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Fixed asset
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Fixed assets (also known as long-lived assets or property, plant and equipment; PP&E) is a term used in accounting for assets and property that may not easily be converted into cash.[1] They are contrasted with current assets, such as cash, bank accounts, and short-term debts receivable. In most cases, only tangible assets are referred to as fixed.[2][3]
While IAS 16 (International Accounting Standard) does not define the term fixed asset,[4] it is often colloquially considered a synonym for property, plant and equipment. According to IAS 16.6, property, plant and equipment are tangible items that:
(a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes and
(b) are expected to be used during more than one period.[5]
Fixed assets are of two types:
- those which are purchased with legal right of ownership (in the case of property, known as freehold assets), and
- those for which the owner has temporary ownership rights for a stated period of time (in the case of property, known as leasehold assets).
A fixed asset can also be defined as an asset not directly sold to a firm's consumers or end-users.[6]
Non-current assets
[edit]In modern financial accounting usage, the term fixed assets can be ambiguous. Instead, the term non-current assets (used by the IFRS and U.S. Generally Accepted Accounting Principles (GAAP) XBRL[7] reporting taxonomies) is preferred when referring to assets that will not be liquidated in the current fiscal period. Specific non-current assets (Property, plant and equipment, Investment property, Goodwill, Intangible assets other than goodwill, etc.) should be referred to by name.[8]
A bakery's current assets include its inventory—such as flour, yeast, and other ingredients—the value of sales owed to the business from credit transactions (accounts receivable), and cash held in the bank. Its non-current assets consist of items like the ovens used for baking, delivery vehicles, and cash registers. While these non-current assets hold value, they are not intended for direct sale to customers and cannot be readily converted into cash.[9][10]
Non-current (fixed) assets are items of value that the organization has bought and will use for an extended period of time, typically including land and buildings, motor vehicles, furniture, office equipment, computers, fixtures and fittings, and plant and machinery.[11] These often receive a favorable tax treatment (in the form of a depreciation allowance) in contrast to short-term assets.[12]
Note that the cost of a fixed asset is its purchase price including import duties, after subtracting any deductible trade discounts and rebates. It also includes the cost of transporting and installing the asset on-site and an estimate of the cost of dismantling and removal once it is no longer needed due to obsolescence or irreparable breakdown.[13]
Accounting treatment
[edit]The primary objective of a business entity is to be profitable and increase the wealth of its owners. To do so, management must exercise due care and diligence by matching the expenses for a given period with the revenues of the same period. The period of use of revenue generating assets is usually more than a year, i.e. long term. To accurately determine the Net Income (profit) for a period, incremental depreciation of the total value of the asset must be charged against the revenue of the same period. Doing so is necessary for determining Net Revenue.[5][14]
Net book value of an asset is the difference between the historical cost of that asset and its associated depreciation. Under most financial accounting standards (Standard Accounting Statement (SAS) 3 and IAS 16), the value of fixed assets are recorded and reported at net book value. Also, carrying assets at net book value is the most meaningful way to capture asset values for the owners of the business and potential investors.[15]
Depreciating a fixed asset
[edit]Depreciation is the expense generated by using an asset. It is the wear and tear and thus diminution in the historical value due to usage. It is also the cost of the asset less any salvage value over its estimated useful life. A fixed asset can be depreciated using the straight line method which is the most common form of depreciation. Tax depreciation is commonly calculated differently than depreciation for financial reporting.[16][17][18]
Straight-line depreciation
[edit]Straight-line depreciation is the simplest and most often used method. The straight-line depreciation is calculated by dividing the difference between assets pagal sale cost and its expected salvage value by the number of years for its expected useful life. (The salvage value may be zero, or even negative due to costs required to retire it; however, for depreciation purposes salvage value is not generally calculated at below zero.) The company will then charge the same amount to depreciation each year over that period, until the value shown for the asset has reduced from the original cost to the salvage value.[19][20]
Straight-line method:
See also
[edit]References
[edit]- ^ Rogers, Karen (8 March 2019). "What Items Are Included in Fixed Assets?". smallbusiness.chron.com. Houston Chronicle. Retrieved 14 April 2021.
- ^ "Current Assets vs. Fixed Assets: What's the Difference?". Investopedia. Retrieved 2025-04-23.
