Definition: Fixed assets indicate a firm’s non-current assets that can generate long-term financial gain and provide an idea of the firm’s operating performance.
What Does Fixed Assets Mean?
What is the definition of fixed assets? The fixed assets are divided into tangible assets such as land, buildings, equipment, machinery, furniture, software, vehicles and intangible assets such patents, copyrights, and trademarks. Long-term assets are important because they provide valuable information about a firm’s financial health and ability to generate earnings from effectively managing its assets.
For investors, firms with high return on assets (ROA) ratios signify a buy and a trusted source of income as, most of the times, these firms, distribute dividends as well. However, as firms depreciate their non-current assets, financial analysts should carefully review the financial statements to make sure how the numbers are determined.
Let’s look at an example.
Example
Company ABC is a construction company that plans to purchase a second building for $15 million. The building is a tangible asset and, if the company keeps the building for more than one year, it becomes a fixed asset. After closing the legal agreement with the buyer, company ABC will own the main building where it will run its core operations and a second building, which can be rented and earn the company an extra revenue. However, the value of the building, $15 million, will be reported as a fixed asset on the balance sheet.
Companies usually report their non-current assets as property, plant and equipment on the balance sheet. Yet, as assets lose value as time progresses, companies also report the depreciation and amortization expenses. Regardless of their physical form, the assets of a company must be accurately valued so that investors and financial analysts can properly assess the intrinsic value of the company. Regulatory bodies such as the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC) determine when and how companies should report their assets, including depreciation.
Summary Definition
Define Fixed Assets: Fixed asset means a long-term resource that provides operational value to a company for more than one accounting period.
