Fixed assets definition:
Fixed Assets normally refer to property, plant, and equipment that are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes, and they are expected to be used with more than one year accounting period.
Those assets included land, building, machinery, cars, computers, and other similar kinds of assets defined by law, the accounting standard and company policies.
Those assets usually have large value and their useful life is more that one year.
Some of the assets are considered fixed assets in one accounting standard or local regulation might not be considered as fixed assets in other standards or regulations. Different entities might treat the same items differently.
In this article we will guide you to know about the technical requirement of IAS 16, IFRS, related to fixed assets Recognition, Measurement, Valuation, Depreciation, and Disclosure in the company’s financial statements.
Definition of fixed assets as per IAS 16:
Fixed assets have been talked very detail in IAS 16 Property, Plant and Equipment.
However, this standard does not cover Assets held for sales which are already covered in IFRS 5 Non-current Assets Held for Sales, Biological assets which are related to agricultural activities covered in IAS 41 Agriculture, exploration and evaluation assets which in cover in IFRS 6 exploration for and evaluation of Mineral Resources.
The fixed assets that we will cover here refer to Property, Plant and Equipment which is cover in IAS 16 Property, Plant and Equipment.
Before we discuss detail about the Recognition, Measurement, depreciation, and Disclosure of Fixed Assets, we would like to mention the definition of Property, Plant and Equipment as per IAS 16.
The standard said:
- 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.
The example of those fixed assets include:
- Office Building
- and others related.
Recognition of Fixed Assets:
Fixed assets recognition is one of the most important things to know as it can be confused you when and how much the fixed assets should be capitalized.
Here are what standard said,
As per IAS 16.7, Fixed Assets or PPE should be recognized based on the following factors:
The cost of items of Property, Plant, and Equipment should be recognized as an asset if and only if
- It is probable that the future economic benefits associated with the item will flow to the entity; and
- Cost of the item can be measured reliably
Please note that all of the items could be recognizes as PPE only if they meet the definition of PPE above; otherwise, those items should treat as inventories that are cover in other standards.
You may need your own judgment on what should be classified as Property, what should be classified as Plant and what should be classified as Equipment since there is no prescription on what constitutes these items.
Okay, now let move to fixed assets measurement,
Measurement of Fixed Assets
They are two-stage that we need to consider when measure fixed assets;
- Initial measurement and;
- Measure subsequent to initial measurement
and, here are what to do on the initial measurement of fixed assets,
Initial Measurement of Fixed Assets:
As per IAS 16, the fixed assets or PPE should be initially recognized at cost. The cost here includes all costs necessary to bring the assets to working condition for its intended use.
They include not only its original purchase price, but also costs of site preparation, delivery and handling, installation, related professional fees for architects and engineers, and the estimated cost of dismantling and removing the asset and restoring the site.
In some cases, the payment of purchasing of Fixed assets might be deferred and the company might need to pay the interests as the result of those deferred payments.
In this case, the standard says, the interest expenses should be included in the cost of fixed assets at the market rate.
Let move to subsequent measurement,
Measure Subsequent to Initial Measurement:
The measurement of fixed assets after initial measurements of fixed assets have been discussed detail in paragraph 29 to 42 of IAS 16.
The standard says, the company has to choose either cost model or revaluation model as its accounting policies and should apply it to the entire class of Fixed Assets.
So what is the cost model and what is the revaluation model?
The definition of the cost model is after recognition as an asset, an item of property, plant, and equipment shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses. [IAS 16,30].
Based on my experience, most of the companies use Cost Model to subsequently measure its fixed assets.
The definition of revaluation model is after recognition as an asset, an item of property, plant, and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses.
Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period. [IAS 16,31].
Depreciation of Fixed Assets:
Depreciation is the systematic way on how to transfer costs of fixed assets to the income statements based on the amount of assets’ contribution to a specific period or measurement compared to the total cost of assets.
IAS 16 talks very clearly about the time in which assets should be depreciated, and the methods to be used.
Okay, now let talk about the time in which assets should be depreciated,
Depreciation of Fixed Assets should be started when the assets are ready for use, according to IAS 16.55.
That means the fixed assets could only be depreciated and charged as expenses only if they are ready for use.
The ready for use mean fixed assets does not require additional process or waiting for other equipment to use.
For example, computers have installed all applications and are can be used.
As standard said, each part of an item of property, plant, and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately. [IAS 16.43.]
The depreciation charge for each period shall be recognized in profit or loss unless it is included in the carrying amount of another asset. [IAS 16.48.]
The residual value and the useful life of an asset shall be reviewed at least at each financial year-end and, if expectations differ from previous estimates, the change(s) shall be accounted for as a change in an accounting estimate in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. [IAS 16.51.]
Depreciation Method of Fixed Assets:
The depreciation of fixed assets method used shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity. [IAS 16.60.]
The depreciation method applied to an asset shall be reviewed at least at each financial year-end and, if there has been a significant change in the expected pattern of consumption of the future economic benefits embodied in the asset, the method shall be changed to reflect the changed pattern.
Such a change shall be accounted for as a change in an accounting estimate in accordance with IAS 8. [IAS 16.6.]
Disclosure of Fixed Assets in Financial Statements
The financial statements shall disclose, for each class of property, plant, and equipment:
(a) the measurement bases used for determining the gross carrying
(b) the depreciation methods used;
(c) the useful lives or the depreciation rates used;
(d) the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period; and
(e) a reconciliation of the carrying amount at the beginning and end
of the period showing:
- (i) additions;
- (ii)assets classified as held for sale or included in a disposal group classified as held for sale in accordance with IFRS 5 and other disposals;
- acquisitions through business combinations;
- increases or decreases resulting from revaluations under paragraphs 31, 39 and 40 and from impairment losses recognized or reversed in other comprehensive income in accordance with IAS 36;
- impairment losses recognized in profit or loss in accordance with IAS 36;
- impairment losses reversed in profit or loss in accordance with IAS 36;
- the net exchange differences arising on the translation of the financial statements from the functional currency into a different presentation currency, including the translation of a foreign operation into the presentation currency of the reporting entity; and
- other changes.