- ^ Sahil, Ahuja (2014-04-19). "Difference between fixed and current assets (with examples)". Accounting Capital. Retrieved 2025-04-23.
- ^ http://eifrs.ifrs.org/eifrs/bnstandards/en/IAS16.pdf [bare URL PDF]
- ^ a b "IFRS - IAS 16 Property, Plant and Equipment". www.ifrs.org. Retrieved 2025-04-23.
- ^ Sinra (2023-02-24). "9 General Categories of Fixed Assets (With Explanation)". Wikiaccounting. Retrieved 2025-04-23.
- ^ "Taxonomy Viewer". xbrlview.fasb.org.
- ^ "IFRS - IFRS 3 Business Combinations". www.ifrs.org. Retrieved 2025-04-23.
- ^ "A STUDY ON FIXED ASSET MANAGEMENT WITH REFERENCE TO KESORAM" (PDF).
- ^ "Evaluation of Fixed Assets Management".
- ^ "What is fixed asset management". www.ibm.com. Retrieved 14 April 2021.
- ^ "Oracle ® FLEXCUBE Universal Banking Fixed Assets User Guide". docs.oracle.com. Retrieved 2025-04-23.
- ^ "Property, plant and equipment | ACCA Global". www.accaglobal.com. Retrieved 2025-04-23.
- ^ "Conceptual Framework for Financial Reporting".
- ^ "Net Book Value". Corporate Finance Institute. Retrieved 2025-04-23.
- ^ "Depreciation: Definition and Types, With Calculation Examples". Investopedia. Retrieved 2025-04-23.
- ^ "Depreciation Methods Template". Corporate Finance Institute. Retrieved 2025-04-23.
- ^ CEPF®, True Tamplin, BSc. "Depreciation | Causes, Methods of Calculating, and Examples". Finance Strategists. Retrieved 2025-04-23.
{{cite web}}: CS1 maint: multiple names: authors list (link) - ^ "Straight Line Depreciation". Corporate Finance Institute. Retrieved 2025-04-24.
- ^ "Straight Line Depreciation Method | Explanation & Examples". Retrieved 2025-04-24.
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Fixed asset
View on Grokipediafrom Grokipedia
A fixed asset, also known as property, plant, and equipment (PPE), refers to long-term tangible assets that a business acquires, owns, and uses in its operations to generate revenue, expected to provide economic benefits over multiple accounting periods rather than being held for sale in the ordinary course of business.[1][2] These assets are essential for production, administration, or rental purposes and are distinguished from current assets by their longevity and illiquidity.[1][2]
Common examples of fixed assets include land, buildings, machinery, vehicles, furniture, and equipment, each contributing to a company's productive capacity without rapid conversion to cash.[2] They represent a significant portion of a balance sheet for capital-intensive industries such as manufacturing, utilities, and transportation, where their efficient management impacts operational efficiency and financial reporting.[3] Fixed assets are subject to periodic review for impairment if events indicate their carrying value may not be recoverable, ensuring accurate reflection of economic reality.[4][1]
Under international financial reporting standards (IFRS), IAS 16 governs fixed assets, requiring initial recognition at cost—including purchase price and attributable expenditures—and subsequent measurement using either the cost model (less accumulated depreciation and impairment) or the revaluation model (at fair value).[1] Depreciation is allocated systematically over the asset's useful life, reflecting patterns of economic benefit consumption, with annual reviews of estimates.[1] In the United States, Accounting Standards Codification (ASC) Topic 360 provides similar guidance, emphasizing capitalization of costs directly related to acquisition or construction and depreciation methods that match expense recognition with revenue generation.[2][5] Both frameworks exclude assets held for sale, which fall under separate disposal rules, and promote transparency through detailed disclosures on carrying amounts, depreciation policies, and commitments for future acquisitions.[1][6]
If estimates of useful life or residual value change due to new information, the adjustment affects current and future periods only, recalculating depreciation from the date of change using the revised estimates applied to the existing carrying amount.[1][37] This prospective treatment ensures financial statements reflect updated realities without retroactive revisions.[1]
Gains and losses are reported in profit or loss from continuing operations, unless the disposal qualifies as a discontinued operation. For example, if a machine with a carrying amount of $8,000 is sold for $5,000, the entity recognizes a $3,000 loss in the income statement. Conversely, if sold for $10,000, a $2,000 gain is credited to income. In the U.S., sales generating gains may trigger tax implications, including depreciation recapture, where previously deducted depreciation is taxed as ordinary income at rates up to 25% for real property or the taxpayer's ordinary rate for personal property, rather than capital gains rates. Retirement without proceeds, such as scrapping or abandonment, results in a loss equal to the carrying amount; this is common for fully depreciated assets, where the carrying amount is zero and no loss is recorded. Exchanges of fixed assets, typically non-monetary transactions, are accounted for at the fair value of the asset received, with any