Fixed Assets Definition. What Are Fixed Assets and How Do You Manage Them?
- Fixed Assets Definition
- Fixed Assets Accounting and Inventory Items Accounting Differences
- Fixed Assets Catalog
- Fixed Assets Depreciation
- Example of Straight Line Depreciation for Fixed Assets
- Fixed Asset Value
- Tangible Asset Disposal
- Software System for Fixed Assets
- ERP Integrated with Fixed Assets Functionalities
Fixed assets play an essential role in how a company generates revenue, which is why monitoring them is an important concern for every organization, regardless of business size. In the absence of an appropriate software solution, managing and organizing all information related to fixed assets are typically difficult and time consuming operations for a company.
Learn everything about the fixed assets catalog, classification, depreciation, revaluation, disposal, and fixed assets.
This article will help you discover how to manage fixed assets more efficiently and will also answer a series of basic questions such as: “What are fixed assets?”, “How do you differentiate fixed assets from inventory items?”, “What information is included in the Fixed Assets Catalog 2023?” and more.
Fixed assets definition
Fixed assets
Fixed assets accounting and inventory items accounting differences
Often, people without experience in accounting or taxation confuse fixed assets with inventory items. However, it is important to understand that there is a clear difference between the two.
Inventory items are goods that have a value lower than the legal threshold required to be considered fixed assets. They are recorded in accounting as a full expense at the time of acquisition and commissioning, without the need to calculate depreciation. Inventory items have a useful life of less than one year, compared to fixed assets (tangible assets), which have a useful life that exceeds 12 months.
Fixed assets legislation: differences between fixed assets and inventory items
According to the legislation regarding fixed assets, assets, and inventory, there are several differences between fixed assets and inventory items, such as:
- Considering that the value of inventory items is below 2,500 lei, they are treated as a full expense and are not depreciated, while fixed assets are depreciated over time.
- The total acquisition value of an inventory item directly affects the company’s profit in the year it was purchased. On the other hand, the value of fixed assets is depreciated over their useful life, influencing profit based on the depreciation recorded in each period.
- Inventory items are goods used for a period shorter than one year, while fixed assets have a useful life longer than one year.
Are considered fixed assets buildings, technical installations, means of transport, animals and plantations, as well as land, including investments made for their development. Furniture, office equipment, equipment used to protect human and material assets, as well as other tangible assets such as advances or tangible assets under construction are also classified as fixed assets.
Are not considered fixed assets prototypes, temporary constructions and installations, forests, tools, instruments, and special devices used for manufacturing serial products or executing specific orders.
At the same time, engines, equipment and other related components purchased to replace worn parts during repairs of any kind are not classified as tangible assets. Protective or work equipment, special clothing, as well as special garments are not considered fixed assets. Animals that have not reached maturity, animals raised for fattening, birds, and bee colonies are also not classified as fixed assets.
Fixed assets catalog
Data regarding the classification of fixed assets and details related to their normal useful life can be found in the classification table, known as the Fixed Assets Catalog. Therefore, those who want to correctly identify and classify fixed assets can use this fixed assets catalog. The Fixed Assets Catalog includes the normal useful life of tangible assets and their classification according to the following categories:
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Category 1: Buildings
Fixed assets included in this category of the fixed assets catalog are real estate assets intended to be used as buildings or constructions. Their value is generally high and, in most cases, involves significant investments for construction or acquisition.
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Category 2: Technical installations, means of transport, animals and plantations
The second category in the fixed assets catalog includes fixed assets that can be used for various organizational activities. For example, it includes machinery such as excavators or forklifts, and the animal subcategory may include work horses, guard dogs, hunting dogs, etc. Unlike fixed assets in category 1, depreciation for fixed assets in category 2 is most often calculated over a shorter period of time.
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Category 3: Furniture, office equipment, equipment for the protection of human and material assets, and other tangible assets
This category includes fixed assets that generally have a lower acquisition value compared to assets in the other two categories. However, they are still subject to the depreciation rules established by law. Examples of fixed assets included in this category of the fixed assets catalog include furniture, household appliances, phones, video surveillance systems, mechanical protection equipment, and others.
Fixed assets catalog current catalog
The current version of the catalog containing the classification and normal useful life of fixed assets is regulated by Government Decision No. 2,139/2004, which entered into force on January 1, 2005 and replaced the previous catalog. Since 2005, the fixed assets catalog has undergone several targeted amendments, the first in 2008 and the second in 2022.
Moreover, a new legislative proposal recently registered in the Senate provides for increasing the entry value threshold of fixed assets from 2,500 lei to 5,000 lei. Increasing the entry value of fixed assets is important, as tangible assets generate future economic benefits.
Fixed assets depreciation
Since companies acquire fixed assets with the purpose of using them for a period longer than one year and to obtain economic benefits throughout their useful life, each financial year may record an expense that reflects the benefits generated through the use of fixed assets. One of the most important characteristics of fixed assets is that they can be depreciated, and this process is recorded and calculated monthly.
Depreciation represents the gradual recovery of the costs related to fixed assets over their entire useful life, and any fixed asset can be depreciated if it meets certain conditions, such as being owned and used in the production process, for supplying goods or providing services, being leased to third parties, or being used for administrative purposes.
Useful life and types of depreciation for fixed assets
The useful life of fixed assets is established based on the classification of the asset within a specific category, according to legislative provisions. Therefore, the company may choose, depending on the asset it owns, a specific number of depreciation years.
