Unit
- Definition: Fixed assets, referred to as property, plant, and equipment (PP&E), are tangible long-term resources held for use in production, service delivery, rental, or administration, with a useful life exceeding one year.
- Key characteristics: They are physical in nature (excluding intangibles), used in operations rather than held for sale, depreciated over their service life, and subject to impairment testing.
- Control and ownership: The entity must control the asset and obtain future economic benefits. Legal ownership is typical, but lease arrangements require control assessment under IFRS 16 and ASC 842.
- Materiality threshold: Organizations set a capitalization threshold (e.g., $2,500) below which costs are expensed as supplies or maintenance, reducing administrative burden.
- Recognition criteria: Under IAS 16 and ASC 360, an asset is recognized when future benefits are probable and cost can be measured reliably.
- Examples: Land, buildings, machinery, vehicles, furniture, computers, and leasehold improvements. Natural resource reserves also qualify.
- Distinction from inventory: Fixed assets are used over multiple periods, whereas inventory is sold in the ordinary course of business within a shorter cycle.
- Financial statement impact: Fixed assets are recorded at cost on the balance sheet, with depreciation expense reducing income each period. Impairment losses may also affect profitability.
- Regulatory standards: IAS 16 (IFRS) and ASC 360 (US GAAP) govern accounting for PP&E, including initial measurement, depreciation, impairment, and disclosure.
- Depreciation methods: Straight-line, declining balance, and units of production are common approaches. The chosen method should reflect the pattern in which the asset's economic benefits are consumed. Straight-line spreads cost evenly over useful life, while accelerated methods like double-declining balance front-load expense, often matching higher early usage or obsolescence risk.
- Useful life estimation: Determining useful life requires evaluating expected physical usage, wear and tear, technological change, and legal or contractual limits. Companies must review and update these estimates periodically when new information emerges, adjusting depreciation prospectively under IAS 8 (IFRS) and ASC 250 (US GAAP).
- Residual value: An asset's expected salvage value at the end of its useful life reduces the depreciable base. Under IFRS, residual values are reviewed at least annually; under US GAAP, review occurs when events or changes in circumstances indicate a revision. Changes affect future depreciation, not prior periods.
- Subsequent costs: Costs incurred after acquisition, such as repairs, maintenance, or major replacements, are capitalized only if they enhance future economic benefits (e.g., extending useful life, increasing capacity). Routine repairs that maintain normal operations are expensed immediately. Judgement is applied per IAS 16 and ASC 360.
- Disposal and derecognition: When a fixed asset is sold, retired, or abandoned, its carrying amount is removed from the balance sheet. The difference between any proceeds received and the carrying amount is recognized as a gain or loss in the income statement. Derecognition occurs when no future economic benefits are expected from the asset.
Regulatory Requirement
Regulation: IAS 16 and ASC 360
Both frameworks require that fixed assets be recognized initially at cost, including all costs directly attributable to bringing the asset to its intended use. Subsequent measurement can follow either the cost model or the revaluation model (allowed under IFRS only). Annual impairment testing is required when indicators exist.
Quick Revision
- Fixed assets are long-term tangible assets used in operations with a life beyond one year.
- Recognition requires probable economic benefits and reliably measurable cost.
- Capitalization thresholds help distinguish between capital expenditures and expenses.
- Regulatory standards IAS 16 and ASC 360 provide the accounting framework.