1. FIXED ASSETS - DEFINITION AND CHARACTERISTICS

Transcription

1 1. FIXED ASSETS - DEFINITION AND CHARACTERISTICS Fixed asses represen a par of he business asses of he company and is long-erm propery, which canno be easily liquidaed (convered ino cash). Their characerisics are: 1. Their service period is longer han one year,. Their urnover coefficien is less han one, 3. They are gradually consumed during heir service period, and 4. Only heir depreciable value is allocaed o a new produc. The following iems are he examples of general caegories of fixed asses: 1. Buildings,. Compuer equipmen, 3. Compuer sofware, 4. Land, 5. Machinery, 6. Perennial plans 7. Vehicles, 8. Paens, 9. Means of ranspor,. Licenses, ec.. CLASSIFICATION OF FIXED ASSETS The mos commonly used crieria for he classificaion of fixed asses are: 1. he sae of asses and heir degree of usabiliy,. heir form, 3. source of he supply. Depending on he sae of he asses and heir degree of usabiliy, fixed asses can be: 1. In preparaion (i.e. under consrucion, assembly) - These are ongoing invesmens, where fixed asses are prepared for heir fuure funcions;. In funcion - Their work enables he execuion of he company business asks; 3. Ou of use - Asses ha are no used emporarily for cerain reasons; 4. Unusable fixed asses - Asses ha are fully depreciaed and can no longer be used for he purpose for which hey were purchased. According o he form of fixed asses, hey are divided ino: 1. Tangible asses - physical iems wih a clear purchase value used by a business o produce goods and services (furniure, compuers, machinery, ec.);. Inangible asses are non-physical iems which help a business generae revenue (paens, copyrighs, concessions and rademarks);

2 3. Cash asses - par of fixed asses ha are formed under special circumsances and relaed o fixed asses, such as: allocaed funds for invesmens in fixed asses, depreciaion cash asses, cash colleced from he sale of fixed asses or insurance organizaions for incurred damages on fixed asses, ec. Depending on he source of he supply, fixed asses are classified as hose obained from: 1. own sources (capial, reserves, depreciaion fund and funds obained by sale of securiies),. borrowed sources (loans). 3. VALUES OF FIXED ASSETS A fixed asse has corresponding value. Basically, he value of a fixed asse represens is price ha is used for is recording and racking in he business books of he company. Fixed asses are recorded by: 1. heir book value,. heir depreciaed value, 3. heir ne book value. The book value is he value a which a fixed asse is purchased. This value is mainly used for recording and racking of fixed asses. Is calculaion depends on he way in which fixed asses are obained. There are hree usual ways in which fixed asses are obained: 1. They can be purchased from a supplier,. They can be produced by he company iself 3. They can be donaed If a fixed asse is purchased from a supplier, hen he book value consiss of invoice value and he coss of acquisiion. Book value = invoice value + coss of acquisiion The invoice value is he price of a fixed asse ha is indicaed in he invoice of he supplier from whom he asse was purchased. Having in mind he fac ha large number of suppliers offers a discoun for advance paymen, he invoice value can be gross and ne. The gross invoice value is he full price of a fixed asse wihou a discoun. The ne invoice value is a gross invoice value reduced by a discoun. The coss of acquisiion are all coss relaed o he purchase of fixed asses and coss required o pu hem ino use or, in oher words, all coss incurred from he momen when a fixed asse is purchased from a supplier o he momen when i is pu ino use. These coss include: delivery coss, handling charges, forwarding charges, ranspor charges, loading charges, cusoms duies and axes, coss of raining personnel for he use of a fixed asse, ec. Example: Company "A" purchased machine from he supplier for 50,000 euros. The ranspor coss are paid,000 euros and he insallaion coss 5,000 euros. Calculae he book value of he machine. Book value = invoice value + coss of acquisiion = 50,000 +, ,000 = 65,000 If a fixed asse is produced by a company iself, hen he calculaion of he book value consiss of wo seps. In he firs sep all cos incurred during he producion of a fixed

