Fixed Assets Addition Vs Exchange of Fixed Assets
Fixed Asset Addition
Fixed Asset Addition is the fixed asset that company purchase or builds in the accounting period. For new purchases, they must be included in the financial statement when risk and rewards are transferred to the company.
Fixed addition can be found in the note of financial statement in the fixed asset section. In the fixed asset movement, we will be able to see the total amount of fixed acquire during the financial year.
Accounting for Fixed Asset Addition
There are two methods by which the company can obtain fixed assets, direct acquisition, and self-construct.
Fixed Asset Acquisition
Fixed Asset acquisition is the most common method to obtain assets as we cannot build everything ourselves. The accounting record is very simple, as we recognize fixed assets when the risk and rewards are transferred from the supplier. Risk and rewards are transferred along with the obligation (liability) to make payment to the supplier. The company needs to recognize even the fixed assets are not being used yet.
|Cash or Accounts Payable||XXXX|
Cost to Be Included
Beside purchasing price, the company may need to pay other costs in order to get fixed asset. Any costs, which necessary to make fixed assets ready to use, are capitalized as part of fixed asset costs. These costs include:
- Shipping cost
- Custom and Import Duty
- Installation Fee
- Professional and legal fee required to set up fixed asset
- Any material use to test the machine during the setup process. It is necessary to test the machine before put it to work.
Self-Constructed Fixed Asset
A self-constructed Fixed Asset is an asset that the company has build under its control. It means the company builds the entire facility of a fixed asset. It is most common for the building and some infrastructures. The construction which company subcontract to other company is not considered as a self-constructed asset.
All the costs must record into work in progress (Other Asset) during the construction. These costs will be reclassed to fixed when construction finishes. The construction finished when the fixed asset is ready to use. They are considered as ready to use when the intended purposes are met.
|Work in Progress||XXXX|
Cost to be included:
It is very hard to sum all costs of the construction, so company needs to carefully assign costs to the job code which represents the construction work. The costs should be included:
- Material: All materials such as steel, concrete, and others must be included in the cost of fixed assets.
- Labor: refer to the workers who work directly for the construction.
- Overhead: These are the cost of the rental, management salary, and other departments who work partially on the project.
- Interest Expense: It is the interest expense on loan that company borrows to support the constructed asset. It only allows capitalizing in the construction period only.
- Depreciation Expense: Depreciation expense on tools and equipment used in the construction must be capitalized into the asset too.
Exchange of Fixed Assets
Exchange of Fixed Asset is the transaction of exchange long term asset between one entity to another. One company dispose one fixed asset and receive a new one from another company. When the company gives up one asset in exchange for other assets with commercial substance.
The word “commercial substance” means that the transactions will change the future cash flow of the company. If the exchange of fixed assets expects to increase the future cash flow, it means that the exchange for fixed assets has commercial substance. Otherwise, it will consider as no commercial substance.
Exchange involving Commercial Substance
When the exchange of a fixed asset has commercial substance, the acquired asset must be recorded at fair value. If the company cannot quantify the fair value, it must be recognized at the book value of the give-up asset. The commercial substance level will base on management judgment if it should take into consideration or not.
Exchange involving without Commercial Substance
When the exchange of fixed assets transactions does not have commercial substance, it will not impact the accounting record. But if it results in loss, it should be recognized immediately. It means the fixed asset receive has less value than the give up the asset. Gain only recognition for the party who obtain additional cash.