What is a Fixed Asset?

Fixed assets are like pearls…

It takes several years to create a quality pearl that may provide you with a handsome profit. The farming process for natural pearls takes much longer than 12 months and requires skill to maximize potential revenue. Similarly, fixed assets take a long time to create a benefit, as they are company resources that usually take at least 12 months to create value or generate a return.

A fixed asset is a resource that takes longer than 12 months to turn into cash, provide revenue or benefit, or be fully used. Fixed assets are also referred to as non-current assets to differentiate them from current assets — assets that can be turned into cash within one year.

On the balance sheet, you can typically find fixed assets below current assets. Examples of fixed assets include equipment, marketable securities, and operating leases.

Typically, all assets listed after the “total current assets” line item can be considered as fixed assets, including:

• Intangible assets: Resources that lack physical form and take longer than 12 months to convert into cash or become used up. Examples include prepaid contracts that still need to be delivered and computer software.
• Goodwill: A special type of intangible asset that is quantified as the difference between a company’s purchase price and the fair market value of its net assets. Examples of goodwill include reputation and brand recognition.

Fixed assets can often be categorized in either of two ways: operating vs. non-operating, or physical vs. intangible.

Operating vs. non-operating fixed assets

Fixed assets can be classified into operating assets — resources used in direct business activities to generate revenue — and non-operating assets.

Examples of operating fixed assets include:

• Furniture, fixtures, and equipment (FF&E): Business property not permanently connected to a building, such as office furniture, partitions, and equipment used in the operations of a company.
• Buildings: Real estate properties used for business operations.
• Vehicles: Transportation equipment used in business operations.

Examples of non-operating fixed assets include:

• Vacant land: An undeveloped land parcel owned by a company.
• Long-term investments: Company investments with a holding period over 12 months or that would take over a year to turn into cash.

Physical vs. intangible fixed assets

Fixed assets can also be classified into physical assets (also referred to as tangible assets) and intangible assets — items that can’t be touched, felt, or seen because they don’t have a physical form.

Examples of physical fixed assets include:

• Land: Real estate owned by a company.
• Buildings: Roofed and walled structure owned by a company.
• Property, plant, and equipment (PP&E): Company-owned fixed, tangible assets that are not easy to liquidate.

Examples of intangible fixed assets include:

• Goodwill: The premium between the total value of all company assets and the fair market value of that company when another company buys it.
• Brand: A specific phrase, word, symbol, or logo that legally makes a product different from all of its peers.
• Research & development: Also referred to as R&D, research & development expenses incurred when innovating to improve products or processes.

A fixed asset may be classified in more than one category. For example, long-term investments are both physical fixed assets and non-operating fixed assets.

A company generally records all of its fixed assets on the balance sheet according to generally accepted accounting principles (GAAP) — a commonly followed collection of guidelines set by policy boards and adopted by general practice that organizations use in financial reporting.

Some GAAP guidelines for fixed asset accounting are more specific than others. For example, a fixed asset is defined as such as long as it takes 12 months or longer to turn into cash.

However, some tools may be defined as a fixed asset depending on a specific value threshold set by the company. For example, one firm may consider a $1,000 power drill a fixed asset and list the drill on the balance sheet, and another firm may expense the drill.

When a fixed asset loses value, a company may need to depreciate, amortize, or impair it, as appropriate.

• Depreciation: The accounting method to quantify a decline in the value of physical fixed assets over time.
• Amortization: Similar to deprecation, amortization is the accounting method used to reduce the book value of intangible assets over time.
• Impairment: A permanent decrease in the fixed asset’s value due to the difference between the asset’s fair market value and book value.

The principal difference between fixed assets and current assets is the time it takes to turn into cash or the length of the useful life.

• Fixed assets take longer than 12 months to convert into cash and/or have a useful life longer than 12 months.
• Current assets are expected to turn into cash in under 12 months and/or have a useful life of fewer than 12 months.

There is no difference between fixed assets and non-current assets because non-current assets is another way to refer to fixed assets.

When a publicly traded company reports financial statements to shareholders, the company often lists fixed assets as non-current assets on its balance sheet.

Intangible assets are fixed assets because they typically take over 12 months to turn into cash or provide a benefit, or they have a useful life of over a year.

Some intangible assets may even have a perpetual life — life that continues forever — because they can be renewed with ease or at a negligible cost.

One formula used to calculate fixed assets is:

Non-current assets = total assets – current assets

You can find both the total current assets and total assets on a company’s balance sheet. Fixed asset accounting may vary per company.

Some companies may provide a total for non-current assets, and some may not. However, the majority of companies report total assets and current assets.

Let’s calculate the total fixed assets for The Home Depot using the value of the assets in the company’s balance sheet for the fiscal year that ended February 2, 2020 (all values below are in millions).

Total assets $51,236 Current assets $19,810 Fixed assets $31,426

Using the balanced sheet, you can determine that The Home Depot held over $31.4 billion worth of fixed assets in that year ($51,236 – $19,810).

Fixed asset accounting standards may vary by company. Some companies provide a specific section for fixed assets (typically as non-current assets) on its balance sheet, and some do not.

When the fixed assets section is available on the balance sheet, you can inspect each item in that section to identify the fixed assets.

Alternatively, when the fixed assets section isn’t available, you can assume that all items listed after the total current assets and before the total assets amount are fixed assets. For example, let’s use The Home Depot’s balance sheet for the fiscal year that ended February 2, 2020 (all values below are in millions).

Using the balance sheet, you can see that The Home Depot reported four types of fixed assets: property and equipment, operating lease right-of-use assets, goodwill, and other assets. Adding these four types of fixed assets, you find that The Home Depot reported a total of $31.4 billion in fixed assets in that year.

One of the main benefits of fixed assets is that identifying the resources that are fixed assets helps owners, financial analysts, creditors, investors, and stakeholders perform financial analysis. The more detailed the value of the assets, the more detailed the possible analysis.

For example, an investor may use fixed assets to calculate the company’s fixed asset turnover — a ratio of sales to fixed assets minus accumulated depreciation, indicating the efficiency of fixed assets used to generate sales. The higher the ratio, the more efficient a company is in using its fixed assets to generate sales.

Another example is that a creditor may use fixed assets to determine what portion of company assets would take longer than 12 months to turn into cash. A creditor may use that knowledge in combination with other factors to assess a company’s ability to make monthly interest payments and eventually pay back the entire debt.