difference between the fair value and carrying amount of the asset given up recognized as a gain or loss. If the exchange lacks commercial substance (i.e., no significant change in future cash flows) or fair value cannot be reliably measured, the acquired asset is recorded at the carrying amount of the asset surrendered, with no gain or loss recognized. Cash settlements, known as "boot," adjust the calculation: the recipient of boot recognizes a partial gain based on the proportion of cash received relative to total consideration, while the payer may recognize a full gain or loss. Under U.S. GAAP (ASC 845), commercial substance is determined by evaluating changes in entity-specific cash flows; exchanges with it are recorded at fair value. Gains and losses from disposals must be disclosed in the financial statements, including the amount, line item in the income statement, and any significant circumstances. Environmental considerations are critical, particularly for assets containing hazardous materials like machinery with oils or electronics with heavy metals; disposal must comply with regulations such as the U.S. Resource Conservation and Recovery Act (RCRA), which governs hazardous waste treatment, storage, and disposal to prevent environmental harm. Entities often engage certified recyclers or follow guidelines from the Environmental Protection Agency (EPA) to ensure proper handling and minimize liabilities.
Definition and Overview
Definition
A fixed asset, also referred to as a capital asset or non-current asset, is a long-term tangible resource that a business acquires and utilizes in its operations to generate economic benefits over an extended period, typically exceeding one year, and is not held for sale in the ordinary course of business.[7] These assets are essential for production, administration, or service delivery and are recorded on the balance sheet rather than expensed immediately. The concept of fixed assets has its roots in established accounting standards that emphasize their role in supporting ongoing business activities. Under International Financial Reporting Standards (IFRS), fixed assets, known as property, plant, and equipment (PPE), are defined as "tangible items that: (a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and (b) are expected to be used during more than one period" (IAS 16, paragraph 6).[8] Similarly, under U.S. Generally Accepted Accounting Principles (GAAP), ASC 360 governs property, plant, and equipment as long-lived tangible assets used in operations, excluding those held for sale. Intangible assets, which are also non-current assets providing long-term economic benefits, are defined separately under IFRS as "an identifiable non-monetary asset without physical substance" that arises from contractual or legal rights or is separable (IAS 38, paragraph 8), while U.S. GAAP under ASC 350 treats them as non-monetary assets lacking physical form but providing future economic benefits.[9] These standards, originating from frameworks developed in the late 20th century and refined through subsequent amendments, underscore fixed assets' distinction from inventory or investments by focusing on their enduring utility in core operations.[8] Fixed assets differ fundamentally from current assets, which are short-term in nature and anticipated to be converted into cash, sold, or consumed within one year or the operating cycle, whichever is longer, often impacting the income statement promptly through turnover.[10] In contrast, fixed assets are relatively illiquid, remaining on the balance sheet for multiple periods and subject to systematic allocation of cost via depreciation or amortization to match expenses with the revenues they help produce.[7] This classification ensures that fixed assets reflect a company's long-term investment in infrastructure and capabilities, such as land, buildings, and machinery, while intangible assets like patents and trademarks contribute similarly to operational sustainability rather than immediate liquidity.[8][9]Key Characteristics
Fixed assets, also known as property, plant, and equipment (PPE), are characterized by their longevity, with an expected useful life exceeding one year and often spanning 3 to 50 years depending on the asset type, such as machinery (typically 5-15 years) or buildings (20-50 years).[8][11][12] A key feature is the capitalization threshold, which determines when an acquisition is recorded as a fixed asset rather than expensed immediately; under both IFRS and US GAAP, there is no universal monetary limit, but many organizations set policies at $1,000 to $5,000, with the Government Finance Officers Association recommending a minimum of $5,000 for governmental entities to balance accuracy and administrative efficiency.[13][14][15] These assets are classified as non-current on the balance sheet, reflecting their role in supporting long-term operational capacity rather than short-term liquidity, and they contribute to the entity's overall financial position by representing a substantial portion of total assets that influence metrics like return on assets.[8][11][16] Fixed assets are held for operational purposes, including use in the production or supply of goods and services, rental to others, or administrative functions, and are explicitly not intended for sale in the ordinary course of business.[8][17] Their illiquidity stems from the difficulty in converting them to cash without significant loss in value, tying up substantial capital that necessitates ongoing maintenance costs and impacts financial leverage ratios, such as the debt-to-equity ratio, by increasing the denominator of long-term asset bases.[18][19][20]Types of Fixed Assets
