Between the acquisition and disposal of an asset, fixed asset accounting takes certain key points of an asset’s life into consideration. Firstly, the initial recordation occurs when an asset is acquired, whether leased or purchased; there are a number of considerations to take into account before recording the asset such as the base unit, the costs to include, and when to stop capitalizing costs.
If the asset is being constructed or if the asset will take time to be brought to the location or into the proper condition for its use, the cost of the interest associated with the purchase may be capitalized. Some fixed assets in capital intensive operations will require substantial disposal costs, such as decontaminating a nuclear plant or remediation for a mine or oil well. In such cases, the remediation costs, i.e. asset retirement obligations, must be accounted for at the initial purchase and recordation of the fixed asset.
Once the fixed asset is on the records, the cost should be gradually charged to expense over time using any one of a variety of depreciation methods. However, there are limited circumstances where an entity is allowed to revalue fixed assets and make subsequent changes. If at any point during the useful life of a fixed asset, the fair value falls below its recorded costs, the recorded costs must be reduced to its current fair value and the loss between the two amounts must be recognized; this is referred to as ‘impairment’.
Lastly, the derecognition of an asset occurs when it is at the point of disposal. At this point, it must be removed from the fixed asset accounting records and any gains or losses on the final disposal transaction must be recorded.