3 asse have o be summed in order o deermine he cos price. Afer ha, he cos price should be compared wih he curren marke price of such a fixed asse and he lower value should be used as he book value, because he upper limi of he book value is he price of he asse formed a he marke. All coss above ha limi are he resul of a company s miscalculaion ha i can save some money by producing a fixed asse by iself. They should no be incorporaed in he book value because hey are he resul of subjecive facors. In he case when a company receives a fixed asse from i.e. long-sanding parners free of charge or, in oher words, as a presen, he basis for calculaion of he book value is he marke price of a used fixed asse wih a similar degree of wear and ear. Then, he coss of acquisiion should be added o he basis obained in his way in order o calculae he book value. The nex fixed asse value ha is used for recording in business books is depreciaed value. This is he wrien off value of fixed asse during is previous usage. Finally, here is he ne book value of fixed asses. This value represens he acual value of he fixed asse a a paricular poin in ime. I is a non-depreciaed porion of fixed asses. I is calculaed when he book value is reduced by he oal amoun of depreciaion calculaed up o ha specific momen. Ne book value = Book value Accumulaed depreciaed value 4. DEPRECIATION DEFINITION AND ECONOMIC ASPECTS Calculaion of fixed asse expendiure and allocaion of is consumpion value on he generaed oupu (producs, services) is realized hrough depreciaion. Depreciaion is defined as a financial expression of fixed asses consumpion in he process of reproducion. Oherwise, depreciaion can be observed in wo ways as a: 1. cos of fixed asses, and. source of invesmen financing. On he one hand, depreciaion reflecs he expendiure of fixed asses in he reproducion process, and, on he oher, calculaed depreciaion is no paid o anyone ouside he company, bu hese financial asses are ransferred o he depreciaion fund. The depreciaion fund is used for he replacemen of he exising worn-ou asses and purchase of new fixed asses, mainenance of asses, repairs and for oher purposes. In his respec, we disinguish beween: 1. simple reproducion of fixed asses,. expanded reproducion of fixed asses. If he depreciaion fund is used exclusively for he replacemen of worn-ou fixed asses, hen i is a simple reproducion. On he oher hand, if he depreciaion fund is used no only for he replacemen of worn-ou fixed asses, bu also for he purchase of new fixed asses (aimed a capaciy expansion), hen such company has expanded reproducion of fixed asses. 5. DEPRECIATION CALCULATION ELEMENTS

4 The basic elemens for he calculaion of depreciaion are: 1. depreciaion basis,. service period (), 3. generaed oupu ( Q). The basis for depreciaion calculaion is he book value, because i should be depreciaed during he service period. The service period is he period in which he fixed asse should serve is purpose. A correc esimae of he service period ensures he objeciviy of he depreciaion calculaion. I depends on many objecive and subjecive facors such as: he ype of fixed asse, he qualiy of maerials, he naure of echnological process, he inensiy of use, he way of handling and mainenance, qualiy of fixed asse and he skill of he fixed asse user. When a company can esimae generaed oupu of fixed asse usage in service period, hen, insead of he ime dimension, he generaed oupu can be used as an elemen for he depreciaion calculaion. In cerain circumsances, he expeced oupu can be known in advance or naurally given, like he quaniy of ore in some ore deposi. In his case, he depreciaion calculaion is based on he calculaion of he depreciaion amoun per uni of oupu. 6. METHODS OF DEPRECIATION CALCULATION Depending on he elemens used for calculaion, he wo major groups of depreciaion mehods approved by he inernaional accouning sandards are: 1. ime based mehods,. funcional mehod. The saring poin for he calculaion of depreciaion using he ime based mehods is he service period of fixed asses. The calculaed depreciaion does no depend on he generaed oupu. These mehods are based on he calculaion of he depreciaion rae, which represens a percenage of he book value ha is allocaed in he depreciaion fund every year during he service period. Depending on he dynamics of he depreciaion rae over he service period, here are he following basic ypes of depreciaion mehods based on ime: 1. sraigh-line mehod,. degressive mehod, 3. acceleraed mehod. Sraigh-line mehod implies ha he depreciaion raes are he same every year or in oher words, he equal amoun of depreciaion is allocaed in he depreciaion fund every year during he service period regardless of he inensiy of use or spending of he given asse. In his case, he depreciaion rae is calculaed as follows: depeciaion rae = 0% In he nex sep, on he basis of he depreciaion rae, he annual depreciaion is calculaed as a percenage of he book value. annual depreciaion = book value depreciaion rae 0