The depreciation process for tangible assets can be analyzed from an accounting, financial, and tax perspective, and depending on the depreciation methods applied, depreciation can take several forms:
- Straight line depreciation: when a fixed asset is depreciated using the straight line method, expenses are allocated evenly over its useful life. More precisely, the depreciation value of the fixed asset is divided equally by the number of years of use. According to tax regulations, depreciation is calculated by applying a straight line depreciation rate to the tax value of the fixed asset at the time it enters the company’s assets.
- Declining balance depreciation: compared to straight line depreciation, declining balance depreciation starts with a higher value that gradually decreases over the useful life of the fixed asset. This method is based on the premise that a fixed asset loses most of its value at the beginning of its use and stabilizes as the asset approaches the end of its useful life.
- Accelerated depreciation: this type of depreciation involves recognizing depreciation of up to 50% of the fixed asset’s entry value in the company’s assets and can be applied starting from the first year of use. For the following years, depreciation is calculated by allocating the remaining depreciable value over the remaining useful life of the fixed asset.
Example of straight line depreciation for fixed assets
For a fixed asset valued at 9,000 lei, with a useful life set at 5 years, straight line depreciation is recorded each month by recognizing a proportional part of the initial value as an expense until the entire value of the asset is fully depreciated.
Monthly depreciation is calculated by dividing the asset’s value by the number of months, resulting in a monthly depreciation amount. For example, if the value is 9,000 lei and the useful life is 60 months, the calculation is: 9,000 lei ÷ 60 months = 150 lei, representing the monthly depreciation value.
Therefore, over the 5 year period, this expense will be recorded in accounting, and the calculation starts from the month following the commissioning of the asset.
Fixed asset value. Fixed assets revaluation
The minimum value that an asset must have in order to be considered a fixed asset may change periodically through legislative amendments; however, in 2023, the value remained the same as in 2022, according to Government Decision No. 276/2013. Therefore, to be classified as a fixed asset, a tangible asset must have an entry value in the company’s assets greater than or equal to 2,500 lei.
According to a statement issued by the National Institute of Statistics, the overall consumer price index in March 2022 compared to the reference period of March 2013 was 126.41%. After more than 10 years without changes, an increase in the fixed assets entry value from 2,500 lei to 5,000 lei is possible, although this law has not yet entered into force. Once the entry value of fixed assets is modified, Government Decision No. 276/2013 regarding the establishment of the fixed assets entry value, published in the Official Gazette of Romania, Part I, No. 313 of May 30, 2013, will be repealed.
Tangible asset disposal. Fixed assets disposal legislation
According to fixed assets disposal legislation, the method of removing a fixed asset from inventory is called disposal and is carried out when the use of this asset no longer provides any future economic benefit. From a tax perspective, fixed asset disposal represents a process in which assets are taken out of operation, and the components resulting from their dismantling are capitalized through their use in the company’s activity or through sale.
For the disposal of a tangible asset, an official report is prepared to certify that the asset has depreciated and can no longer be used at its initial capacity. A justified proposal for removing the fixed asset from operation is made by the administrator, inventory manager, or other persons responsible for managing the company’s assets. After the disposal process is completed, an official document is issued confirming the deactivation of the respective asset, proving that the conditions for removing the fixed asset from operation have been met.
Software system for fixed assets
Fixed assets play a major role in a company’s economic activity, as they represent long term investments that contribute to increased productivity, competitiveness, and profitability. With the help of an ERP software for fixed assets, companies can apply an appropriate depreciation plan from those predefined in the system or create a new one.
A high performance ERP software solution for enterprise resource management is an essential tool for efficient management of tangible assets, helping organizations track, monitor, and optimize the use of fixed assets.
An ERP system for fixed assets provides business owners with clear visibility into the current status of their assets and supports them in making the right decisions regarding asset acquisitions and disposals. In addition, the ERP system enables automated location, tracking, and maintenance of fixed assets without manual data entry. This automation helps reduce costs, optimize resources, and ensure efficient monitoring of fixed assets.
Learn more about ERP software applications
SeniorERP is a next generation software solution with over 450 successful implementations and a wide range of integrated functionalities that effectively cover all business components, regardless of the company’s industry.
ERP integrated with fixed assets functionalities
SeniorERP is a resource management software solution with fast implementation, and SeniorXRP is a resource management software solution with extended functionalities for managing complex businesses, both representing examples of ERP systems. These include complete functionalities for fixed assets management, featuring advanced options for defining and configuring categories within the fixed assets catalog, depreciation methods, fixed assets revaluation coefficients, locations, and cost centers.
With ERP systems, organizations can obtain at any time the status of fixed assets in terms of depreciation period and depreciated value, as well as the remaining period and value to be depreciated. During fixed assets revaluation, the platform automatically calculates depreciation values and generates the corresponding accounting entries in accordance with accounting legislation.
Senior Software ERP solutions use the latest version of the Fixed Assets Classification Catalog and support all depreciation methods provided by legislation: straight line, declining balance, or accelerated.
Fixed assets accounting benefits achieved with an ERP system
- Efficient management of fixed assets, from acquisition to disposal
- Fast access to relevant data through reports and dashboards available in the system
- Reduced working time through automation of monthly depreciation calculations
- Configuration of predefined depreciation plans, in accordance with current legislation
- Automatic generation of documents related to key operations such as commissioning, modernization, disposal, fixed asset sale invoice, etc.