Fixed assets, as opposed to current assets, are those assets with a remaining useful life of over an year. Following the accruals principal, these assets are shown on the balance sheet but their value is depreciated, and treated as an expense in the P & L account for each year of their life.
There are two types of fixed assets:
- Tangible fixed assets
- Intangible fixed assets
Tangible fixed assets include physical assets such as land and buildings and equipment. Long term financial investments are also considered tangible.
The most important intangible fixed asset is goodwill. Other intangibles includes patents, copyrights and trademarks.
In many cases it may be necessary to adjust for the value of intangibles (usually by deducting them from total fixed assets) in order to allow fair comparisons between companies or to to make measures of financial strength (such as gearing) more meaningful. This is because the value of intangibles is often less certain and usually reflects the history of the company.
Depreciation, amortisation and depletion
Although the commonest way of accounting for the limited useful life of a fixed asset is to depreciate it, intangible assets are amortised (essentially the same), and assets whose use can be measured (such as mines) may be depleted.
Assets that do not have a limited life or that keep their value (such as land and investments) may not need to be depreciated, amortised or depleted. If the value of such assets does change, impairment or re-valuation may be necessary. This is how goodwill is treated under IFRS