Visible or invisible: about a company's fixed assets

Fixed assets, or non-current assets, form an important part of the balance sheet of many, production-oriented, firms. Fixed assets consist of tangible, intangible, and financial assets.

Fixed assets are regularly covered during a due diligence, to understand e.g. depreciation, age of the assets, and capex.

In the following, I am going to illustrate which aspects to consider in a financial due diligence.

Classification

• Intangible assets include software and licenses, goodwill, and patents.
• Tangible assets include land, building, vehicles, and office equipment.
• Financial assets include investments in affiliated companies as well as any stock market investments that the company might have done.

Aspects for a due diligence

• Understand the capitalization and the depreciation policy. If expenses are not recognized as assets, then they are typically included in other operating expenses and consequently reduce the firm’s operating profit (EBITDA).
• Analyze income from financial assets separately, as it is a non-business-related income (unless it’s a financial services company).
• Understand the average age of the asset base and if there are any deferred investments (I will cover this in a separate article about capital expenditures).

Tips

• Always check if depreciation and amortization in the balance sheet match depreciation and amortization in the income statement, especially in the planning period (oftentimes, this is not the case).
• Run a fixed assets roll forward, i.e. fixed assets last year PLUS additions MINUS depreciation and disposals need to match current year’s assets. This ensures that data across different sources is consistent.

Final thoughts

Fixed assets are an important part of the balance sheet of many firms and often vary even among firms within the same industry (due to different asset management policies). Thus, it is important to understand the asset base and the applied policies, especially if seller and acquirer follow different policies with regard to fixed assets.

Hi, I am Jan, I share insights about financial due diligence procedures. If you find this helpful and would love to receive more content like this, follow me here on LinkedIn.

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