5 Example: Perform a depreciaion calculaion machine using he sraigh-line mehod, if he invoice value is 150,000 euros, he ranspor coss are 30,000 euros, insallaion coss are 0,000 euros and he service period is 8 years. Book value = invoice value + coss of acquisiion = 150, ,000 +0,000 = 00,000 = 8 depeciaion rae = 0% = 0% = 1.5% 8 book value depreciaion rae annual depreciaion = = 0 00, = 5,000 Book value Depreciaion Annual Accumulaed rae depreciaion depreciaion Ne book value 1 00, % 5,000 5, ,000 00, % 5,000 50, , , % 5,000 75,000 15, , % 5,000 0,000 0, , % 5,000 15,000 75, , % 5, ,000 50, , % 5, ,000 5, , % 5,000 00,000 0 The applicaion of his mehod enables he direc calculaion of he ne book value for each year of service period using he model: ne book value z = book value where z is he specific year during he service period. book value z The mehod is widely used in pracice because of is simpliciy. In addiion, he advanage of his mehod is ha i conribues o price sabiliy and enables he formulaion and implemenaion of a long-erm sable business policy of he company. The disadvanage ha is usually cied is he discrepancy in acual spending and he calculaed depreciaion. The degressive mehod implies ha he depreciaion raes and herefore he annual depreciaion are reduced year by year. Supporers of his mehod sar from he assumpion ha he fixed asse in he firs years of use is new and able o produce higher oupu and herefore he calculaed depreciaion is higher. As ime passes, fixed asse becomes obsolee and he producion possibiliies are decreasing, so i is normal ha he annual depreciaion is decreasing, oo. The depreciaion rae is calculaed using he model: (z 1) depreciaion rae z = 0 [( ) z ( ) ] The annual depreciaion is calculaed as a percenage of he book value for each year separaely, because depreciaion rae is decreasing over he period. Example: By applying a ime degressive mehod, calculae he depreciaion of equipmen, whose book value is 0,000 euros and he service period is years. Book value = 0,000

6 = (1 1) depreciaion rae 1 = 0 [( ) = 0 [ ] = 19% ( 1) depreciaion rae = 0 [( ) = 0 [ ] = 17% (3 1) depreciaion rae 3 = 0 [( ) = 0 [ ] = 15% (4 1) depreciaion rae 4 = 0 [( ) = 0 [ ] = 13% (5 1) depreciaion rae 5 = 0 [( ) = 0 [ ] = 11% (6 1) depreciaion rae 6 = 0 [( ) = 0 [ ] = 9% (7 1) depreciaion rae 7 = 0 [( ) = 0 [ ] = 7% (8 1) depreciaion rae 8 = 0 [( ) = 0 [ ] = 5% (9 1) depreciaion rae 9 = 0 [( ) = 0 [ ] = 3% ( 1) depreciaion rae = 0 [( ) = 0 [ ] = 1 ( 1 ] = 0 [( ( 9 ] ( ] = 0 [( 9 ( 8 ] ( 3 ] = 0 [( 8 ( 7 ] ( 4 ] = 0 [( 7 ( 6 ] ( 5 ] = 0 [( 6 ( 5 ] ( 6 ] = 0 [( 5 ( 4 ] ( 7 ] = 0 [( 4 ( 3 ] ( 8 ] = 0 [( 3 ( ] ( 9 ] = 0 [( ( 1 ] ( ) ] = 0 [( 1 ) ( 0 ) ]

