Generally accepted accounting principles (GAAP) are the national accounting standards used primarily in the United States and for those companies releasing financial statements in the United States. GAAP has specific procedures for fixed assets, which are those items a company retains for 12 months or longer in its business operations. The most important issues for GAAP fixed asset procedures are initial valuation, depreciation, and revaluation for specific assets. Other technical issues may also be important, though some of these items relate to very specific fixed assets. A certified public accountant is the best source for certain conditions that relate to a GAAP fixed asset.
Initial GAAP fixed asset value is the starting point for this accounting process; in some cases, it may also be controversial. GAAP requires the use of historical value — usually determined as the price paid for an asset — as its book value. This theory is troubling to some as the historical value does not reflect replacement value. To correct this, GAAP fixed asset principles place new rules on the revaluation of certain asset classes, though the use of historical cost is still in place for the initial recording of fixed assets. Companies can also record other costs, such as setup, shipping, and related test run expenditures as part of the historical cost of the GAAP fixed asset.
As companies use fixed assets in business, a related expense must go against income to represent the use of these items. This process — called depreciation — is part of the matching concept in accounting that demands certain costs to be directly associated with the generation of revenues for a given period. Depreciation represents the use of a GAAP fixed asset during a given period, usually a year, with accountants posting depreciation amounts each month. Companies can use a number of different methods, such as straight line, sum-of-the-years digits, declining balance, or depletion depreciation methods. These methods all fall under GAAP-accepted methods and are available to use in certain conditions.
GAAP fixed asset procedures may require the revaluation of certain assets. For example, those that involve securities or other assets based on current investments may need revaluation. This is necessary due to the asset not being worth the original cost a company paid. GAAP provides specific measures for the revaluation process so a company can present the most accurate fixed asset information to business stakeholders. Gains or losses relating to fixed assets typically go against a company’s net income for a given period.
