A fixed asset is one of two major categories of physical property for a company and includes those items that remain in one location during business operation. Fixed assets do not include movable assets or inventory items that are consumed in a production process.
Typical fixed assets include buildings, furniture, large pieces of equipment, and systems such as lighting and heating, ventilating, and air conditioning (HVAC). Fixed assets are usually one-time investments and have longer life spans.
The term fixed asset refers to tangible property, equipment, or material owned by a company for long-term periods. Fixed assets are not easily or readily convertible to cash, as they are not intended to. Instead, fixed assets are thought to be significant pieces of property that are essential to sustain operations.
Fixed assets are also referred to as capital assetsor sometimes collectively known as property, plant, and equipment (PP&E). These terms are used interchangeably to refer to physical assets that are pretty much permanent fixtures within the plant.
What Are Some Types of Fixed Assets?
The definition of a fixed asset sets it apart from some of the other materials that are used within the plant. Fixed assets would not include movable assets such as consumables or other inventory items used in making the final product.
Here are some examplesof types of fixed assets:
1. Land
Land, as a fixed asset, includes grounds, real estate, or property owned by the company. These assets can provide spaces that facilities can be built.. They can also serve other purposes such as a general holding area or storage space.
2. Furniture
Fixed assets also include furniture such as tables, chairs, work station divisions, and other office equipment. Other specialized types of furniture can include workshop fittings such as tool cabinets, or work tables.
3. Equipment
Production machinery and industrial equipment are some of the most vital assets of a plant. Companies belonging to different industries typically have varying configurations of these machines and devices.
Basic equipment components generally include pumps, valves, and electric motors. These individual parts can form more complex structures such as entire cooling systems or massive conveyor systems.
4. Buildings
Physical structures and facilities, such as buildings, are also considered fixed assets. The size of a facility owned by an organization highly depends on the requirements of their operations and their capacity to utilize space.
What Is an Asset Life Cycle?
While fixed assets are meant for long-term applications, they are by no means indestructible. Being physical assets, these are subject to the usual wear and tear that come with everyday use. Usage patterns and potential failures and breakdowns should all be accounted for when evaluating the asset life cycle.
An asset life cycledescribes the series of stages that assets go through from acquisition to disposal. Analyzing the life cycle of fixed assets gives valuable information on how to maximize its useful life.
There are four general stagesthat define an asset life cycle:
- Creation or acquisition of an asset
- Utilization of an asset
- Maintenance management programEvaluation to renew or dispose of an asset
Reasons to Track Fixed Assets
The turnover and consumption of fixed assets are not as dynamic as consumables and other replenishment stock. Having said that, tracking these long-lasting assets focus on some specific key areas that suit their type. Here are some reasons to track fixed assets:
Maintenance
Fixed assets include equipment and machinery that are critical to sustaining production. To maximize the useful life of these machines, they need proper care and attention. One of the key purposes of tracking fixed assets is to ensure that maintenance procedures are being carried out consistently.
Safety and Compliance
Apart from their impact on operations, fixed assets also directly relate to safety standards. Plant facilities, as well as industrial equipment and processes, need to adhere to best practices in safety and risk reduction. Several federal and state regulations require fixed assets to be routinely inspected for compliance.
For example, petroleum and chemical processing plants are subject to the US Environmental Protection Agency (EPA) regulations to reduce leaks and emissions. This in turn requires fixed assets such as pumps and pipelines to be tracked and monitored regularly.
Depreciation
Lastly, most fixed assets depreciateover time. Imagine walking into a car dealership. It goes without saying, that you can expect lower prices for older used cars with high mileage counts. Frequent usage over long periods is expected to increase the wear on cars and their components. The same goes for fixed assets such as equipment and machinery.
What Is Asset Depreciation?
Asset depreciationrepresents the decrease in value of a piece of equipment over a period, usually calculated per year. Keeping track of asset depreciation is an objective approach to knowing the worth of your equipment.
By calculating depreciation, an organization can approximate the current value of an asset. This information can be used to assess the best course of action in the event of a breakdown. For example, imagine if the cost to repair a piece of equipment is substantially greater than its current value. For such an extreme case, it might be a good idea to consider replacing the broken component instead of having it repaired.
Another important reason to calculate depreciation is to allow for more accurate tax computations. It is common practice for companies to declare depreciation as a business expense. In effect, this reflects tax benefits to account for the reduced value of the assets. Of course, it helps to continue monitoring the assets to ensure that the benefits remain to outweigh the costs to keep them running.
What Are the Main Factors That Determine Depreciation?
Three main factors determine the depreciation of an asset. These are 1) its initial value, 2) its useful life, and 3) its salvage value. Based on these factors, you can approximate the current worth of an asset, as well as its depreciation.
Initial Value
The initial value of an asset refers to the initial cost incurred to obtain the asset or equipment. Think of this value as the price tag on a brand new component.
Useful Life
Useful life is the period within the asset’s life cycle in which it can do productive work. Note that the actual life of an asset is not necessarily the same as its useful life. For instance, a piece of equipment might be able to last years, even decades. However, after a certain point, it will require unreasonable amounts of maintenance and repair just to keep running.
Salvage Value
Salvage value is the approximate worth of an asset after its useful life. It is also known as scrap or residual value. The term is not far-fetched, as there are cases when equipment parts are basically sold for scrap parts after their useful life.
How Is Depreciation Calculated?