Tangible Assets
Tangible fixed assets, also referred to as property, plant, and equipment (PPE), are physical items that possess substance and are held by an entity for use in the production or supply of goods or services, for rental to others, or for administrative purposes on a continuing basis over more than one period.[8] These assets are expected to provide economic benefits through their long-term utility in business operations, distinguishing them from current assets intended for short-term consumption or sale.[21] Common examples of tangible fixed assets include land, which is typically non-depreciable due to its indefinite useful life; buildings and structures; machinery and manufacturing equipment; vehicles; furniture and fixtures; and office or specialized tools.[22] For instance, a manufacturing firm might own assembly line machinery as a core tangible asset, while a retail business could hold delivery vehicles and store shelving.[3] These assets exhibit unique attributes such as susceptibility to physical deterioration from wear and tear, as well as technological or functional obsolescence that can diminish their value over time.[23] Unlike non-physical assets, tangible fixed assets require verification of legal title and are often insured against risks like damage from fire or natural disasters to mitigate potential losses.[21] Tangible fixed assets are typically acquired through methods such as outright purchase, self-construction, donation, or non-monetary exchanges where existing assets are traded for new ones.[24] Under finance leases (or leases where substantially all risks and rewards of ownership are transferred), the lessee recognizes a right-of-use asset similar to an owned fixed asset.[25][26] Industry variations in tangible fixed assets reflect operational needs; manufacturing sectors often feature heavy concentrations of such assets, including large-scale machinery and assembly lines essential for production processes.[27] In contrast, service-oriented industries, such as consulting or hospitality, tend to hold lighter assets like office equipment, computers, and vehicles to support administrative and client-facing activities.[27]Accounting Treatment
Initial Recognition and Measurement
Fixed assets are initially recognized in the financial statements when it is probable that future economic benefits associated with the item will flow to the entity and the cost of the item can be measured reliably.[28][29] This criterion applies to tangible property, plant, and equipment under IAS 16 and ASC 360.[28][29] Upon recognition, fixed assets are measured at cost, which includes the purchase price after deducting trade discounts and rebates, plus import duties and non-refundable purchase taxes, and any costs directly attributable to bringing the asset to the location and condition necessary for it to operate as intended by management.[28][29] Directly attributable costs encompass examples such as site preparation, delivery and handling, installation, professional fees for architects and engineers, costs of testing whether the asset is functioning properly, and the initial estimate of dismantling, removal, or site restoration costs if obligated.[28][29] Proceeds from selling any items produced while bringing the asset to that location and condition (for example, during testing) and the costs of producing those items are recognized in profit or loss.[28] However, costs such as abnormal wastage of materials or labor, training staff to operate the asset, and administrative or general overheads not directly attributable to the acquisition are excluded from the cost.[28][29] US GAAP follows a similar approach to directly attributable costs under ASC 360.[29] Under both IFRS and US GAAP, the default measurement basis at acquisition is the historical cost model, where the asset is recorded at its acquisition cost.[28][29] IFRS permits an alternative revaluation model for entire classes of property, plant, and equipment, allowing subsequent measurement at fair value if it can be measured reliably, though US GAAP does not allow revaluation for fixed assets.[28][29] The decision to capitalize an item as a fixed asset rather than expense it immediately depends on its significance and expected future economic benefits; items below a certain materiality threshold, often based on entity policy, are typically expensed to simplify recordkeeping without materially distorting financial statements.[15][28] A typical journal entry for the acquisition of a fixed asset records the debit to the fixed asset account for the full cost and a credit to cash or accounts payable. For example, if a machine is purchased for $100,000 in cash, the entry is:- Debit: Machinery $100,000
