What Are Fictitious Assets?

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Companies can have multiple asset types that help them run operations. One asset classification is fictitious assets. These are not very popular for companies to list on their balance sheet, which is how companies report assets. Fictitious assets can also create controversy if the items are on the balance sheet for the sole purpose of making the company look better financially.

Definition

Fictitious assets are the result of an accounting entry. No physical item backs up the entry reported on the company’s financial statements. A common example of a fictitious asset is business start-up costs. Accountants record these costs as an asset because they do bring some value to the new business. The company may need to write off this fixed asset against earnings, however, to properly report all tangible and intangible assets on the balance sheet.

Goodwill

Another common fictitious asset is goodwill. This asset represents an amount over and above a company’s actual valuation. For example, Joe is going to purchase Widgets International, and the company has an actual value of $50,000. Joe offers $70,000 as the purchase price, with the $20,000 excess being the goodwill associated with the offer. Joe records the excess amount paid as goodwill, as allowed by generally accepted accounting principles.

Classification

Goodwill -- although a fictitious asset -- is typically an intangible asset for recording purposes. Though the item is a fictitious asset because it is not real, GAAP requires the item to be recorded as an intangible asset. The purpose for this is because a company will not need to immediately expense any amount of goodwill recorded through a business purchase. Goodwill does retain some value through multiple accounting periods for the business.

Fair Value Accounting

Goodwill does not result in a potentially immediate expense for companies after a certain period of time. Companies can leave goodwill on their books for any length of time, depending on their business industry and applicable accounting guidelines. Accountants will need to adjust the goodwill for current market values, however. This requires an evaluation, with accountants writing off a loss of goodwill against earnings.

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References

  • Intermediate Accounting; David Spiceland
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