Accounting treatment for fixed assets – Polaris Industries Inc. (Term Paper Sample)

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Accounting treatment for fixed assets – Polaris Industries Inc.
Polaris Industries Inc. designs, engineers and manufactures off-road vehicles such as motorcycles, snowmobiles, side-by-side vehicles and all-terrain vehicles. The vehicles are designed to serve a number of purposes ranging from commercial to luxury. It also makes parts and accessories needed to keep these vehicles running smoothly as well as garments for keeping riders safe and comfortable. The company sells its products through a network of distributors and dealers located in the US, Canada and other parts of Europe. Polaris Industries Inc. is also quoted on the New York Stock Exchange. The company’s head offices are in Minnesota, USA.
Understanding depreciation
A company requires fixed assets to help it produce goods for sale to its consumers. Examples of such assets include: machinery, computers, buildings, furniture and motor vehicles. As time goes by, the fixed assets owned by a company, excluding land, lose their value and “ability to provide services” (Warren, Reeve and Duchac 453). This is referred to as depreciation. It can be caused by wear and tear or exposure to weather elements. Depreciation also occurs through obsolescence, a situation that is manifested through an asset falling out of use following changes in technology or a shift in customer preferences. Accounting for depreciation involves allocating the cost of a fixed asset as an expense over its useful life. This results in a net figure which is the book value of the asset. This figure is arrived at by taking the cost of an asset in question, less the total depreciation to date. Warren, Reeve and Duchac also help erase the misunderstanding that depreciation measures “…decline in the market value of a fixed asset” (453). At the same time, depreciation does not involve providing cash to replace a fixed asset. Peterson supports this by stating that depreciation is an expense that results from use of assets. He adds that depreciation is “measured by allocating the expected net cost of using the asset over the estimated useful life in a systematic and rational manner” (102). Without accounting for depreciation, a company would be overstating the value of its fixed assets.
How the company depreciates its fixed assets
Polaris Industries Inc. uses the straight-line method of depreciation. This is a method where an equal amount of depreciation is charged on an asset every year over its useful life. Straight-line method uses three important values: the initial cost of an asset, expected useful life, residual value.
Computation of depreciation under straight-line method is as follows:
Annual depreciation = Cost of asset – Estimated residual value
Asset’s useful life
For simplicity of calculation, the annual depreciation is usually converted into a percentage. This is done by dividing 100% by the number of years a company has agreed upon as its expected useful life. On the other hand, determination of an asset’s useful life is purely at the discretion of every company or business entity.
The description of how Polaris Industries Inc. treats deprecation of fixed assets is found in the annual reports. Such details are normally stated on the notes accompanying financial reports. For instance, in the latest annual reports for the fiscal year 2013, this information is found on “Note 1 Organization and Significant Accounting Policies” under the subheading, “Property and equipment” (p.53). The report states that:
The company shows its property and equipment at cost
It then depreciates the same using the straight-line method
The useful lives are, 10-40 years for building and improvements and 1-7 years for equipment and tooling
Polaris Industries Inc. also eliminates fully depreciated tooling assets from its schedule every year.
Fixed assets are usually recorded in the balance sheet. For Polaris Industries Inc. details of fixed assets and the resultant depreciation are found on the consolidated balance sheet appearing on page 46 of the 2014 annual report. Polaris has indicated the total cost of its plant and equipment on a yearly basis. Below this is the accumulated depreciation followed by the value net of depreciation.
To illustrate how Polaris calculates depreciation, assuming that on January 1, 2013 the company purchases equipment worth $74,000 with an expected useful life of 10 years and an estimated residual value of $5,000, annual depreciation will be as follows:
Annual depreciation = Cost – Residual value / Estimated useful life
= $74,000 - $5,000 / 10 years = 69,000 / 10 = $6,900
Converting depreciation to percentage = 100% / 10 = 10%
Therefore, from this illustration, the depreciation expense for the year ending December 31, 2013 will be $6,900. In essence, this also means that the equipment is depreciated at the rate of 10% per annum. To capture depreciation effectively, every company must keep a fixed assets register. This is a schedule showing the movement of assets. Among other things, it shows:
Acquired assets including the name, serial or registration number where applicable
Dates of acquisition
Cost or amount paid to acquire these assets
Asset category, in Polaris’ case this could be equipment, tooling, land, building or improvements
Rate of depreciation according to company policy
Assets disposed and dates of these transactions