Differences between a capital goods acquisition and a purchase of inventory

3. Capital acquisitions process peculiarities

The workflow supporting fixed asset acquisitions doesn’t differ significantly from the inventory purchase workflow, but it is more complex in nature as individual fixed asset items are more expensive and associated risks are higher.

Illustration 2: Fixed asset acquisition process

Fixed Asset Acquisition Process

Generally, large fixed asset items are bought as part of a capital project and require senior top managers to authorize the purchase.

In comparison to the inventory acquisition process, fixed asset ordering may include selection of a vendor though a tender in order to optimize costs. Vigorous negotiations may result in individual contract terms that need to be reflected correctly in accounting records. For instance, a company may buy a building and in addition to the agreed upon price of the building, it may be obliged to incur site restoration costs. The value of such restoration costs should not be ignored and accounted for correctly in accordance with accounting standards.

If a fixed asset item is constructed using a company’s own resources or with the help of a vendor, special inventory items may be required and/or services rendered. In such cases, raw materials or other supplies are accounted for as inventory, but they are subsequently written-off to the construction in progress. When the construction is over, the construction in progress object is transferred to fixed assets.

Additional risks may be present when a company purchases fixed assets:

  • Costs incurred during a fixed asset purchase are inappropriately capitalized or expensed;
  • Construction in progress additions are not input completely or are not entered in the correct period;
  • Leased assets are incorrectly classified;
  • Assumptions used to estimate depreciation are not reasonable.
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