In a typical organization setup the most puzzling assets are equipments, plant and property. This is because their market value continues to reduce with years and when they have to be disposed the organization must ensure that the selling price is an amount that can be easily recovered.
When an organization purchases assets mentioned above collectively, it would be wise to identify the cost of every individual asset. According to Schroeder, Clark, and Cathey (2011) this is because having a generalized cost could be misleading. When determining the cost of an asset that has to be developed the accountant must consider the costs of the materials and the labor that will be incorporated into the asset for it to be complete.
If the asset includes equipment that is bought from the supplier the price tag attached to that equipment does not represent the actual value of that asset. This is because from time to time the equipment may develop mechanical problems which require a specialist to repair it. This implies that when the company is disposing such an item the money spent on repairing that item must be integrated into the price tag.
When assets are obtained through exchanging with other assets it is difficult to determine the actual worth of such asset but the accountant has to be patient to wait until the asset has been used for some time so that he/she can observe the expenses spent on refining the asset. This includes expenses such as those incurred while excavating the construction site and clearing vegetation when preparing to put up structures. Vehicles are the most complicated assets hence the accountant must advice the management on how to purchase models that have low depreciation rate.
How to Address Long-Term Assets
When calculating the cost of such equipment the accountant should consider the amount of output brought by that asset. For instance, when calculating the value of a fleet of trucks the accountant should consider the amount of monetary value brought by every single truck which should then be subtracted from the initial cost price of buying every truck. Additionally, the accountant should analyze the amount of money spent on repairing the trucks and if the expenses outweigh the revenue collected, we can certainly say that such an asset is a liability.
Tirole (2002) argues that assets that are in the form of stocks are also difficult to manage because the price at which the stocks were bought may have declined over a period of time. This means that the value of stocks can never be constant because the prices keep on moving up and down. Land is the most precious asset that an organization can own because its value can never depreciate. However, its market value may change if there are structures to be erected on that land. This because the amount of money spent on purchasing materials is always on the increase.
Equipments on the other hand can be gauged according to the revenue they have generated. When an organization has incurred a bad debt it is very difficult to dispose equipment especially when there are limited users of such equipment. It would be advisable for organizations to dispose long term assets before the resale value declines extremely.
When evaluating assets it is important to consider the intensity of depreciation. This means that each asset especially equipment must be analyzed to determine if it is in good shape to generate more income. The accountant must identify the cost of repairing such equipment against that of purchasing new equipment. This involves the services of property and asset values. If the amount of repairing equipment is closer to the amount of purchasing a new one it would be better to buy a new one. Besides, if the equipment is still in good shape it is advisable to repair it if the recommended service life has not been exhausted.
Best practices for long term liabilities
Long term liabilities include stocks which are currently viewed as assets but may be transformed into liability incase the market prices come down. Money owed to creditors can also be placed in this category because the organization may not be able to pay the debt. The best way in managing long term liabilities is to monitor their progress early enough and take an affirmative action rather than waiting until the situation gets out of hand (Banks, 2005).
Some assets can become a liability due to depreciation caused by aging or natural causes such as bad weather. Possible liabilities can be prevented by insuring such possessions so that they can be recovered incase they are destroyed. Moreover, the risks involved in long term liabilities should be analyzed to determine the chances of recovering money spent to cater for liabilities. This entails monitoring the market trends before acquisitions.
When bonds are being issued for the purpose of generating income to caution against liabilities the organization should ensure that its interests are way above the market rates so that more people can be lured by the rates. This is because lenders consider what they will get as profit at the end of the payment period. Organizations should ensure they reduce their liabilities by repaying their debtors on time.
Accounting for Income Taxes
Most companies are faced with the problem of maintaining their books of accounts with regard to correct representation of income taxes. This is because it takes a lot of effort in predicting the correct taxes and there is constant change in income tax laws from different boards. FASB has been active in ensuring that companies are able realize, rate, and present their tax positions (PriceWaterHouseCoopers, 2007). In this light, it would be appropriate to have a uniform rate of determining income taxes with the aim of having predictable temporary differences in the books of accounts.
Banks, E. (2005). Liquidity Risk: Managing Asset and Funding Risks. Finance and Capital Markets Series. Basingstoke, UK: Palgrave Macmillan.
PriceWaterHouseCoopers. (2007). Guide to Accounting for Income Taxes. National Professional Services Group. Web.
Tirole, J. (2002). Financial Crises, Liquidity and the International Monetary System. Princeton, NJ: Princeton University Press.
Schroeder, R., Clark, M., & Cathey, J. (2011). Financial Accounting Theory and Analysis: text and cases. (10th Ed.). Hoboken, NJ: John Wiley & Sons.