The Valuation of Fixed Assets the Valuation of Land and Buildings

The valuation of fixed assets The valuation of land and buildings

Land is valued at cost despite rises or falls in market value. Cost includes broker's commission, surveying and legal fees and insurance charges. In addition, draining, levelling and landscaping costs and other improvements such as fencing, sewerage and water mains should be included, though it is quite common in the case of farm accounts for these improvements to be shown separately because of the different tax allowances which they occasionally enjoy. Land is not generally regarded as susceptible to depreciation as understood in accounting.

The definition of assets in accounting reflects its orientation towards the law. In this connection, only assets in the ownership of the business may be classed as assets for accounting purposes. This definition poses a particular problem in the case of land. Strictly speaking, only freehold land lies in the ownership of the business for accounting purposes. Leasehold land enjoyed subject to the payment of rent is not classified as an asset, and the rent-charge appears as an expense in the income statement. By contrast, a long lease acquired by the payment of a capital sum is shown as an asset, and the capital payment is usually allocated as expenses over the period of the lease. Leasehold rights extending to 99 and 999 years, for example, are virtually undistinguishable from freehold rights for accounting purposes. Ground rents are chargeable as yearly expenses.

As in the case of land, buildings are valued on a historical cost basis-whether they have been acquired or constructed. Construction costs include such incidental expenses as architect's fees, inspection fees and insurance costs applicable to a construction project. Where an existing building has been purchased, the costs of rendering the building suitable for its intended purpose should be added to the purchase price in arriving at its historic cost value.

The valuation process for buildings differs from that of land in two ways:

(a) A cost of maintenance is involved in the repairs which have to be made from time to time in the upkeep of the building. Such asset maintenance expenses are charged as they are incurred to the income statement. Additions and improvements to the building, which are distinguished from repairs, must be capitalized and added to the value of the building on the balance sheet.

(b) Buildings depreciate in the course of use and as they become dated. Whereas this may not always be true of residential property, it is invariably true as regards industrial and farm buildings. In such cases, the account value should be shown at cost less the accumulated depreciation to date of the balance sheet.

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The valuation of assets

The key to an understanding of the manner in which the accountant approaches the problem of valuation is to be found in the classification of assets. Fixed assets are long-term assets whose usefulness in the operations of the firm is likely to extend beyond one accounting period. They are not intended for resale, so that their value depends upon the future cash flows which they are intended to generate. By contrast, current assets are those assets which are intended to be exhausted in the income-earning operations of the next accounting period, and this includes... see: The Valuation of Assets