Fixed assets are important, as the production of goods and services is based upon them. Everything considered as fixed asset remains with the enterprise for a longer period of time and serves the enterprise longer.
The different items of the fixed assets mostly are of high value and have a useful life of several years. For the annual financial statements these fixed assets have to be impaired at every year end.
There are three most common fixed asset positions:
Financial fixed assets
Financial assets include all financial receivables that are not directly associated with the products and services of an enterprise. The can consist of participations, long-term loans or other stocks or bonds that are long-term investments.
Financial assets also know great value fluctuations. Because they do not know a useful life and only irregularly lose value such value loss has to be dealth with by unplanned depreciations which have to be – depending on the actual situation – performed at the balance sheet date.
Tangible Fixed assets
Tangible assets such as property, production plants, IT, machines, cars etc. are used on a long-term basis. Long-term is defined by Art. 960d par 2 of the Swiss code of obligations as a period of “more than twelve months”. Tangible assets are used for the productions of goods and for providing services. Tangible assets can be produced by the enterprise itself or they can be bought from third parties. Their loss of value over their useful life has to be executed with scheduled depreciations.
Intangible fixed assets
As their name already says these goods and objects are not tangible. This concerns branding rights, patents, licenses and software, development costs or publishing rights. A special case within this category is goodwill that has been bought with the acquisition of an enterprise.
As well as all other fixed asset intangible assets must be depreciated. Based on SWISS GAAP FER 10 such depreciation shall be done over the useful life of such asset or, if the useful life can not clearly be defined, over a period of 5 to a maximum of 20 years.
Definition of the depreciation amount
To show the loss of value of the fixed assets, yearly depreciations have to be calculated. The are defined due to tax provisions or based on the useful life of the asset.
If tax criteria are the point of reference, the tax authority has defined maximum depreciation rates she will accept for the different categories of fixed assets. They are defined for the straight line as well as the reducing-balance method.
If the useful life of the assets is the point of reference, the useful life for every category has to be defined specifically. These guidelines usually are defined based on experience or other criteria. In general, the useful life for computers and IT gadgets is in a range of 3-4 years, whereas cars have a lifespan of 5 years. For trucks, bigger building machines of complete production lines the useful life can range from 8 to 15 or more years. Buildings – depending on what they are used for – usually last for 30 to 50 years.
Of course, there are also fixed assets that do not know any wear and tear. Those are such as properties (land plots), stocks, participations, loans etc. If the value of such assets accidently changes (stock market crash, rezoning of properties and the like), this has to be covered by unscheduled depreciations.
Basically, there are two different methods:
If the straight-line method is used, the asset is reduced in its value with similar amounts for each year of its useful life until its balance sheet value has reached zero (respectively CHF 1 p.m., it the asset is used longer than its predicted useful life. Example for a car: purchase price: CHF 50’000; useful life: 5 years; depreciation: straight-line 20 % per year. The depreciation amount for each of the five years is CHF 10’000.
Using the balance-reducing method the depreciation is calculated each year. Reference for the first year is the purchase price; for the following years the remaining balance becomes the basis for the calculation. This method shows higher depreciation amounts at the beginning which is maybe closes to the course of value loss of the fixed assets.
Example for a car: purchase price: CHF 50’000; useful life: 5 years; depreciation: balance-reducing 40 % per year. The depreciation amounts are: year 1: CHF 20’000; year 2: CHF 12’000; year 3: CHF 7’200 etc.
With the balance-reducing method there always remains a residual value of some kind. Therefore, usually the residing amount is fully depreciated within the last year of the useful life.
A comparison of the straight-line and the reducing balance method is shown in the following table.
depreciation year 1
depreciation year 2
depreciation year 3
depreciation year 4
depreciation year 5
This shows that as a tendency by using the reducing-balance method hidden reserves are accumulated in the beginning of the lifespan which are dissolve over the next years.
Special form – non-recurrent write off
Some Swiss cantons allow non-recurrent write offs. In these cantons fixed assets can be depreciated in full within their first year if the profit situation allows it. As a result hidden reserves are formed in the first year and are dissolved years over the useful life of the fixed asset.
Presentation and disclosure of the impairment of assets
The loss of value can be shown in a direct or an indirect method.
Using the direct method, the depreciation is booked as a reduction within the same account where the purchase of the fixed asset was booked. The closing amount therefore shows the residual value of the respective category of fixed assets.
Advantage: small chart of accounts
Disadvantage: the purchase value of the fixed assets is not directly visible within the accounts.
With the indirect method an extra value adjustment account is opened. All depreciations are then booked against this account.
Advantage: the purchase amount as well as the accumulated depreciations are always directly visible within the accounts.
Disadvantage: fixed assets leaving the books at the end of their useful life or because they are sold have to be booked correctly in a way that their purchase price as well as their accumulated depreciation has to be booked against extraordinary income or expenses. This is a little more demanding but gives a substantially better overview.
Excursus: Fixed assets accounting
For enterprises with lots of fixed assets such as a huge fleet of vehicles or machines or with many fully equipped working spaces, fixed assets accounting makes sense. In such accounting every fixed asset gets its own account and is numbered and clearly identified. After purchasing the fixed assets is booked and after that will be automatically depreciated following the defined method (straight-line or balance reducing) and in the respective periodicity (monthly, quarterly etc.). The calculated depreciations than are automatically transferred into the financial accounts.
If you have further questions related to the bookkeeping, valuation and depreciation of fixed assets our expert in this field Tatjana Späni will be more than happy to help you along.