Investments of a more or less permanent nature sometimes take the form of investments in land. This may be for the purpose of securing an income; it may be of a speculative nature, as when land is held for appreciation in value; it may be to secure room for future expansion; or it may be for the purpose of preventing a competitor from securing favorable holdings as to trade location or facilities. For whatever purpose acquired, as here considered, the land is a permanent investment and should be separated in the records from land held for operating purposes. The manner of accounting for these investment holdings is somewhat dependent on the purpose for which they are held. In most cases, particularly if the land is income-producing, at least a land expense and income account will be needed in addition to the asset account or accounts with the land.
As to the valuation of these holdings, full cost with no account taken of depreciation or appreciation in value is the correct basis. As stated in [Chapter XVII, page 307], under certain conditions the carrying charges on non-income-producing lands may be added to the value of the holdings. If lands are held over a long period to secure appreciation in value, certainly all carrying costs should be loaded on to the asset account, offset, as shown in [Chapter XVII], by a suitable reserve. Care must always be taken not to secure inflated values by these methods. If any of these holdings are disposed of, the profit or loss then actually realized must be taken into account; but no unrealized profit or loss should be brought onto the books—except, perhaps, as a balance sheet footnote.
CHAPTER XVI
MACHINERY AND TOOLS,
FURNITURE AND FIXTURES,
AND OTHER EQUIPMENT
General Considerations
The valuation of assets grouped under the head of equipment presents nothing new in principle but requires consideration of many points in the application of principles and of some features in accounting. Here the principle of value as a going concern is particularly effective. As in the valuation of prepaid expenses on a going concern basis, so here forced sale or liquidation value has no place. The business is viewed as established and as expecting to operate continuously. Capital has become tied up in certain equipment essential to the undertaking, in the sense that to dispose of it in its entirety would mean a break-up of the business. It cannot therefore be freed or put to other uses without a reconstruction of the present enterprise. Accordingly, the possible market value, as second-hand property, should not in any way influence the valuation at which this group of assets is carried on the books. Only full cost at the time of installation and depreciation, using the term in its broad sense, need be considered in the problem of valuation.
Distinction between Personalty and Real Property
The present chapter deals with such fixed asset equipment as machinery and tools, furniture and fixtures, delivery equipments, patterns, lasts, dies, maps, drawings, electrotypes, ovens, furnaces, etc., as distinguished from the more fixed group of lands, buildings, leaseholds, and the like. In the main, the point of differentiation is the legal one of personalty and real property, although the intricacies of the law on this vexed subject are never, so far as is known, reflected in the books of account, nor is it the purpose here to attempt to lay down any working rules or standards by which such differentiation can be made. There seem to be none except certain broad generalizations, each case resting on its own peculiar surroundings. Circumstances, however, may arise under which a clear-cut distinction is desirable. A bond issue supported by a mortgage on real property or on personal property may depend, although not usually, on such a distinction for a large share of its security. The margin of safety may hinge on this point. It may be desirable to be able to trace on the face of a balance sheet the particular property covered by a mortgage. And should foreclosure of the mortgage become necessary, it is, of course, essential to know exactly the property subject to the lien. These are not points under contemplation in a going concern, although the possibility of their arising should not be lost to view. Here the problem of valuation and accounting for such valuation is viewed from the standpoint of a going concern and not one facing partial or total liquidation. Furthermore, as stated above, the point is, in its final analysis, one of law and not of accounting.
It is not intended by the foregoing statement to sanction any method of keeping the records in non-accord with fundamental rulings of the law, but only to state that, so long as substantial agreement is secured, accounting has served its intended purpose. Wherever any specific property is known to be subject to a lien, it is of value to the management for the accounts to reflect the fact. There may, however, be circumstances under which it is not desirable that the accounting records give this information. Conditions must govern each particular case without prejudice, and the principle holds that so long as substantial accuracy is reflected in the accounts as to this point nothing more is necessary.
Machinery and Tools
Under this head will be included not only the assets carried under that ledger caption, but also power machinery, power transmission, shafting, connections, electric transmission cables, and the like. The term is used in a very broad sense. While all these items are subject to one general rule of valuation, usually each must be separately considered to determine the practical application of the rule. The valuation involves, of course, the factor of depreciation, and it is readily apparent that not only do different pieces of machinery differ in this respect, but the same machines in different factories will vary as to this element and even in the same factory two similar machines will not usually be affected in the same way. This may be caused by defects or differences in quality, almost invariably latent, inhering in the machine and also by the different conditions under which they are operated. As pointed out in Chapter VI on depreciation, many of these are engineering problems which the accountant alone cannot solve but the existence of which he should know. Manifestly, all that can be attempted here is to point out their existence.