The Fixed Assets Section of the Balance Sheet

The fixed assets section of the balance sheet is one of the easiest sections to read and understand. This article is written to describe and illustrate some simple examples of the fixed assets section. I am not teaching the reader about the accounting system(s) used for fixed assets or how to calculate depreciation. This article is to help the value investor understand how to read this section of a balance sheet.

I will start by teaching some basic terms used on the balance sheet. From there, I will describe the most basic presentation format and then begin to expand this section so the reader can gain a more in-depth understanding of the fixed assets section.  Finally, I will explain the importance of understanding the corresponding notes associated with fixed assets.

Introduction

The balance sheet is divided into two sides, the ‘Assets’ side and the ‘Liabilities and Equity’ side. The ‘Assets’ side has three major sections. The first is ‘Current Assets’, which includes cash, receivables, and inventory (if interested in learning more about current assets, read An Explanation of Current Assets ). The second section is ‘Fixed Assets’ and the third is called ‘Other Assets’ – mostly intangibles such as rights, patents, and goodwill. This article is written to explain the ‘Fixed Assets’ section of the Assets side of a balance sheet.  The following illustrates a simple formatted ‘Assets Side’ of a Balance Sheet.

                                  XYZ, Inc.
                             Balance Sheet
                                12/31/ZZ
Current Assets                                     $ZZ,ZZZ
Fixed Assets (Netted)                         ZZZ,ZZZ
Other Assets                                            Z,ZZZ
Total Assets                                                       $ZZZ,ZZZ

Notice how the final number for Fixed Assets is just a straightforward summed up number. In general, fixed assets are composed of two numbers. The first is the total acquisition costs of all the fixed assets. The second is the lifetime to date accumulated depreciation. The accumulated depreciation is an offset against acquisition costs. The two numbers are netted to form the Net Fixed Assets or the Fixed Assets (Netted) on the ‘Assets’ side of the balance sheet.

Terminology

The following are terms used with fixed assets and their respective associated definitions:

Fixed Assets – a group of items that are generally expensive and have life expectancies of more than one year. For a more thorough understanding of this term, please read the following: The Definition of Fixed Assets.

Real Estate – in accounting, it is most commonly tied to land. Some companies will include the structures and other improvements on the land in the total value accumulated. Often, real estate is subdivided into the following groups (accounts):

• Land – strictly the cost associated with the purchase of land. In general, the land has no improvements. This term is used instead of ‘Real Estate’ when specifically grouping unimproved land.
• Improvements –this account name includes the cost associated with developing the property, including site clearing, drainage, parking lot grading, curbing, asphalt, concrete, sidewalks, lighting fixtures, access routes, landscaping, fencing, etc.
• Buildings – this account includes the cost of the physical structure for the plant or the office facilities. It often includes storage facilities and warehousing issues (ramps, docks, safety rails)

Property, Plant & Equipment – this group of fixed assets is more commonly seen with manufacturing-based balance sheets. In effect, the ‘Fixed Assets’ section will have this line as a summation of the associated cost tied to purchasing the land, constructing the facility, and installing the associated manufacturing line of equipment, including the warehouse items.

Equipment – this term is more commonly found with contractors, shipyards, site developers, and other heavy equipment-based companies.

Transportation – this term is used for all tractors, trailers, trucks, autos, and other forms of transportation items (aircraft, marine, and rail cars).

Technology – servers, computers, printers, phone systems, etc.

Furniture & Fixtures – office desks, cubicles, artwork, decorations, kitchen items, file storage units, shelving, etc.

Tooling – general tools, generators, compressors, specialized tools (such as dental or electronic equipment)

Accumulated Depreciation – this refers to the lifetime depreciation associated with the existing fixed assets on the balance sheet. It is really just an offset account against the total acquisition costs of fixed assets. This term is often misstated by folks who will use the term depreciation. Depreciation is actually an expense referring to the amount assigned during the current fiscal year and is located on the profit and loss (income statement) of the company. Accumulated Depreciation is the total lifetime to date of all those fiscal years combined and is found only on the balance sheet.

Notice how the above groupings of assets are commonly found in most business operations. The list covers everything from the office to the building.

The next three segments describe the fixed assets section of the ‘Assets’ side of the balance sheet, from the simple format to the more complicated format. As companies grow in size, it is more common to use the simple format to illustrate the total value of the fixed assets of the company.

Simple Format

Very large companies use the simple format of the fixed assets section of the balance sheet. The following is an illustration:

                                                   XYZ, Inc.
                                               Balance Sheet
                                                  12/31/ZZ
Current Assets                                                          $ZZ,ZZZ
Fixed Assets
  Property, Plant & Equipment              ZZZ,ZZZ
  Accumulated Depreciation                 (ZZZ,ZZZ)
  Fixed Assets Netted                                                ZZZ,ZZZ
Other Assets                                                                  Z,ZZZ
Total Assets                                                           $ZZZ,ZZZ

Notice how the ‘Fixed Assets’ section is now four lines of information. A header line, the two data lines of value, and the subtotal line of the two data lines. In all the more detailed formats to follow, only ‘Accumulated Depreciation’ remains as a single offset line of data. Rarely do companies break out the accumulated depreciation into the respective subgroups of ‘Fixed Assets’.