7 Book value Depreciaion Annual Accumulaed rae depreciaion depreciaion Ne book value 1 0, ,800 3,800 16,00 0, ,400 7,00 1, , ,000,00 9, ,000 13,600 1,800 7,00 5 0,000 11,00 15,000 5, , ,800 16,800 3,00 7 0, ,400 18,00 1, , ,000 19, , , , ,000 0 Wihin his mehod, he ne book value of fixed asse for a cerain year is calculaed using he model: z ne book value z = book value ( ) The acceleraed mehod implies ha he depreciaion raes and herefore he annual depreciaion are increased year by year. Supporers of his mehod sar from he assumpion ha he fixed asse in he firs years of use is less consumed because i is operaed a less han full capaciy, so producion of oupu is lower and herefore he calculaed annual depreciaion is also low. As ime passes, he fixed asse is worked ou and he producion possibiliies are increasing, so he annual depreciaion is increasing, oo. The depreciaion rae is calculaed using he following model: depreciaion rae z = 0 [( z ) ( z 1 ) ] The annual depreciaion is calculaed as a percenage of he book value for each year separaely, because depreciaion rae is increasing over he period. Example: By applying a ime acceleraed mehod, calculae he depreciaion of equipmen, whose book value is 0,000 euros and he service period is years. Book value = 0,000 = depreciaion rae 1 = 0 [( 1 = 1% depreciaion rae = 0 [( = 3% depreciaion rae 3 = 0 [( 3 = 5% ( 1 1 ] = 0 [( 1 ( 0 ] = 0 [ ] ( 1 ] = 0 [( 4 ( 1 ] = 0 [ ] ( 3 1 ] = 0 [( 3 ( ] = 0 [ ]

8 depreciaion rae 4 = 0 [( 4 ( 4 1 ] = 0 [( 4 ( 3 ] = 0 [ ] = 7% depreciaion rae 5 = 0 [( 5 = 9% depreciaion rae 6 = 0 [( 6 = 11% depreciaion rae 7 = 0 [( 7 = 13% depreciaion rae 8 = 0 [( 8 = 15% depreciaion rae 9 = 0 [( 9 = 17% ( 5 1 ] = 0 [( 5 ( 4 ] = 0 [ ] ( 6 1 ] = 0 [( 6 ( 5 ] = 0 [ ] ( 7 1 ] = 0 [( 7 ( 6 ] = 0 [ ] ( 8 1 ] = 0 [( 8 ( 7 ] = 0 [ ] ( 9 1 ] = 0 [( 9 ( 8 ] = 0 [ ] depreciaion rae = 0 [( ) ( 1 ) ] = 0 [( ) ( 9 ] ) = 0 [ ] = 19% Book value Depreciaion Annual Accumulaed rae depreciaion depreciaion Ne book value 1 0, ,800 0, ,00 3 0, ,000 1,800 18,00 4 0, ,400 3,00 16, , ,800 5,000 15, ,000 11,00 7,00 1, ,000 13,600 9,800,00 8 0, ,000 1,800 7,00 9 0, ,400 16,00 3,800 0, ,800 0,000 0 According o his mehod, he ne book value of a fixed asse for a paricular year is calculaed using he following model: ne book value z = book value book value ( z ) The saring poin for calculaion of depreciaion using he funcional mehod is he generaed oupu. This mehod is based on he calculaion of he depreciaion quoa, which represens an amoun of he book value ha is allocaed in he depreciaion fund for each oupu uni. The depreciaion quoa is calculaed using he model:

