Internal Control of Fixed Assets: A Controller and Auditor's Guide

CHAPTER TWELVE 12

Developing the Fair Value of Fixed Assets

TRADITIONALLY, BOTH ACCOUNTING FOR and control of fixed assets has been based on the cost to the company of the asset. Assets are recorded at cost when acquired, depreciated down to salvage value, or to zero, and then removed from the fixed-asset register, or property record, upon sale or other disposition. Very straight-forward, with the possible exception that an impairment charge may have to be taken in situations where the economic value is severely impacted. As discussed in Chapter 5 on Impairment there are some clear indicators as to when assets must be tested. In the absence of any such indicators, the original cost of the asset continues to be utilized for both accounting and internal control. Insurance and property tax assessments also usually start with the original cost.

Original cost can either be the amount paid to the vendor (including freight and installation) or an allocated portion of the purchase price in a business combination. In a business combination the new “cost” is based on the “fair value” of the asset at the time of the transaction. Many companies, in a business combination, will have retained a valuation firm to determine the fair value of the Property, Plant, and Equipment (PP&E), working capital, and intangible assets, with goodwill as the balancing item.

From the perspective of internal control, there is no difference between acquiring a new asset directly from its vendor, and acquiring ...