Medium Detailed Format

As the size of the company decreases, the ‘Fixed Assets’ section becomes more detailed to assist the reader in a better understanding of how the company’s fixed assets are arranged. The following is an example of a typical office-based organization:

                                                    XYZ, Inc.
                                                Balance Sheet
                                                    12/31/ZZ
Current Assets                                                        $ZZ,ZZZ
Fixed Assets
  Real Estate                                         ZZZ,ZZZ
  Technology                                           ZZ,ZZZ
  Furniture & Fixtures                             ZZ,ZZZ
  Accumulated Depreciation               (ZZZ,ZZZ)
  Fixed Assets Netted                                              ZZZ,ZZZ
Other Assets                                                                Z,ZZZ
Total Assets                                                        $ZZZ,ZZZ

Notice in this format, the assets are grouped into distinct categories commonly found in the office environment. You would expect technology to be separated from the balance of the office items.

This can be further detailed for other types of service-based organizations. For example, a medical office would have an ‘Equipment’ line inserted after real estate.

Complex Format

Sometimes the small business operations like to break out the fixed assets into their respective divisions of business. The following is an example of how a small fabrication company would break out its respective fixed assets:

                                                          XYZ, Inc.
                                                     Balance Sheet
                                                         12/31/ZZ
Current Assets                                                                                               $ZZ,ZZZ
Fixed Assets:
  Real Estate            Manufacturing        Field Operations         Total
        Land                    $ZZ,ZZZ                  $ZZ,ZZZ            $ZZZ,ZZZ
        Improvements       ZZ,ZZZ                      Z,ZZZ                 ZZ,ZZZ
        Buildings             ZZZ,ZZZ                ZZZ,ZZZ               ZZZ,ZZZ
        Total Real Estate  ZZZ,ZZZ                ZZZ,ZZZ           Z,ZZZ,ZZZ
  Equipment/Tooling    ZZZ,ZZZ                ZZZ,ZZZ              ZZZ,ZZZ
  Transportation                 –                         ZZZ,ZZZ              ZZZ,ZZZ
  Technology                 ZZZ,ZZZ                  ZZ,ZZZ              ZZZ,ZZZ
  Furniture & Fixtures     ZZ,ZZZ                  ZZ,ZZZ                 ZZ.ZZZ
  Sub-Total Division      ZZZ,ZZZ               ZZZ,ZZZ           Z,ZZZ,ZZZ
  Accumulated Depreciation                                                    (ZZZ,ZZZ)
  Fixed Assets Netted                                                                                      ZZZ,ZZZ
Other Assets                                                                                                       Z,ZZZ
Total Assets                                                                                                 $ZZZ,ZZZ

Although more complicated in nature, notice how the reader of this information can better understand the company’s overall business divisions. This is not commonly used, but for those small capital-intensive operations, such as site developers or contractors, you can break out your columns into the respective areas of earnings (road construction, real estate development, or marine operations).

A common misunderstanding for small business owners is that they believe their balance sheet has to conform to some standard. The truth is that the small business owner can prepare his balance sheet in any format he desires so long as it conforms to Generally Accepted Accounting Principles. The formats above are well within those guidelines. The only drawback to the above is how ‘busy’ it looks. Unless the reader is acutely aware of the company’s operations, they may find this format too difficult to understand. The preparer could sum the two divisions or use one line to represent real estate. To help the reader better understand the details, the preparer of the report could use notes in a separate sheet of information to assist the reader in understanding the information provided.

Notes to Financial Statements

In general, it is a good idea to prepare notes for the financial statements to assist the reader in better understanding the respective summed up information provided. A medium-format presentation of ‘Fixed Assets’ could be detailed similarly to the complicated format illustrated above in the notes section of the financial statements.

In addition to a more detailed format, the notes section should provide a more comprehensive report related to the accumulated depreciation line of the ‘Fixed Assets’ section of the balance sheet. Readers of such information will want to know the depreciation cycle(s) (straight line or some other format) and the associated remaining life expectancy of each of the groups of ‘Assets’. 

The following is an example of a notes section related to fixed assets for the University of Virginia:

Fixed Assets and Depreciation

Fixed assets are stated at cost at the date of acquisition or fair market value at the date of donation in the case of gifts. In the case of buildings, the University capitalizes fixed assets that have a value or cost in excess of $50,000 at the date of acquisition and an expected useful life of one or more years. Both the Academic and Medical Center Divisions capitalize moveable equipment at a value or cost of $2,000 or greater and an expected useful life of one or more years. Maintenance or renovation expenditures of $50,000 or more are capitalized only to the extent that such expenditures prolong the life of the asset or otherwise enhance its capacity to render service.

Depreciation of buildings, of improvements other than buildings, and of infrastructure is provided on a straight-line basis over estimated useful lives ranging from ten to fifty years.

Depreciation of equipment and capitalized software is provided on a straight-line basis over estimated useful lives ranging from three to twenty years.

Depreciation of library books is calculated on a straight-line basis over ten years.

Fixed assets financed with debt proceeds are reported when expenditures are incurred. Projects that have not been completed as of the date of the statement of net assets are classified as Construction in Process. Construction period interest cost in excess of earnings associated with the debt proceeds is capitalized as a component of the fixed asset.

Fixed assets, such as roads, parking lots, sidewalks, and other non-building structures and improvements, are capitalized as infrastructure and depreciated accordingly.

In accordance with AICPA Statement of Position 98-1, the University capitalizes computer software developed or obtained for internal use. Capitalization begins at the application development stage, which consists of the design, coding, installation, and testing of the software and interfaces.

Summary – Fixed Assets Section of the Balance Sheet

The ‘Fixed Assets’ section of the ‘Assets’ side of the balance sheet can be formatted in a simple presentation or detailed to the division level. No matter how presented, any reader reviewing this section should read the associated notes if provided. It is important for the small business owner to fully understand the cost of the group’s assets and their respective life expectancy. In addition, understanding the depreciation cycles used is essential in understanding the entire picture of the ‘Fixed Assets’ section of the balance sheet. Act on Knowledge.