What is a fixed asset?
Fixed assets are the long term assets held by the company such as a car, an oven, or a brand for example.
The main difference between expenses and fixed assets is that the fixed assets bring long term benefits to the company.
For example, renting a car for 2 days enables the company to benefit from the car during only 2 days, whereas buying the car enables the company to benefit from it for much longer. Therefore the cost of renting a car would be classified as an expense while the purchase of the car would lead to the creation of a fixed asset for the company.
To be classified as a fixed asset, an asset must fulfil the following criteria:
- Identifiable: the asset could be separated, sold, or rented; or is arising from contractual or other legal rights
- Measurable : the cost of the asset can be estimated accurately
- Bring future economic benefits to the company: revenues or cost reductions
- Controlled by the company: the company is in a position to fully benefit from the economic advantages brought by the asset
Depending on the nature of the asset, fixed assets are classified in 3 different categories: intangible assets, tangible assets, and financial assets.
Intangible fixed assets
An intangible asset is something that cannot be touched.
Or more precisely according to the definition of the IAS38 directive: intangible fixed assets are non-monetary assets which are without physical substance and identifiable
Here are a couple of examples of intangible fixed assets:
- a patent
- a concession
- a software licence
- a brand
Tangible fixed assets or Properties Plants and Equipments (PPE)
Strictly speaking a tangible asset is an asset that can be touched.
Or according to the IAS16 directive: PPE are tangible assets held for use in the production or supply of goods or services, for rental to others, or for administration purposes; and are expected to be used during more than one period.
Here is a couple of examples of tangible fixed assets:
- a building
- an oven
- a car
Financial fixed assets
Financial fixed assets are securities held for more than 1 year by the company.
For example shares in a subsidiary or a joint-venture.
Depreciations and Amortisations (D&A)
Some assets (mainly tangible fixed assets) degrade with usage or time.
To reflect this, the company will depreciate (tangible assets) or amortise (intangible assets) these assets along their useful (or economic) life.
This mechanism results in an expense charged in the P&L. This expense is a pure accounting treatment and has no impact on the company's cash flow.