Financial Explainer — fixed assets

Many small business owners rely on their accountants or small business advisor if they're struggling to understand their financial statements. To help, we've created a series of blogs that go through each element. The idea is create building blocks so you have a better understanding about how your business is performing.

This blog looks at fixed assets (sometimes referred to as non-current or long-term assets).

Fixed assets are long-term assets that your company owns and expects to hold for >1 year. They're not intended for immediate sale and are used to generate revenue over an extended period.

Non-current assets tend to be split into three categories:

Tangible, e.g. property, plant and equipment

Intangible, e.g. patents, trademarks and goodwill

Financial, e.g. long-term investments

You'll find your fixed assets listed on the assets side of your balance sheet after your current assets.

Here are some examples of what you'll find listed under tangible fixed assets:

• Property, plant equipment: physical assets your company owns and uses for its operations. For example, factory buildings, manufacturing machinery, vehicles, office buildings and computers.

• Land: company-owned real estate, excluding buildings, e.g. a plot of land on which your factory is built or the land for your office buildings or company parking lots.

• Furniture and fixtures: Office furniture and non-movable fittings. For example, desks, chairs and shelves in your office or factory.

• Leasehold improvements: Improvements made to your rented company property. For example, you may have renovated your leased factory, warehouse or office space.

• Construction in progress: Ongoing work on your buildings or structures that is not yet complete. For example, you may be in the process of building a new factory or office.

Here are some examples of intangible fixed assets. These are non-physical assets that your company owns and controls to generate future revenue. They are particularly important for companies that rely on intellectual property and/or reputation.

• Goodwill: This is the value a company builds up over time from its brand, customer base and reputation. In most situations, goodwill is not accounted for. However, if one company buys another, the acquirer recognises goodwill on acquisition. It is calculated as the premium the buyer paid over the fair value of the acquired company's net assets (total assets minus total liabilities).

• Patents: This is the cost you paid for legal protection granted for inventions (where a company is given exclusive rights to produce from or use the invention for a set period). For example, your company may have a unique manufacturing process or own a proprietary IT algorithm.

• Trademarks: This is the cost you paid for a recognisable sign, design or expression that distinguishes your company's products or services from others. For example, Nike's swoosh branding.

• Copyrights: This is the cost you paid for the legal rights granted to you as a creator of some original work. For example, a book publisher owning the rights to a book or specialist training material owned by a consultancy.

• Licences and franchises: This is the value of legal agreements that allow a company to use another entity's intellectual property (e.g. brand name or technology) for a fee. A typical example is fast food franchises, such as McDonald's.

• Customer lists: This is the value of established customer relationships and is recorded as an asset on acquisition (in the event that valuable customer relationships are included in the acquisition). It could be a list of loyal retailers for a manufacturer or the list of regular clients of a law firm.

• Software: This can be purchased or internally-developed proprietary software that your company owns and uses for its operations.

• Development costs: This is the money you have spent to innovate to develop new products or improve existing ones — on the basis it would lead to a viable commercial prospect (otherwise it would be treated as an expense in your income statement). For example, when a vehicle manufacturer upgrades a car model.

Here are some examples of financial fixed assets. These are long-term investments or assets that provide value over an extended period; usually >1 year. These assets are not used directly in your day-to-day operations but are held for financial purposes, e.g. generating a return.

• Long-term investments: These are stocks, bonds or investments in other companies that are expected to be held for several years.

• Investments in subsidiaries or joint ventures: These are equity stakes or ownership in another company either for strategic or operational control. For example, a beverage company may hold a stake in a packaging company that produces its bottles.

• Long-term receivables: This is money owed to a company that is not expected to be collected within a year. This can be because of long-term or multi-year credit agreements with certain clients.

• Deferred tax assets: This line item shows a tax benefit that arises when a company has future tax-deductible expenses that will reduce the tax it needs to pay in future. For example, a company may have losses from previous years (perhaps because of a recession) that can be applied to future profits to reduce the resulting tax liability.

As you can see, there's a lot that can go into your fixed assets. And there can be different ways to measure some of these assets.