Fixed assets: meaning, structure, depreciation, sources of financing Lecture for Corporate Finance Mgr. Tetiana Konieva, Ph.D Corporate Finance FIU/BAFIK Outline of the lecture •Structure of fixed assets •Investing activity •Examples of tangible and intangible assets of Xiaomi •Distribution of depreciation of tangible and intangible assets by costs •Distribution the value of fixed assets •Tax saving effect •Terms of depreciation •The Four Basic Methods of Depreciation •Forming of depreciation fund •Sources for fixed assets financing Structure of fixed assets: • • Fixed assets (Non-current assets) – those, which are not current assets: Intangible assets – an identifiable non-monetary asset without physical substance (patented technology, computer software, databases and trade secrets; trademarks, internet domains; video and audio-visual material; franchise agreements; marketing rights (International Accounting Standard IAS 38 — Intangible Assets) = original value - accumulated amortisation: original value accumulated amortisation Incomplete capital investment (unactuated equipment, equipment that is not put into operation, unfinished building) Tangible assets; Property, equipment, buildings, vehicles = original value - accumulated depreciation original value (price of purchase excluding VAT + transportation + insurance + cost of installation + customs fees.) accumulated depreciation Investment property – is property (land or a building or part of a building or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both (International Accounting Standard IAS 40 — Investment Property): land held for long-term capital appreciation land held for a currently undetermined future use building leased out under an operating lease vacant building held to be leased out under an operating lease property that is being constructed or developed for future use as investment property Investment property is property (land or a building or part of a building or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both. Long-term biological assets (adult, working, productive livestock - cattle, goats, pigs, horses; gardens, vineyards) Long-term financial investments: calculated by the equity method in other enterprises (Investments in associates and joint ventures in amount more, than 20% of their capital) Other financial investments (stocks, bonds of other enterprises, states; deposits for a term of more than 1 year) Long-term accounts receivable; Long-term trade and other receivables Deferred tax assets Other fixed assets Total fixed assets Investing activity • •International Accounting Standard 7 — Statement of Cash Flows: investing activities are the acquisition and disposal of long-term assets and other investments that are not considered to be cash equivalents. Examples of investing activities are cash outflow for the purchase of fixed assets and financial investments, securities issued by other entities; cash inflow from the sale of the fixed assets, financial investments, received dividends, interest rate • II. Cash flow from investing activities Cash inflow from sales of: financial investments fixed assets Cash inflow from received: percent dividends Cash inflow from derivatives Other cash inflow Cash outflow for purchase of: financial investments fixed assets Cash outflow by derivatives Other cash outflow Net Cash flow from investing activities Examples of tangible assets of Xiaomi Examples of tangible assets of Xiaomi Examples of tangible assets of Xiaomi Distribution of depreciation of tangible assets by costs Examples of intangible assets of Xiaomi Examples of intangible assets of Xiaomi Distribution of depreciation of intangible assets by costs Advantages of fixed assets: • practically do not feel the impact of inflation, they are better protected from it • they are characterized by a lower commercial risk of losses in the course of the company's operational activities; •they are practically protected from unscrupulous actions of partners • these assets are able to generate a stable profit, ensuring the release of various types of products according to the conditions of the commodity market • they contribute to the prevention (or significant reduction) of the loss of inventories in the process of their storage • they are characterized by greater reserves for a significant expansion of the volume of operational activity during the period of growing in the commodity market Disadvantages of fixed assets: • subjected to material and moral wear (aging) (especially the active part of production fixed assets and intangible operating assets) • these assets are difficult to manage operationally, since they change weakly in the structure in the short term • weakly liquid assets (can be quickly transformed into cash), that cannot serve as a means of ensuring the flow of payments serving operational activities Distribution the value of fixed assets •Original (beginning) value= Price of purchase without Value Added Tax + Freight (transportation) charges + Installation, testing + Insurance + Custom duties +Registration fees…….. • •Original value (for example, equipment = $100000; Useful life = 5 years (period, during which the assets serve) • • • • • • • • • • •$100000 = cash outflow from investing activity ≠ costs at once; •it is distributed during useful life; monthly part will be the cost • First year Second year Third year Forth year Fifth year $100000/5 years/12 months=$1667= costs per month $100000/5 years/12 months=$1667= costs per month $100000/5 years/12 months=$1667= costs per month $100000/5 years/12 months=$1667= costs per month $100000/5 years/12 months=$1667= costs per month Tax saving effect: Terms of depreciation •Original value= Price of purchase without Value Added Tax + Freight charges + Installation, testing + Insurance + Custom duties +Registration fees •Depreciation – distribution of original value of tangible assets during their useful life •Amortization – distribution of original value of intangible assets during their useful life •Useful life – period, during which the assets serve •Book value = original value – accumulated depreciation •Salvage (residual) value – price of asset’s selling at the end of useful life (0, >0……) •Depreciated value = original value – salvage value The Four Basic Methods of Depreciation •Straight-line •Sum-of-the-years’ digits •Double declining balance •Units of production • The Four Basic Methods of Depreciation •Straight-line method: •Annual depreciation = (original value – salvage value) • useful life • • • Double declining balance: •Annual depreciation = Book value *2 • useful life • • •Depreciation per month = Annual depreciation/12 • The Four Basic Methods of Depreciation •Sum-of-the-years’ digits: • •Annual depreciation = •(original value – salvage value) * quantity of years up to the end of useful life • 1+2+3+4+5+6+……+10useful life • •Units of production: •Annual depreciation = Annual amount of production from asset * (original value – salvage value) • total amount of production from asset • • •Depreciation per month = Annual depreciation/12 • Forming of depreciation fund Sources for fixed assets financing: •Depreciation funds •(Financial) Leasing •Long-term bank credit •Issued bonds •Equity (issued shares) Thank you for your attention!