VALUATION AND INTERPRETATION OF FIXED ASSETS 1. Fixed or capital assets.—The assets designated as fixed or capital assets are those of a permanent na ture which a business organization has acquired, and which are generally financed thru the issue of capital stock or bonds. In some instances, assets of this char acter are financed thru surplus, but in any event they represent that portion of the capital investment which the company does not intend to dispose of, or which could not be disposed of without seriously crippling the operation of the business. Assets, the utilify of which lasts less than one year from the date when they are placed in service, ordinarily should not be included under this group.
2. Real estate, or real bal ance sheets frequently show "real estate," or "real property," which includes land, land improvements, leaseholds and buildings. Real property is the right to use and enjoy land. Under the law of real prop erty, buildings or permanent structures erected on the land become a part of it. While this is the legal view, from the accounting viewpoint a sharp distinction is drawn between land and buildings. The reason for this is that the accountant is forced to consider the question of depreciation in connection with buildings, and it is advisable to keep separate accounts for the component parts of the real property investment.
3. Plant land distinguished from land held as an investment.—The account for plant land should be charged with the value of the land acquired strictly for the purpose of manufacturing or trading operations. Business firms will occasionally make investments in land for other purposes, such as for development in connection with housing schemes for employes, and the like. Land acquired for such purposes is essen tially an investment and will ordinarily receive differ ent treatment in the accounts.
4. Valuation of plant land.—The account with plant land should be charged at the time of purchase with the actual cost of the lnd, whether it is paid for in cash or in securities. It is proper to include in the cost all the necessary and incidental expenses in con nection with the acquisition of the property, such as the cost of title-searching or the registration of title, broker's commission or fee, the cost of recording the deeds and conveyancing, taxes accrued up to the date of the transfer of title, and other liens or assessments levied against the property at the date of its acquisi tion.
5. Land improvements.—While the cost of improv ing land or rendering it suitable for the purposes for which it is intended to be used, is frequently merged in the land account, it is generally advisable to keep a separate account for the cost of these improvements. It may be necessary to drain the land and to fill in swamps; it may be necessary to cut down embank ments. In fact, any improvements of a permanent nature which add to the value of the land, and render it suitable for the purposes for which it is to be em ployed are properly chargeable to this account.
6. Land general principles out lined in the preceding paragraph apply to land pur chased primarily for investment. The cost of any improvements made to land investments should also be carried in a separate account. It must be remem bered, however, that land of this character will not produce any revenue under ordinary conditions. There will be annual carrying charges for taxes and for interest on borrowed money, and for statistical purposes it is probably desirable to add expenditures of this kind to the value of the land. Accordingly, the problem is to measure the cost of this unproduc tive investment. However, where the method of cap italizing the ordinary maintenance expenses is fol lowed, a reserve equivalent to the amount of the an nual capitalized charges should be set aside out of profits. The reason for this is that if the land is ul timately disposed of, such capitalized charges may not be recovered. Accordingly, the failure to provide for a reserve would inflate the surplus and, in the case of a corporation, these capitalized expenditures would be made available for dividends.