By examining Facebook’s income statement and balance sheet, we can better understand the company’s fixed assets. We can observe the sequential growth in the historical cost of property and equipment line items. We can also take a closer look at the depreciation rate for property and equipment, in order to derive a net value for Facebook’s fixed assets. In a later article we will examine capital expenditure (capex) for new property and equipment.1
Before we analyze Facebook’s capex, it is instructive to assess the composition and value of Facebook’s currently held property and equipment. In Q1 2013, the combined historical costs of Facebook’s fixed assets were $3.53 billion, an increase of 47.7% over the year ago quarter.2 The largest component of Facebook’s property and equipment is network equipment. In the first quarter the historical cost of Facebook’s network equipment passed $2 billion.3
Facebook’s filings also reveal the depreciation rate for its fixed assets. For its network equipment, Facebook estimates that the useful life of its purchases and leases will be three to four years. Buildings will fully depreciate after 15 to 20 years. Computer software and office equipment will last two to five years. Leased equipment and leasehold improvements depreciate at a rate lesser to the useful life or remaining lease term. Land and construction in progress does not depreciate.
We can derive a net value for Facebook’s quarterly property and equipment by accounting for accumulated depreciation. In Q1 2013, Facebook’s accumulated depreciation reached $1 billion, an increase of 87% over the year ago quarter, and a sequential increase of $120 million. Concurrently, Facebook’s fixed assets’ net value reached $2.5 billion in the first quarter, a 36.5% increase over the year ago quarter, and a sequential increase of $678 million.
Accumulated depreciation for Facebook’s fixed assets is increasing at a fairly constant rate relative to net value. Facebook’s net value of fixed assets should continue to rise during FY 2013 with new capital purchases and leases, especially due to the comparatively short useful life of its network equipment. The construction of Facebook’s data centers in Oregon, North Carolina, and in Sweden will drive new network equipment purchases and other capital leases.
Having established the composition and accumulated depreciation of Facebook’s fixed assets, we are now in a better position to examine the company’s capital expenditure. According to CFO David Ebersman, Facebook anticipates spending $1.8 billion in capex in FY 2013.4 The historical costs and net value of Facebook’s property and equipment serves as the basis from which we can assess trends in purchases and leases of new capital going forward.
- I owe a debt of gratitude to Ryan Seal, BBA, Finance for providing me with a cursory overview of property and equipment, and for helping me to better understand Facebook’s quarterly income statements and balance sheets.
- Historical cost refers to the nominal value of an asset; the original cost of the asset is recorded on the balance sheet excluding changes in its value (i.e. depreciation) over time. Because historical costs do not include depreciation, the total value of assets measured by line item will be materially greater than the net value of those assets.
- Form 10-Q, Facebook Inc., 2013.
- Facebook Q4 2012 Earnings (transcript), Facebook Inc., 2013.