ACCOUNTING FOR FIXED ASSETS 201
Working life
Machines and things
A quick look through some company accounts shows that typical depreciation
periods might be 3 years for computers, 5 years for office equipment, 10 years
for some industrial machinery, 20 years for a jumbo jet and 100 years for airport
runways (I didn’t think that this last example was reasonable either).
Fitting of premises
Spending on fittings that you cannot take with you – fixed partitioning, plumbing,
cabling, decorating – is treated as freehold improvements (if you own the
premises) or leasehold improvements (if you rent). Such spending is usually
amortised over the shorter of the life of the fittings, the lease or the building.
Research and development
Spending on your research and development team and the gizmos that they
dissect is best treated as current expenditure. However, where there is clearly
identifiable spending on the specific development of a viable product, you may
charge the outlays to capital, show the total on the balance sheet as an asset
(perhaps as product X), and begin writing it off once the product is ready for
market. The amortisation might be over the period during which you will be able
to sell the product, or over a given number of units sold.
Start-up costs
Identifiable start-up costs for a new business – such as incorporation and
professional advisers’ fees and management costs – are often capitalised and
written off over between two and five years.
Goodwill
Goodwill is the difference between the market value of a business and the net
value of the assets. It represents the future cash flow that can be generated by,
for example, trading on a name or location. You cannot show in your accounts the
goodwill value that you attach to your own company. But if you are taken over, the
acquiring company can show goodwill and amortise it over up to 20 years (more
in some circumstances). It is, however, more common in Europe to charge this
directly to shareholder equity.