Buildings

Definition

Buildings are physical structures that are constructed to serve various purposes, such as providing shelter, housing, or facilitating commercial, industrial, or institutional activities. They are considered tangible assets, which are physical resources that can be seen, touched, and measured, in contrast to intangible assets that lack physical substance.

5 Must Know Facts For Your Next Test

1. Buildings are classified as long-term, fixed assets that are expected to provide economic benefits for more than one year.
2. The cost of a building includes not only the purchase price but also any additional costs incurred to prepare the asset for its intended use, such as site preparation, architectural fees, and construction costs.
3. Businesses must allocate the cost of a building over its useful life through the process of depreciation, which reduces the asset's book value on the balance sheet over time.
4. The useful life of a building can vary depending on factors such as the construction materials, maintenance, and the building's intended use, with typical useful lives ranging from 20 to 50 years.
5. The value of a building can be impaired if events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable, requiring the company to recognize an impairment loss.

Review Questions

• Explain how buildings are classified as tangible assets and distinguish them from intangible assets.
  • Buildings are classified as tangible assets because they are physical, identifiable resources that a company owns and can be measured in monetary terms. They have a physical substance that can be seen, touched, and measured, unlike intangible assets, which lack physical substance but can still provide future economic benefits, such as patents, copyrights, and goodwill. The key distinction is that tangible assets, like buildings, are physical in nature, while intangible assets are non-physical resources that a company owns.
• Describe the process of accounting for the cost of a building and how it is allocated over its useful life through depreciation.
  • The cost of a building includes not only the purchase price but also any additional costs incurred to prepare the asset for its intended use, such as site preparation, architectural fees, and construction costs. This total cost is then allocated over the building's useful life through the process of depreciation. Depreciation is the systematic allocation of the cost of a tangible asset, like a building, to reflect the gradual decrease in the asset's value due to wear and tear, obsolescence, or other factors. The useful life of a building can vary depending on factors such as the construction materials, maintenance, and the building's intended use, with typical useful lives ranging from 20 to 50 years.
• Explain the potential for impairment of a building's value and the implications for a company's financial reporting.
  • The value of a building can be impaired if events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. This means that the building's fair value has decreased below its book value, and the company must recognize an impairment loss. Recognizing an impairment loss reduces the building's carrying value on the balance sheet and the company's overall asset value, which can have a significant impact on the company's financial reporting and performance. Impairment of a building's value is an important consideration for companies, as it can affect their financial statements and the overall assessment of the company's financial health.

Related terms

Tangible Assets: Tangible assets are physical, identifiable resources that a company owns and can be measured in monetary terms, such as buildings, equipment, inventory, and cash.

Intangible Assets: Intangible assets are non-physical resources that a company owns and can provide future economic benefits, such as patents, copyrights, trademarks, and goodwill.

Depreciation: Depreciation is the systematic allocation of the cost of a tangible asset, such as a building, over its useful life, reflecting the gradual decrease in the asset's value due to wear and tear, obsolescence, or other factors.