Explaining the Functionality of Asset Classes

Objective

After completing this lesson, you will be able to explain the important phases of the asset lifecycle

Introduction

Ready to start your journey into Asset Accounting? Let's start with the video below:

What is an Asset?

First of all, it is important to understand what is meant when speaking of an asset. Kevin takes a look at Lisette's notes.

Note

An asset is typically an object, a right, or an item owned by an enterprise. It is intended for long-term use and can be identified individually in the balance sheet. Each asset belongs to a company code.

All postings made for the asset (acquisition, retirements, depreciation, and so on) are posted in the assigned company code.

Asset Accounting

Asset Accounting is used to manage and monitor tangible fixed assets. It provides detailed information about the transactions involving tangible fixed assets.

Lifecycle of a Fixed Asset

For Kevin’s understanding Lisette has prepared a graphic that illustrates the basic financial accounting lifecycle of a fixed asset.

	Acquisition
	First, the assets arrive at the company, a warehouse, or the place they are to be used. This is called acquisition. During this step, you first create an asset master record and then capitalize the asset. When the asset is capitalized, the asset value is posted in the system.
	Usage
	The accounting lifetime of the asset starts from the capitalization date. It ends with the deactivation date. If a capitalization date is set and the deactivation date is not, the asset belongs to the company's asset portfolio. During its lifetime, the asset is periodically depreciated. Value corrections can also be made during the useful life, if required. If the asset is depreciated by too much in one year, you correct it in the following year using a write-up. If additional depreciation is required, post an unplanned depreciation.
	Retirement
	The asset lifecycle ends with retirement. Asset retirement is the removal of an asset or part of an asset from the asset portfolio. From an accounting bookkeeping perspective, this removal of an asset is posted as an asset retirement.

Asset Class

On most business days, assets are being purchased by the Bike Company. Kevin’s task is to enter the asset master data in the system in a structured way. Today, the Bike Company has put the 3D printer, which is used to print bicycle parts, into operation. The printer can be used for rapid prototyping of smaller parts such as a cable guide, as well as bigger parts, such as a chain guard. Before assigning the correct asset class, Kevin must first create the asset master record for the 3D printer. He is wondering which app will be the one to create the master record. Lisette tells him that he can create new fixed assets in the Manage Fixed Assets app. He can then use existing fixed assets as a template or create the fixed assets from scratch.

Assigning Asset Classes

The asset class assignment plays a central role in the creation of the asset master record. Each asset must be assigned to one asset class. This is important as certain control parameters and default values are defined for depreciation and other master data in the asset class.

To learn about different asset classes, Lisette has prepared a visual overview for Kevin. Take a moment to process the graphic below, before moving on with your learning journey.

The figure illustrates the structuring, numbering, and account determination for various asset classes. It categorizes assets into five asset classes: Buildings (1100), Machinery (2000), Furniture (3000), Assets under construction (4000), and Low value assets (5000). Each asset class is assigned a specific range of numbers for identification. The corresponding balance sheet accounts for these asset classes are Buildings (16001000), Machinery (16002000), Furniture (16006000), Assets under construction (AuC, 16009000), and Low value assets (LVA, 16020000). The diagram visually connects each asset class to its respective balance sheet account through a structured numbering system.

Deep Dive

For his workday routine, it's quite important that Kevin has a good understanding of asset classes, that's why Lisette brings him closer to some important details:

Structuring
An asset class is being used to ensure that the fixed asset is displayed correctly in evaluations such as the asset history sheet, asset list, and balance sheet. The main purpose of the asset class is Structuring.
Numbering
Depending on the asset class, each asset receives a unique number to identify it within the system. Each asset class is connected to a number range. When you save your entries in the master record, the system automatically assigns an asset number based on the asset class number range.
Account Determination
The values of each assets needs to transfer to the balance sheet. The assets class contains an account determination key that will determine correct balance sheets accounts.

Discussing Asset Classes

Let's follow along another conversation taking place between Lisette and Kevin, to get a deeper understanding of asset classes.

Have a look at the example Lisette was talking about.

Lisette's Example

The figure displays an Manage Fixed Assets screen for an asset identified as 20000002-0, which is a 3D printer. The screen is under the Valuation tab, showing three items with different ledgers and depreciation areas. For Ledger 0L, there are two depreciation areas: Book Depreciation (Dep. Key: LINS, Useful Life: 10 years, Start Date: 01.02.2024) and Local Tax (Dep. Key: DG25, Useful Life: 10 years, Start Date: 01.01.2024). For Ledger 2L, the depreciation area is IFRS (Dep. Key: LINS, Useful Life: 8 years, Start Date: 01.02.2024).

Local GAAP (1), Tax (15) and International Financial Reporting Standards (IFRS) (32)

These valuation approaches are represented in the system as depreciation areas. The depreciation keys and useful lives can be different for each depreciation area.

The asset class is a characteristic in the universal journal entry. This means that to separate the data in reporting in General Ledger Accounting by asset class, there's no need to create a new account determination for a new asset class.

Kevin's Key Takeaways

Note

Asset classes are the most important means of structuring fixed assets for reporting purposes.
The assignment of asset numbers can be controlled by the asset class.
Another important function of the asset class is to establish the connection between the asset master records and the corresponding accounts in the general ledger.
Make sure to check the default values when creating the master data and correct them if necessary. As the depreciation keys and useful life can be different for each depreciation area.

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