Accounting for Fixed Assets under IFRS
Have you ever come across an asset that you felt was misreported, that it might be under-reported in value? Accounting for fixed assets is tricky at times, being governed by a number of standards set under the International Accounting standards as well as various industry norms, and can differ significantly from country to country. Keeping track of all the norms can be challenging in case of companies having a multi-national presence.
By definition, fixed assets are either tangible or intangible. Tangible fixed assets include a variety of items such as land, plant, machinery, etc. while intangible assets include goodwill, brand recognition, copyrights, patents, trademarks, trade names, and customer lists.
Fixed assets are again divisible into appreciating and depreciating asset classes. As per the Indian accounting standards, IAS-16 deals with depreciating fixed assets, while appreciating fixed assets are classed under IAS-40, i.e. investments. Our primary focus here would be look at those assets classified as depreciating fixed assets, i.e. primarily, Property, Plant and Equipment which fall under IAS-16. Please note that, in this case, property does on cover real estate or land which is classified as an appreciating asset or investment and therefore subject to IAS-40.
IAS Definition of Fixed Assets
According to the IAS-16, a fixed asset meets the following criteria:
- The asset is used or being capable of use for the production of goods, services or administration of the entity, i.e. the company.
- The cost of the asset can be measured reliably using set standards
- Future economic benefits arising from the asset are associated with flow to the entity, and therefore the risk and rewards of ownership of the asset lie with the entity.
Measuring the Value of the Fixed Asset
The value of an asset is measured in not only the actual price paid to acquire that asset. It can include a number of other aspects as well. The book value of the asset should include:
- Purchase price
- Non-refundable duties or taxes
- Installation expenses
- Professional fees required for managing the asset
- Cost directly attributable to the asset
- Cost of installation, storage and dismantling
- Interest cost or borrowing cost (real or notional)
Deferred Payment Term
In case the acquisition of the asset is funded through borrowing, then the deferred payment needs to be worked out as discounted value and the difference will have to be added to the Value as a borrowing or interest cost over the period of repayment/credit.
In certain cases, where the purchase of an asset is through exchange/barter than an outright sale, i.e. another asset is given lieu of the one being purchased; the value is taken as the fair value of the asset. In case the measurable value of the assets is not measurable or it lacks commercial value, then the value is taken as the value of the asset being given up in exchange. For example, if A is exchanged for B and value of A cannot be measured by fair market standards, then the fair value market value of B is taken as the value of A.
Tracking the value of the Asset
Once the value of the asset has been recognised when it enters the Fixed Asset register, it can be updated on a regular basis using either the actual cost minus accumulated depreciation and impairment loss system or the re-evaluation system.
In case of the latter, re-evaluation of assets needs to be done annually at least. This ensures timely detection of machinery value and loss due to pilferage, etc.
Measuring Depreciation of Fixed Assets
In order to replace the asset in question at the end of its useful life, a provision needs to be made to purchase its replacement. This is known as depreciation, and it can also be defined as the value by which the usefulness of the asset has reduced in a given period of time, usually in a year.
Depreciation methods vary and depending on the way the asset is used, these can also be changed to reflect the changed pattern.
At times, the value of the asset may be lower than the book value listed by conventional depreciation, and an impairment charge or loss will then have to be listed against the asset, as per IAS-36.
When an asset is no longer able to deliver according to its purpose or is sold off or disposed, the subsequent loss has to be registered in the P&L account.
As per IAS-16, the financial statements shall disclose for each class of asset:
a. The measurement base
b. Depreciation method & Amount
c. Useful life
d. Gross carrying amount, additions, deletion, accumulated depreciation & accumulated impairment losses at the beginning and end of reporting period.
e. Increase & decrease in revaluation reserve
f. Impairment loss charged in Profit & loss a/c
All of the above is simplified with the use of a Fixed Asset Management tool like Tracet, which can define depreciation methods and subsequent calculations, tracking and reporting according to the required tax and accounting standards. To know more about how Tracet can help your fixed asset tracking, fill out the form below or contact us at firstname.lastname@example.org