Operating Assets – Definition
The term operating assets is used to identify the broad category of long-lived assets that are used to produce goods or services. This group includes not only tangible assets (often known as property, plant, and equipment or fixed assets) but also those that exist only as intangible rights (such as trademarks, patents, and goodwill). The category excludes assets that are held as investments and current assets and various miscellaneous items, such as long-term receivables and deferred charges.
Explanation of operating assets
The acquisition and holding of operating assets impact short-run solvency somewhat negatively in that they require a long-term commitment of cash in order to provide their optimal use. Management is willing to make this kind of long-term commitment because the assets are intended to boost earning power by improving the firm’s ability to provide goods and services. Long-run solvency is consequently strengthened by the improved earning power.
There are numerous items of information about operating assets that could be useful to the readers of financial statements. First, disclosures of the value committed by the firm to these assets help statement readers assess the potential earning power of the firm provided by its productive resources. GAAP are presently structured such that the preferable amount to report is the assets’ book value, which is that portion of the original cost which has not yet been allocated to a period as an expense.
Many participants have argued for presenting a more direct measure of the assets’ current value; also supplemental disclosure of estimates of those amounts as well as the book value adjusted for inflation. GAAP call for classification of operating assets on the balance sheet into appropriate categories based on tangibility or intangibility, their basic nature (such as land, buildings, and equipment), or the line of business in which they are used.
The example below presents American Motors Corporation’s balance sheet disclosure of operating assets.
In order to assist solvency assessments, disclosures are also provided of specific claims held against the assets by creditors through collateral agreements. In the event of insolvency, these claims entitle the holder to take possession of the asset or to receive the cash from its sale. The current value disclosures required the objective of providing useful information for solvency assessments.
An important accounting objective is the measurement of the expense incurred by using an operating asset. Finally, the statement of changes in financial position (SCFP) presents information about the amount of working capital generated during a time period by the sale of operating assets and the amount used in acquiring them.
Since disposals are beyond the primary activities of the firm, information about the proportionate amount of the total funds provided by this source is helpful in assessing solvency. Because acquisitions are representative of commitments to future activity and growth, information about their amounts is also important for assessing the firm’s future solvency and earning power.