Net fixed assets definition
/What is Net Fixed Assets?
Net fixed assets is the aggregation of all assets, contra assets, and liabilities related to a company's fixed assets. The concept is used to determine the residual fixed asset or liability amount for a business. This information is of considerable interest to investors, who can use it to estimate the age of a company’s asset base.
How to Calculate Net Fixed Assets
The calculation of net fixed assets is as follows:
+ Fixed asset purchase price (asset)
+ Subsequent additions to existing assets (asset)
- Accumulated depreciation (contra asset)
- Accumulated asset impairment (contra asset)
- Liabilities associated with the fixed assets (liability)
= Net fixed assets
Advantages of Net Fixed Assets
There are several advantages associated with using the net fixed assets concept, which are as follows:
Acquisitions analysis. The net fixed assets calculation is useful for someone evaluating the fixed assets of an acquisition candidate, and who must rely on financial information to develop an opinion about those assets. If the calculation yields a very small amount in proportion to the gross amount of fixed assets, this implies that the company has not invested in the replacement or upgrade of its fixed assets - in short, the acquirer may find itself replacing many of the fixed assets of the target company.
Capital investment trend analysis. A net fixed assets analysis can be used by any outside party to determine whether a business is investing enough in its fixed asset base. If the net fixed asset level is declining over time, it is possible that management is not allocating sufficient funds toward fixed asset purchases to keep the organization competitive.
Disadvantages of Net Fixed Assets
The concept is of less use for internal management purposes, since managers can easily review the fixed assets in person and consult maintenance records to determine whether fixed assets should be replaced. Also, the net fixed assets figure is assumed to equate to the market value of a fixed asset, which is not necessarily the case. Some assets, such as buildings, can increase in value over time, which can result in large disparities between the net fixed asset figure and market value.
Related AccountingTools Courses
The Interpretation of Financial Statements
Example of Net Fixed Assets
A potential acquiree has listed on its balance sheet gross fixed assets of $1,000,000, $150,000 of accumulated depreciation, and $200,000 of accumulated impairment charges. Based on this information, the acquiree has net fixed assets of $650,000.