9 book value depreciaion quoa = ΣQ The annual depreciaion is calculaed by muliplying he depreciaion quoa by he annual producion volume (Qg). annual depreciaion = depreciaion quoa Qg Example: Company "S" purchased a freigh vehicle whose book value amouns o 0,000 euros and he service period is 5 years. I is esimaed ha he vehicle will pass 50,000 km during he service period, as follows: I year,000 km, II year 1,000 km, III year 8,000 km, IV year 9,000 km and V year 11,000 km. Perform a calculaion of he depreciaion of a freigh vehicle using he funcional mehod. Book value = 0,000 = 5 Q = 50,000 km depreciaion quoa = book value ΣQ = 0,000 50,000 = Book Depreciaion Annual Accumulaed Ne book Qg value quoa depreciaion depreciaion value 1 0,000,000 0,000 0,000 80,000 0,000 1,000 4,000 44,000 56, ,000 8,000 16,000 60,000 40, ,000 9,000 18,000 78,000, ,000 11,000,000 0,000 0 The advanage of ime based mehods is he fac ha hey ensure obaining sufficien funds for he purchase of new asses and replacemen of worn-ou asses a he end of heir service period, and he disadvanage is he discrepancy beween calculaion of depreciaion and he real wear. On he oher hand, he advanage of he funcional mehod is an objecive calculaion of depreciaion, which follows he real wear of fixed asses and disadvanage is he fac ha if a fixed asse is used insufficienly during he service period, a company may experience a siuaion ha a he end of he service period here are no sufficien funds in he depreciaion fund o purchase a new asse in order o replace he worn ou one. 7. RESIDUAL VALUE OF FIXED ASSETS The presened depreciaion mehods did no ake ino accoun he fac ha fixed asses usually have a cerain value or, in oher words, hey are no fully depreciaed afer expiry of he service period. In ha sense, he residual value is he value ha a fixed asse can have afer he expiry of he service period. Therefore, he residual value needs o be esimaed and aken ino accoun in deermining he depreciaion rae and depreciaion quoa. By including he residual value, he model for calculaing he depreciaion rae changes o: depreciaion rae = book value residual value book value 0

10 Example: Company "B" purchased a machine for 130,000 euros. Is service period is 6 years. The supplier approved a rebae of % for an advance paymen. Unil he dae of puing he machine ino operaion, he company had he following coss: ranspor coss 15,000 euros, insallaion coss,000 euros and coss of maerial needed for insallaion 3,000 euros. The company paid he machine 3 days before delivery. I is esimaed ha he machine will have a residual value of 15% of NVOS afer he expiry of he service period. Perform a depreciaion calculaion for he machine. Invoice value = 130,000 Rebae = % of invoice value = 13,000 Book value = invoice value + coss of acquisiion = (130,000 13,000) + 15,000 +, ,000 = 145,000 = 6 Residual value = 15% of book value = 1,750 book value residual value depreciaion rae = 0 = book value = 14.17% annual depreciaion = book value depreciaion rae 0 = 145,000 1, , , = 0, Book value Depreciaion Annual Accumulaed rae depreciaion depreciaion Ne book value 1 145,000 14,17% 0, , , ,000 14,17% 0, , , ,000 14,17% 0, , , ,000 14,17% 0, , , ,000 14,17% 0,546.5,73.5 4, ,000 14,17% 0, ,79.0 1,71.0 Also, he model for calculaing he depreciaion quoa changes o: depreciaion quoa = boobook value residual value ΣQ Example: Company "B" purchased a machine for 500,000 euros. The supplier approved a rebae of 15% for an advance paymen. In addiion, he company also had he following expendiures: ranspor coss of 0,000 euros, cusoms duies coss 3,000 euros, annual insurance premiums of 5,000 euros, rial work coss 7,000 euros and oher adminisraive coss 6,000 euros. The service period of he equipmen is 7 years. I is esimaed ha 70,000 unis of producs will be produced during he service period wih uniform annual producion and ha, he equipmen will have a residual value of 5% of book value afer he expiry of he service period. The company paid he equipmen hree days afer he delivery. Perform he depreciaion calculaion of equipmen using a funcional mehod. Book value = invoice value + acquisiion coss = 500, , , ,000 = 558,000 = 7

