Valuation of tangible Assets

Valuation of Fixed assets

• Introduction:
• Fixed asset is an asset that is held with the intention of being used for the production
of goods/services.
• They are held for long term use and are not meant to be resold in the ordinary course
of business.
• The fixed asset is used by the company, its value decreases,i.e it is subject to wear and
tear and depreciation, so its current value is reflected in the financial statements.
• There are 2 types of fixed assets, i.e, Tangible & intangible assets
• Examples of tangible fixed assets: land & building, plant & machinery, Furniture &
fixtures, Vehicles, equipments, etc
• Examples of intangible fixed assets: Goodwill, Copyrights, Patents, Trademarks, etc
• Fixed assets are recorded at their original costs, which includes more than purchase
price. Additional costs incurred to acquire, install,and prepare the asset for its use will
be included.

• Measuring the asset value:

• Asset values can be of many types:
-book value
-Net present value based on future cash flows to be derived from the assets
- Replacement value based on the worth to be derived from the future use of the asset.

• Related costs in relation to Fixed asset valuation:

• The costs of the fixed asset will include the purchase costs and any other costs
incurred to bring the asset to its present location & condition.
• The following is the list of the costs that have to be assigned to the fixed asset:
1. Purchase price and the related taxes.
2. Construction costs.
3. Import duties.
4. Freight and handling.
5. Interest costs incurred for the period required to bring the asset to present location
& condition.
6. Site preparation.
7. Asset testing costs.
8. Professional fees. Etc

▪ The following are the costs that are not assigned to a fixed asset:
1. Administration and general overheads costs.
2. Cost incurred after the asset is ready for use.
3. Relocation and reorganization costs.
4. Initial operating losses. Etc
Self constructed assets:
➢ A self constructed asset is an asset that a firm builds on its own
rather than purchasing it from outside.
➢ These are the assets that will be used in operating the business and
not stock that would be sold to the customers.
➢ When a company self constructs a business, there are DIRECT and
INDIRECT costs which should be included in computing the cost
of such asset.
➢ Direct costs are usually easily identifiable and can be traced to the
asset directly.
➢ For example: if the company self constructs a new manufacturing
equipment, then the costs of the constructin materials used for the
equipment, wires and other parts used to build the electrical system
for the equipment, any other purcahesd parts will be added to the
costs of the equipment.
➢ Invoices, bills, cash memos, payroll of the employees, etc can be
used as a source documents for such costs.
➢ If the employees are working on many projects at the same time(i.e
building different assets at the same time, then labour costs will be
allocated on the basis of the labour hours worked on a songle
project).
➢ Indirect costs can be more diificult to allocate as they are incurred
in general.
➢ Indirect costs may include costs of indirect materials, depreciation
of assets used for construction, etc