Definition and Explanation
Fixed assets, also known as Property, Plant and Equipment, are tangible assets held by an entity for the production or supply of goods and services, for rentals to others, or for administrative purposes.
These assets are expected to be used for more than one accounting period. Fixed assets are generally not considered to be a liquid form of assets unlike current assets. Examples of common types of fixed assets include buildings, land, furniture and fixtures, machines and vehicles.
The term ‘Fixed Asset’ is generally used to describe tangible fixed assets. This means that they have a physical substance unlike intangible assets which have no physical existence such as copyright and trademarks.
Fixed assets are not held for resale but for the production, supply, rental or administrative purposes. Assets that held for resale must be accounted for as inventory rather than fixed asset. So for example, if a company is in the business of selling cars, it must not account for cars held for resale as fixed assets but instead as inventory assets. However, any vehicles other than those held for the purpose of resale may be classified as fixed assets such as delivery trucks and employee cars.
Fixed assets are normally expected to be used for more than one accounting period which is why they are part of Non Current Assets of the entity. Economic benefits from fixed assets are therefore derived in the long term.
In order for fixed assets to be recognized in the financial statements of an entity, the basic criteria for the recognition of assets laid down in the IASB Framework must be met:
- The inflow of economic benefits to entity is probable; and
- The cost/value can be measured reliably.
How much do you know about examples of fixed assets?
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Which of the following are examples of fixed assets?
Cars on display at a showroom.
As cars displayed at a showroom are held for sale in the ordinary course of the business, they are not fixed assets of the company. Instead, cars must be treated as inventory.
Machine installed at a factory.
Since machines are expected to provide economic benefits for more than one accounting period, they are rightfully classified as fixed assets.
Employees with more than one year of service remaining before their retirement.
As employees do not meet the accounting definition of an asset they cannot be considered as fixed assets of an entity as such.