This article is brought to you by AssetAccountant Pty Ltd, ACN 631 508 051 (“Asset Accountant”).
Many accountants prefer to maintain a single fixed asset register for their clients’ businesses. And, since tax depreciation tends to be much more aggressive than accounting depreciation, basing fixed asset registers solely on tax rules seems like a great choice.
For example, in Australia, the Tax Act permits the immediate deduction of 100% of the value of some assets. Other assets can be depreciated aggressively in pools by taking advantage of rules like ‘Backing Business Investment’ accelerated depreciation.
Depreciating assets as aggressively as possible makes great sense for tax, but using these same rules for accounting has some serious downsides.
For accounting, your fixed asset register should reflect the value of an asset at any time during its useful life. And the ‘cost’ of the asset should be spread across the asset’s useful life – allowing you to reflect the cost to use that asset to produce income in any given period.
But, aside from distorting the true value of assets to a business, depreciating too aggressively reduces the value of those assets on the balance sheet as well as reducing profits on the P&L – thereby undervaluing the business. This can have significant impacts on a business’ ability to borrow, meet banking loan covenants, and sell the business at a fair value.
Keeping separate asset registers for tax and accounting ensures you can maximise taxable deductions for your client and maximise the value of the business on the balance sheet.