years. The assets is said to be "in service". While the asset is in service, the cost of these services need to be matched to the revenue obtained from its use. The general name for this process is amortization but there are a number of other names used. The portion of the assets costs that are charged to a period are an expense in that period. Eventually, all costs for the assets will be converted to expenses over a period of years.
Types of Long-Lived Assets
The main distinction in the type of assets is between assets that have a physical presence, like a building or vehicle, and assets, like intellectual property, which don't. Tangible Assets refers to the assets that have a physical presence and Intangible Assets refers to items like intellectual property, patents, and other non-physical assets. The common name of the long-lived assets on balance sheets as "property, plant and equipment" but this is often reduced to "fixed assets" simple because it is shorter.
The methods by which an asset is converted to an expense varies with the type of asset, local accounting laws and with corporate policies which are intended to provide consistency across many periods. The following table provides a list of asset types and amortization methods:
| Type of Asset | Amortization Method | |
|---|---|---|
| Tangible Assets | ||
| Land | Not amortized | |
| Plant and equipment | Depreciation | |
| Natural Resources | Depletion | |
| Intangible Assets | ||
| Goodwill | Amortization | |
| Patents, copyrights, etc | Amortization | |
| Leasehold Improvements | Amortization | |
| Deferred Charges | Amortization | |
| Research and Development Costs | Not-capitalized | |
| Marketable Securities | None | |
| Investments | None | |
Purchasing Assets
There are a number of situations where the purchase of a capital assets is treated as a period expense rather than a capital expense that will be amortized over time:
- Small items where the value of the asset is below some threshold are typically expensed in the the period in which they where purchased regardless of how long a life they may have. Hand tools are a good example where the life of the asset may be years but the dollar value of its purchase is not worth recording as an asset. The value threshold is defined by each company and can be vary depending on the size of the organization from a few dollars to several thousand. Small items are included as assets when larger assets are purchased. For example, the capital cost of a new factory will include the cost of the hand tools required to make it operational. However, the eventual replacement of these tools is treated as an expense.
- Betterments or improvements to an asset that increases its value are treated as a capital acquisition. In comparison, a repair - even if it is expensive - that does not add value is treated as a period expense. The difference is the test of increase in value from the work. A repair that extends the useful life of the asset beyond its expected service life can be capitalized. Repairs to a leaky roof would be a period expense. Replacement of an ancient heating-cooling unit could be considered a capital acquisition betterment as it is extending the life of the building.
- Replacements ...