- Credit: Cash $100,000
Subsequent Valuation
After initial recognition, fixed assets are subsequently measured using either the cost model or, under IFRS, the revaluation model.[30] Under the cost model, which is the primary approach under both IFRS (IAS 16) and US GAAP (ASC 360), fixed assets are carried at their historical cost less any accumulated depreciation and accumulated impairment losses.[31] This model ensures that the carrying amount reflects the asset's original acquisition cost adjusted for wear and tear or value declines over time, without periodic adjustments to current market values.[8] Under IFRS (IAS 16), entities may elect the revaluation model for an entire class of fixed assets if fair value can be measured reliably, typically requiring an active market such as for land or buildings.[30] In this model, assets are carried at a revalued amount, which is the fair value at the date of revaluation less any subsequent accumulated depreciation and impairment losses.[8] Revaluations must be performed regularly—such as annually for assets with significant and volatile changes in fair value, or every three to five years for more stable assets—to ensure the carrying amount does not differ materially from fair value at the balance sheet date.[30] Increases in value are recognized in other comprehensive income and accumulated in equity under a revaluation surplus, unless reversing a previous decrease recognized in profit or loss; decreases are recognized in profit or loss.[8] US GAAP does not permit revaluation, maintaining the cost model exclusively for subsequent measurement.[31] Component accounting requires that if a fixed asset consists of significant parts with different useful lives or patterns of consumption, each major component is depreciated separately over its individual useful life.[32] For example, in a vehicle, the engine might be treated as a separate component from the body if its cost is significant and it has a shorter useful life, allowing for more accurate allocation of costs.[33] Replacement costs for such components are capitalized as a new asset, with the carrying amount of the replaced part derecognized.[32] This approach applies under both IFRS (IAS 16) and US GAAP (ASC 360), though IFRS emphasizes it more explicitly for complex assets.[31] Borrowing costs directly attributable to the acquisition, construction, or production of qualifying fixed assets—those that take a substantial period to prepare for intended use, such as a manufacturing plant—are capitalized as part of the asset's cost under IFRS (IAS 23).[34] For instance, interest costs incurred during the construction phase of a building are added to its carrying amount until the asset is substantially complete and ready for use.[35] US GAAP similarly requires capitalization of interest costs for qualifying assets under ASC 835-20, using a similar methodology to attribute costs based on specific and general borrowings.[31] Once the asset is in use, such capitalization ceases. Financial statement disclosures for fixed assets include the measurement basis used (cost or revaluation), the gross carrying amount, accumulated depreciation and impairment losses, a reconciliation of the carrying amount at the beginning and end of the period showing additions, disposals, and other changes, as well as the depreciation method, useful lives, or depreciation rates applied.[36] Under IFRS (IAS 16, paragraphs 73–79), entities must also disclose any restrictions on title, assets pledged as security, and contractual commitments for future acquisitions if material.[30] These requirements ensure transparency in how fixed assets are valued and managed on the balance sheet.[36]Depreciation and Amortization
Depreciation Methods
Depreciation serves to systematically allocate the depreciable amount of a tangible fixed asset over its useful life, adhering to the matching principle by aligning the expense recognition with the revenue the asset generates.[1] Under International Accounting Standards (IAS 16), this allocation reflects the pattern in which the asset's future economic benefits are expected to be consumed.[1] Similarly, U.S. Generally Accepted Accounting Principles (GAAP) under ASC 360 emphasize distributing the cost or other basis of tangible capital assets over their useful lives.[5] The depreciable amount is calculated as the cost of the asset minus its estimated residual value, where the residual value represents the amount recoverable at the end of the useful life through disposal or trade-in.[1] The useful life is an estimate based on factors such as expected usage, physical wear and tear, technical or commercial obsolescence, and legal or contractual limits.[1] Both IAS 16 and ASC 360 require periodic reviews of these estimates, with adjustments applied prospectively without restating prior periods.[1][37] The straight-line method allocates an equal amount of depreciation each accounting period over the asset's useful life, making it suitable for assets with consistent usage patterns.