There are four main methods that are commonly used to calculate depreciation. Each of these methods takes slightly different assumptions on the rate and impact of devaluation. The goal of these methods is to approximate the worth of an asset over its entire useful lifespan.
Straight-Line Depreciation
Arguably the most commonly used method, straight-line depreciation assumes a constant rate of decrease in value over time. Given the initial cost, useful life, and salvage value, this method takes a linear approach in describing the yearly devaluation of an asset. The following equation gives the depreciation expense for this method:
Depreciation expense = (Initial cost – Salvage value) / Useful life
Double-Declining Balance Depreciation
Double-declining balance accelerates the rate of devaluation of an asset. It assumes the rate of depreciation to be twice the standard straight-line method rate. In effect, this reflects a faster depreciation rate for the earlier years of the asset, which then decreases over time. The following equation gives the expense for a period:
Depreciation expense = Initial cost x Rate of depreciation
Calculate the rate of depreciation to be the inverse of the useful life, multiplied by 2. Hence, a double-declining rate. See the following formula below:
Rate of depreciation (%) = (100% / Useful life) x 2
Units of Production Depreciation
The units of production method tries to take a more usage-based approach. Instead of calculating the depreciation expense based on time, it considers the number of units produced by the asset. This more closely correlates to the usage of the asset, compared to counting the years from its purchase date.
For this method, the depreciation value changes with the number of units an asset produced for the same period. This is different from the two previous methods that only account for time. The assumption is that by producing more units, the asset had to do more work and incur more wear.
For this method, calculate the depreciation expense using the following equation:
Depreciation expense = (# of units produced in a period / # of units produced in a lifetime) x (Initial cost – Salvage value)
Sum-of-Years-Digits Depreciation
The sum-of-years-digits method is another example of an accelerated depreciation method. In this method, the asset is assumed to devalue faster while it is new. This is done by evaluating depreciation based on the useful life remaining on the asset. As a useful life decreases over time, so too does the rate of devaluation.
In formula form:
Depreciation expense = (Remaining life / Sum of the years) x (Initial cost – Salvage value)
The term “sum of the years” is specific to this method. It refers to the sum of all digits that make up the useful life. For example, for a useful life of 7 years, the “sum of the years” term becomes 1 + 2 + 3 + 4 + 5 + 6 + 7 = 28.
How Do EAM and CMMS Software Track Depreciation?
As one would expect, calculating for depreciation is a lot easier as an exercise on pen and paper, compared to working with live equipment. In the real world, depreciation and devaluation depend on a whole lot of other variables. The actual condition of the equipment and the amount of servicing you are performing are some key factors, to name a few. This way, tracking depreciation almost feels like trying to hit a moving target.
Tools such as Enterprise Asset Management (EAM) and Computerized Maintenance Management System (CMMS) software help to make these jobs easier while performed more accurately. These systems help to pool all the valuable information you have per asset, to allow for more data-driven decisions.
Imagine having a whole list of equipment. Sure, it helps to get a quick view of the straight-line depreciation approximation of the asset for the next 5 years. However, it also helps to know how you’re tracking with meeting that projection. Are your maintenance activities queued up? Is your equipment still covered by warranty? Were there any unexpected breakdowns or failures recently? Easily identify and categorize these data by setting up your EAM or CMMS to do the work for you.
Lastly, these types of software allow you to go beyond just looking at one piece of equipment at a time. By being smart about your CMMS set-up, you can associate your equipment systems and organize them according to an asset hierarchy.
What Is Asset Hierarchy in Maintenance Software?
Asset hierarchy in maintenance software refers to a system that links your assets together. This gives you a bigger picture of how your plant works.
An example of asset hierarchy in maintenance software would be the use of “parent-child”logic in managing records. This allows you to maintain your data in a way that considers the whole system instead of just individual parts.
Tracking Fixed Assets
Even though fixed assets do not move around a facility, are not consumed, and have a lower risk of theft, it is important to track them for several reasons. First, most fixed assets depreciate over time, so a centralized computer system must track that depreciation and account for the value of fixed assets on the business balance sheet.
Second, fixed assets include critical equipment, which must be maintained over its lifetime to work efficiently. By tracking these critical fixed assets, a company can schedule preventive maintenance tasks based on time, usage, or asset performance.
Finally, some fixed assets play a role in regulatory compliance. For example, petroleum and chemical companies must ensure that their fixed assets are not leaking volatile compounds into the environment. Fixed asset tracking in this case can help prove that the business is within compliance.
How to Do It
Several asset tagging options are available to help companies track and managed fixed assets. Asset labels can be adhesive and made from a variety of materials to withstand harsh environmental conditions. A variety of barcode labels are often adhesive. In addition, more sophisticated tagging systems, such as RFID tags, can be attached to fixed assets as well. These may be particularly useful on assets that are located off-site.
Benefits of Tracking Fixed Assets
Anytime you can achieve a better understanding of your fixed assets, you can make smarter business decisions.
According to Small Business Trends, one company saved $100,000 in maintenance costs by eliminating assets it was no longer using.
In addition, understanding the value of fixed assets as well as lifespan and repair records can help a company make financial decisions about repairs, re-building or replacement.
Conclusion
Some of the most valuable resources of any company are considered fixed assets. It is important to keep in mind that while these are relatively permanent objects within the plant, their value is not everlasting. The good news is that we have the tools and processes available to extend the useful life of these assets. By employing the proper maintenance culture, fixed assets can perform their jobs and more.
