Definition of Fixed Assets:
Fixed Assets are referred to property, plant, and equipment. These items are held and used in the production and supply of goods or services. Furthermore, this equipment has also been used to perform administrative tasks. In addition, the life of these fixed assets must be over a year in an accounting period. Furthermore, the price tag that is being attached to them counts a lot as they are expensive. These fixed assets fall under the IAS 16 according to the IFRS.
According to the IAS 16 standard:
Property, plant, and equipment are tangible items that: Are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and
Are expected to be used during more than one period.
Here we will discuss the key points covering IAS 16 for property, plant, and equipment. We are further going to discuss classifications of fixed assets, recognition and measurement of these fixed assets.
Classification of Fixed Assets:
Computer equipment falls under the head of the fixed asset in the Balance sheet. Fixed assets of the balance sheet include,
- Land
- Machinery
- Office Building
- Computers
- Cars
- Table
- Chair
and others related.
The cost of fixed assets does not appear in the income statement of any company. Rather than it appears on the balance sheet. Although the depreciation being charged on these assets apart from land is included in the income statement under the head depreciation expense.
Classification of computer equipment:
Computer equipment falls under the head of office equipment as they are being used to manufacture goods or render services. This computer equipment has a useful life of more than one year or one accounting period. Furthermore, these types of assets are commonly known as tangible assets.
On the other hand, there is another type of computer equipment, such as delicate parts of computer software, that are being used to run the organization’s day-to-day business. This software falls under the intangible asset category.
Measurement of Fixed Assets:
The measurement of fixed assets can further be divided into two major categories: initial measurement and subsequent measurement.
Now, let’s explain these methods to have a clear and better understanding of the fixed assets.
Initial measurement:
In initial measurement, the cost of the office equipment or computer equipment relates to the cost associated with them. At the same time, they are being purchased from the market for usage. Furthermore, there is another aspect of this initial measurement. All the costs associated with preparing the site or letting them into the working condition are included in the initial cost of the computer equipment or type of fixed asset. Following costs are usually part of the initial measurement.
- Cost of purchase (invoice amount)
- Transportation cost
- Installation cost
- Professional fee
The cost incurred for getting it into the running condition
Measure that is after initial measurement:
Two models are being used for measuring the after initial measurement. These two models are described below in detail. These models include the cost model and revaluation model.
Cost model:
The cost model can better be described as after recognizing an asset or computer equipment, and it must be carried on its cost less accumulated depreciation or minus the accumulated impairment losses, if any.
Revaluation model:
The revaluation model comes after recognizing any asset, office equipment, or computer equipment with a fair value that can be measured reliably. It must be carried at a revalued amount, considering the revalued amount as its fair value at the revaluation date. Furthermore, the revaluations for an asset must be done regularly to ensure the carrying amount must not differ from that you have recorded in your system or your books at the closing of your books at the year-end.
Recognition of Fixed Assets:
For recognition of the fixed assets, several factors are being applied under the standard of IAS 16. These factors are elaborated in detail below.
The cost of computer equipment being purchased by the organization for performing their official and business tasks can only be recognized according to the standard if
The future economic benefits of this associated computer equipment will then flow towards the organization and not to the outside entity.
The other crucial factor for recognizing is that the cost of these computer equipment can be measured reliably.
In the end, you must consider that only those items are considered to be PPE or fixed assets that fall under the proper definition for these assets. Otherwise, they all will be considered an inventory and will be treated in a completely separate manner and treatment.
For this reason, there is only one thing that you can do when you are working in an organization, and you found yourself in the same scenario. All you need to do is use your own judgment for making the proper classification of these PPE. If they all fall under the exact parameter of the IAS 16, then they are treated in a manner that has been described in the IAS 16, or we have detailed the entire process for you above.
On the other hand, if these assets do not fall under the exact parameter that the IFRS and IRFIC have set for preparing financial statements, the treatment for these assets would be completely different.
Depreciation of the fixed assets
As we have discussed, the purchase price for PPE is not directly debited in the profit n loss statement. It doesn’t mean that it’s never debited in the profit and loss statement.
To debit/expense out the cost of the assets, there is a concept of depreciation which means the asset’s cost is expensed in line with obtaining economic benefit from the assets. So, depreciation allocates the cost of the asset in different periods of usage. The well-known methods of depreciation include the straight-line method and reducing balance method.
However, both of the methods can be used depending on the nature of the asset. If the asset is expected to deliver the same level of performance throughout life, the straight-line method can be better to opt for. On the other hand, if the asset performs better in the initial years, the reducing balance method can be more logical to opt for.