11 ΣQ = 70,000 Qg = 70,000 / 7 =,000 Residual value = 5% of book value = 139,500 depreciaion quoa = book value residual value ΣQ = 558, ,500 70,000 = 5,9786 Book Depreciaion Annual Accumulaed Ne book Qg value quoa depreciaion depreciaion value 1 558, ,000 59,786 59, ,14 558, ,000 59, ,57 438, , ,000 59, , , , ,000 59,786 39, , , ,000 59,786 98,930 59, , ,000 59, , , , ,000 59, ,50 139, REVALUATION OF FIXED ASETS VALUE In marke condiions, frequen changes in he marke value of fixed asses are usual. This is especially rue in unsable economies characerized by price flucuaions. Afer a cerain ime, he book value does no correspond o he marke price. In such circumsances, companies perform consan adjusmen of he book value recorded in he business books wih prices esablished on he marke. This procedure is called revaluaion. I is essenially a re-deerminaion of he value of fixed asses. Revaluaion goals: 1. real expression of he company s asse value,. objecive calculaion of fixed asses expendiures, 3. real expression of business resuls. These goals are inerdependen and linked o one anoher. The real expression of he company s asse value implies real represenaion of he book value as a basis for he depreciaion calculaion. The real represenaion of he book value enables an objecive calculaion of depreciaion as a par of he oal expendiures. The objecive calculaion of he oal expendiures furher enables a realisic expression of business resuls. The mos commonly used mehods of revaluaion are: 1. esimaion mehod,. coefficien mehod. The esimaion mehod involves formaion of appropriae eam of expers in he company ha deermines he marke price for each asse and according o ha adjuss is book value. The advanage of his mehod is he objecive adjusmen of he values of he fixed asses according o changes in marke prices. On he oher hand, he main disadvanage of his mehod is ha i can be raionally applied in companies wih a small number of fixed asses. In larger companies, however, wih a large number of fixed asses, he applicaion of his mehod is hampered. The esimaion would las for a long ime and cause excessive coss, which in some cases exceeds he benefis of revaluaion.

12 Example: Company "A" purchased a machine whose invoiced value amouns o 76,000 euros. Insallaion coss amoun o 15,000 euros and he cos of raining saff o use he machine is 5,000 euros. The service period of he machine is 8 years. I is esimaed ha he machine will have a residual value of 3,000 euros afer expiraion of service period. In he sevenh year here was an increase in prices, so he price of he given machine increased o 1,400. Calculae machine depreciaion using a sraigh-line mehod. Book value = invoice value + acquisiion coss = 76, , ,000 = 96,000 = 8 Residual value = 3,000 Revaluaion coefficien = 1,400 96,000 = 1.15 book value residual value depreciaion rae = 0 = book value = 8.33% annual depreciaion = book value depreciaion rae 0 = 96,000 3,000 96, , = 7, Book value Depreciaion Annual Accumulaed rae depreciaion depreciaion Ne book value 1 96, % 7, , , , % 7, , , , % 7, , , , % 7, , , , % 7, , , ,000 1, % 7, , , , ,019. *1,15 55,.1 7 1, % 9, , , , % 9, , ,89.5 Residual value * Revaluaion coefficien = 3,000 * 1,15 = 36,800 Using he coefficien mehod he new book value is deermined by applying he appropriae revaluaion coefficiens o he exising (recorded) book value. The advanage of he coefficien mehod is a simple and raional applicaion (hey insure low coss and hey are no ime-consuming) and is disadvanage is insufficien objeciviy because he same coefficien is applied o he whole group of fixed asses, alhough heir prices have changed o a differen exen. Example: Company "X" purchased he machine for 1,000 euros. The supplier offered 0% rebae of for an advance paymen. Transpor coss were paid 16,000 euros, insallaion coss 8,000 euros and he cos of maerials needed for insallaion is 4,000 euros. The service period of he machine is 9 years and i is esimaed ha afer he expiraion of his period, machines will have a residual value of 16,000 euros. The machine was paid wo days before delivery. In he hird year, he machine did no work. In he fourh year, prices rose by 15%. Afer ha, in he sixh year prices rose again, by 0%. Calculae machine depreciaion using a sraigh-line mehod.

13 Book value = invoice value + acquisiion coss = (1,000 -,000) + 16, , ,000 = 116,000 Residual value = 16,000 = Revaluaion coefficien = = Revaluaion coefficien 5 = = 1. 0 book value residual value depreciaion rae = 0 = book value = 9.58% annual depreciaion = book value depreciaion rae 0 = 116,000 16, , , = 11, Book value Depreciaion Annual Accumulaed rae depreciaion depreciaion Ne book value 1 116, % 11, ,11.8 4, % 11,11.8 1,779.7,5.6 5, , , % 1, , , % 1, , , * % 1,779.7 *1. 15, ,898.5 *1. 76, ,501.5 *1. 83, % 15, , , % 15, , , % 15, , , % 15, ,01.1,058.9 Residual value * Revaluaion coefficien * Revaluaion coefficien5 = 16,000 * 1.15 *1. =,080