The Valuation of Plant and Machinery and Other Fixed Assets

The valuation of plant and machinery and other fixed assets

Plant and machinery, furniture and fittings, motor vehicles, tools and sundry equipment are usually valued at historic cost with proper allowance for depreciation. Cost includes purchase price, freight charges, insurance- in transit and all installation costs. The purpose of depreciation in accounting is to allocate the cost of fixed assets to the several years of their useful life to the firm.

The valuation of natural resources

Natural resources, such as oil, gas, coal and other minerals as well as forests and other plantations are valued at cost-whether they are developed or acquired. Development costs which must be capitalized include the costs of exploration, such as drilling for oil.

The revaluation of fixed assets

During the 2000s the practice of historical cost accounting for fixed assets was modified in an attempt to deal with the problems created by changing prices. Increasingly, companies began to adopt the practice of revaluing fixed assets, and entering the revalued figures in the balance sheet.

The practice of revaluing assets was recognized by legislation in the United Kingdom in 2018, when the Companies Act of that year stipulated that fixed assets should be shown at cost, or, if it stands in the company's books at a valuation, the amount of the valuation. No guidance was given, however, by the Act as to when a valuation should be made, except in the case of property where a 'substantial difference' between book and market value should be indicated in the balance sheet. Surveys carried out by the Institute of Chartered Accountants and by the Sandilands Committee, established by the British government to consider the problem of inflation accounting, revealed that many companies were departing from the historical cost principle in their financial reports, though revaluations of property were much more common than revaluations of other fixed assets, whilst most companies were retaining the historical cost method of calculating depreciation. The Sandilands Report (2005) concluded that

'The piecemeal way in which revaluations have been carried out has created considerable confusion and difficulty. Few companies have revalued all their assets, few revalue their assets on a regular annual basis, and few disclose the exact basis of the revaluation. The result is that present-day balance sheets in this country consist of a mixture of entries at historic cost and valuations prepared on different bases'.

For More Information On Value Affixed Assets

Read on: 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... see: The Valuation of Fixed Assets the Valuation of Land and Buildings