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A paper asset is any type of asset that is carried on a balance sheet but cannot be converted into cash quickly or easily. Companies often have a number of paper assets on their books, sometimes in the form of parts and equipment that are no longer usable but have not yet been charged off the accounting records. There are accounting practices that make it possible to incrementally remove assets of this type from the books, either by writing off the obsolete equipment or selling the property at salvage value. Depending on tax laws that apply in the jurisdiction in which the company is located, this process may result in creating a tax break that can be used to lower the taxes owed for the period in which the sale is made.
The low liquidity of a paper asset, either due to obsolescence or the fact there is no market for that asset, means that the company is essentially paying taxes on a holding that provides no benefit of any kind. For this reason, it is not unusual for companies to have some type of process in place that makes it possible to declare the asset obsolete and remove it from its financial records. In large corporations, this process normally is originated at plant level and forwarded to a comptroller’s office at the corporate headquarters.
The comptroller will then determine if the asset could be of use at another location of the company. If so, arrangements are made to transfer the paper asset to the new location, and remove it from the accounting records of the plant that is seeking to have the equipment declared obsolete. Should the asset be of no use to the company at any of its locations, and it is determined that the item cannot be sold, the comptroller will often grant the request for obsolescence and approve both the removal of the asset from the accounting records and transport of the obsolete equipment to a landfill or junk dealer.
Since a paper asset is often no longer of any value to the owner, that asset does not generate benefits that help to offset the taxes that are assessed on the item from one year to the next. In order to lower the tax burden and save money, companies usually assess parts and equipment on an annual basis to determine if there is any reason to retain those assets for another year. By declaring the paper asset obsolete in accordance with governmental laws and regulations that are relevant to the type of asset involved, the company can dispose of the asset and no longer carry the book value of that asset in its accounting records. The end result is fewer taxes due and more money kept by the company for use in projects like product development or upgrades to equipment that remains important to the business operation.
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