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Bookkeeping Principle for Fixed Assets

Bookkeeping Principle for Fixed Assets

Principle of Fixed Asset Bookkeeping


Principle of Fixed Asset Bookkeeping

                  Fixed asset of the business is taken for bookkeeping in that asset account in paid cost price for acquisition of such asset, including supply expense and asset preparation to maintain in usability condition. Therefore, freight, import tax, insurance premium. In addition, installation expense and machinery test run expense until that asset is ready for use shall be added in cost price of that asset.

Declaration of Asset Item in Balance Sheet    Sheet is declared in cost price deducted by accumulated depreciation.

Accumulated Depreciation   means the amount of depreciation that is deemed as expense in previous years and it is classified as the account in type of valuation of fixed asset.

Book Value   is cost price deducted with accumulated depreciation.

Fixed assets of the business may be derived from various methods as follows

  1. Assets Purchased by Cash or Credit
  2. Assets Purchased according to Installment Payment.  According to the purchase of purchase by installment, even though legal title has not been transferred to the buyer until price is completely paid. However, in practice, when trading is agreed, the buyer will do the bookkeeping of asset with present value of that asset as of the trading agreement contract date. The buyer posts it to be payable by outstanding amount of debt. The variance will be recorded as prepaid interest account, and it will be adjusted to be transferred into interest account based on the occurring accounting period.
  3. Assets Purchased by Share Certificate Issuance Method.   In case that the company pays asset price by share certificate or debenture of the company, bookkeeping of cost price of asset will be done in following price.
    1. Bookkeeping based on market price of capital stock or debenture certificate
    2. Bookkeeping based on market price of asset is applied in case that the market price of the issued security is unknown.
    3. Bookkeeping based on cost appraisal of asset is applied in case that market price of the issued security and market price of the asset is unknown.
  4. Assets Acquired by Trade-In.   When business takes the existing primary asset to be traded-in for new asset, it must be sometimes paid in cash or other assets may be additionally transferred for trade-in. Whentrading-in, primary asset will be transferred out at book value and cash payment is simultaneously paid as agreed. The part of new asset obtained is recorded at which price depending upon accounting policy of the business as follows.
    1. Bookkeeping of new assets in book value of the primary asset plus additional money paid. According to this method, profit and loss variance from asset exchange is unavailable.
    2. Bookkeeping based on Trade-in Price plus additional cash paid.
    3. Bookkeeping based on present market price of asset of which the certain price is known such as:
      1. Bookkeeping of new asset based on market price
      2. Bookkeeping of new asset based on market price of the primary asset plus additional cash paid.
  5. Asset Acquired from Donation or Discovery.   In accounting principle, the asset acquired from donation receipt or discovery in market price is appraised and then account of that asset is debited and account of capital from donation or account of capital from appraisal of discovered asset appraisal in case of discovery of natural asset.
  6. Self-Built Asset.  The calculation of cost price of the asset consists of production cost such as direct raw material, direct labor cost, production overhead, for example, building that is self-built. Cost price consists of below items.
    1. Cost price of direct raw material used in construction
    2. Direct labor cost used in construction
    3. Other construction expenses such as depreciation of equipment and construction utensil, drawing expense, construction license fee, work supervision fee, systemization fee, etc.
    4. Insurance premium during construction such as accidental insurance and fire insurance
    5. Loan interest borrowed for use in construction

      TAS 15 of Association of Accountants has set the criteria that posting of borrowing cost (loan interest) is cost price of asset. Such cost shall consist of significant amount and it is the expenditure of essential asset relying on a certain period of time before that asset is ready for use according to objective or ready for sale. Loan interest is deemed as cost price of asset only if it is entered into below criteria.
      1. Actual incurred loan interest
      2. Loan interest incurred during preparation so that that asset is usable based on objective.
      3. Loan interest is deemed as expiry of posting time as cost price of asset when asset is completely built and ready for use.
  7. Building decoration expense such as painting, equipment expense and installation expense of building equipment that is inseparable or unmovable such as safe embedded inside the building, etc.

      The account of office equipment that is separable or movable with different useful life from the building such as furniture, air-conditioner, elevator, escalator, etc. shall be separated as office equipment.

Principle of Bookkeeping of Intangible Assets         The criteria are applied like tangible fixed asset by using cost price. This means that total expense paid is for asset acquisition.

        If intangible asset is purchased by payment in other assets, not in cash, the market price of exchanged asset shall be applied as cost price of intangible asset. If market price is unknown, the price of that intangible asset shall be applied for bookkeeping.

Amortization of Intangible Assets
Intangible assets with definite useful life should be amortized. Cost price of asset is run out within that useful life duration.

Declaration of Intangible Asset in Balance Sheet.  Intangible asset is declared in separate item from tangible fixed asset under topic of intangible asset or may be declared under topic of other assets. The criteria of account debiting method applied in financial statement or notes to financial statement shall be notified.

Definite Useful Life

  • The business will consider whether intangible asset has indefinite useful life only when according to relevant factor analysis, it is unfound for the limitation of the ability to anticipate about duration of which such asset can generate net cash flow obtained by the business.
  • Factorsused for consideration is for defining useful life of intangible asset.
    1. Intangible asset utilization as expected including whether other groups of executives can effectively manage that asset.
    2. Life cycle of intangible asset and public information related to estimate of useful life of similar asset which is utilized in the same way
    3. Obsoleteness in technique, technology, trade or other aspects
    4. Stability of the industry that utilizes the intangible asset and change in market demand for product or service derived from intangible asset
    5. Response expected to be occurred from the competitor or future competitor
    6. Level of incurred expenditure for maintaining future economic benefit expected to be gained from intangible asset, and ability and will of the business for achieving the level of that expenditure.
      (Has upgrade expenditure still been periodically existent?)
    7. Duration that business can control asset and legal right or similar restriction in use of asset such as maturity date of the relevant lease contract; and
    8. Is useful life of intangible asset dependent on the useful life of other assets of the business?

Intangible Asset – Duration of Useful Life

  1. Useful life of intangible asset derived from contract making or other legal right shall not be over than the contractual term or other legal right but it may be shorter depending upon duration expected by the business for utilization in that asset.
  2. duration of that contract or legal right is limited but term can be renewed,the useful life of that intangible asset shall include renewal duration particularly the case that evidence can support that the business has none of significant cost from such renewal.

Intangible Asset –review as of the date of the ending period

  1. The business shall review useful life of intangible asset that is unamortizedevery accounting period.
    1. For evaluation whether any event or situation is still existent to support that useful life of that asset cannot be defined.
    2. If no event or situation supports that the useful life of such asset is indefinite, the business shall record change in estimate of useful life of the asset from intangible asset with indefinite useful life as intangible asset with definite useful life.