The movable fixed assets—paradoxical as the limiting adjectives may seem—having now been considered, the present chapter will treat of the immovable tangible fixed assets. By immovable is meant real property as distinguished from personalty, and by tangible the intention is to exclude from the present consideration such intangible items as good-will, patents, copyrights, trade-marks, franchises, and the like.
In accounting for this group of assets there is no place for the caption “real estate.” In its stead the two titles, “land” and “buildings,” are used. This is to avoid confusion and to afford a better basis for calculating depreciation. The term real estate or real property has a very definite legal connotation, but in the popular mind is held to include land and buildings. From the accountant’s point of view there is no objection to the use of the term in the balance sheet, but in the accounts themselves the two assets should be carefully separated. For the private commercial enterprise, land as a fixed asset is subject neither to depreciation nor to appreciation; whereas buildings are constantly depreciating in value. While depreciation can be calculated with fair accuracy on the combined basis, the single basis of building values is the only scientific basis. The separation of the two values is also essential for insurance purposes and the proper adjustment of fire losses. They will therefore be separately treated in this discussion.
Cost of Buildings
Buildings as fixed assets should be valued by the formula for the fixed asset group, viz., full cost less depreciation. Some points in connection with proper methods of accounting and special cases of valuation require comment.
First, as to making the proper record of cost of the buildings. Three cases must here be considered:
1. If the building is purchased outright for cash, whatever costs are incurred in securing full title and expert opinion as to the sufficiency of the title are proper charges against the building. If the building is erected on contract, the full cost of the contract and any necessary supplementary charges comprise the carrying value of the structure.
2. If the building is bought by the issue of stocks or bonds, the present value of those securities and all costs in connection with their issue should constitute the cost of the building. Determination of the present value of the securities is oftentimes a difficult matter. When sales on the market take place concurrently, that determines the price. When, as is usually the case, several existing companies are bought up or merged to form a larger company, the old stockholders are given shares in the new company for their equities in the old. The book value of their old holdings may be the basis for the issue of the new stock or the issue may be on the basis of a larger or smaller value than this. This whole question of the value of the assets taken over is equally a question of the value of the securities issued therefor. This is considered in full in [Chapters XX] and [XXI] and will be given only brief treatment here.
Manifestly all considerations relating to buildings purchased by stocks and bonds have equal application to all other fixed assets so purchased, and the treatment in later chapters will therefore be more inclusive than could be any statement of the case applicable only to buildings. It suffices to say here that usually the par value of the securities issued constitutes the value placed on the assets bought. The valuation as a rule is made by an appraisal committee from the board of directors which inspects the various properties taken over and places a value on them. In the absence of fraudulent intent, the courts will usually sanction and uphold these values as having been made by interested parties competent to act. This is the method generally used for injecting water into properties.
3. When buildings are put up by the concern itself, full cost may include not only cost of material and labor and a fair proportion of the overhead where supervision of construction is local, but all other expenses directly incurred in connection with construction. These will include architects’ fees for plans and supervision, cost of permits and licenses, interest on borrowed moneys and insurance during construction, accidents and injuries to workmen during the construction period, easements, damages, strike costs, and the like. If the structure is being erected on a site occupied by an old building, the cost of wrecking less any salvage value is a proper charge against the new structure. If bonuses have to be paid tenants in the old building to secure release of their quarters, these, too, are similar charges to the new structure. Charges such as interest and insurance during construction are capital charges only up to the point of fitting the building for occupancy and so making it an operating and income-producing unit. Thereafter these must be treated as revenue charges.
Some interesting and at times complicated situations arise when, as in the case of an office building, the structure is occupied in sections as completed. Theoretically, only the portions of the charges of this kind applicable to the completed sections now become revenue charges, the rest still being capitalized so long as sections remain uncompleted. Practically all that is desired is substantial accuracy. The items may be comparatively insignificant but when in doubt the bias should always be on the side of conservatism.