[1] The annual depreciation expense is computed as: This method is widely used for its simplicity and compliance with both IAS 16 and ASC 360.[5] The declining balance method, an accelerated approach, applies a constant depreciation rate to the asset's declining book value each period, resulting in higher expenses in early years.[1] A common variant is the double-declining balance method, where the rate is twice the straight-line rate: This method is permitted under IAS 16 and ASC 360 for assets that generate more benefits early in their life, such as technology equipment.[5] The units-of-production method bases depreciation on actual usage or output rather than time, ideal for assets like manufacturing equipment where wear correlates with production volume.[1] The periodic expense is: Both IAS 16 and ASC 360 endorse this method when it better reflects the asset's consumption pattern.[5] The choice of method depends on the asset's expected benefit pattern, with tax considerations influencing decisions; for instance, in the U.S., the Modified Accelerated Cost Recovery System (MACRS) mandates accelerated methods like double-declining balance for most tangible assets to front-load tax deductions.[38] The following table compares the primary methods:| Method | Pros | Cons | Typical Use Case |
|---|---|---|---|
| Straight-Line | Simple to calculate and apply; provides consistent annual expenses.[39] | Does not reflect accelerated wear or early benefits; lower initial tax savings.[39] | Assets with even usage, e.g., buildings. |
| Declining Balance | Matches higher early expenses to revenue; accelerates tax deductions.[39] | More complex calculations; later-year expenses may be minimal.[39] | Assets with front-loaded benefits, e.g., vehicles. |
| Units-of-Production | Directly ties expense to actual output; accurate for variable usage.[39] | Requires reliable usage estimates; administrative burden for tracking.[39] | Production-based assets, e.g., machinery. |
Amortization of Intangible Assets
Amortization represents the systematic allocation of the cost of an intangible asset over its useful life, akin to depreciation for tangible assets but applied exclusively to non-physical assets such as patents and copyrights.[40] Under both International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting Principles (GAAP), this process ensures that the expense matches the periods benefiting from the asset's use.[41] For intangible assets with finite useful lives, amortization begins when the asset is available for use and continues over the estimated period of economic benefit, typically using the straight-line method unless a different pattern better reflects the consumption of benefits.[42] Patents, for instance, are commonly amortized over their legal protection period or shorter economic life, whichever is applicable.[40] The basic straight-line formula divides the amortizable amount—calculated as the asset's cost minus any residual value—by the useful life in years or units.[43] Entities must periodically reassess the useful life and amortization method, adjusting prospectively if changes occur due to technological or market factors.[44] Intangible assets deemed to have indefinite useful lives, such as certain trademarks or goodwill, are not subject to amortization; instead, they undergo annual impairment testing to ensure their carrying value remains recoverable.[9] This distinction prevents overstatement of expenses for assets expected to generate benefits indefinitely.[45] Special considerations apply to software, which is amortized over its expected benefit period, often three to five years depending on technological obsolescence risks.[46] For internally generated intangibles, costs are generally expensed as incurred unless they meet strict criteria for capitalization, such as during the development phase of qualifying assets like software under IFRS.[47] U.S. GAAP is more restrictive, prohibiting capitalization of most internally developed intangibles except for certain software costs.[41] Both IFRS (IAS 38) and GAAP (ASC 350) mandate amortization for finite-lived intangibles while prohibiting it for indefinite-lived ones like goodwill, promoting consistency in financial reporting across jurisdictions.[41]Impairment and Disposal
Impairment Testing
Impairment testing for fixed assets is conducted to determine whether the carrying amount of an asset exceeds its recoverable amount, defined as the higher of its fair value less costs of disposal and its value in use.[48] Under US GAAP, for long-lived assets such as property, plant, and equipment, impairment is assessed when the carrying amount exceeds the sum of undiscounted future cash flows, with the loss measured as the excess of carrying amount over fair value.[49] Triggers for impairment testing include external factors such as significant market declines, adverse changes in technology or legal environments, and increases in market interest rates, as well as internal indicators like physical damage to the asset, obsolescence, or restructuring plans that affect future use.[48] For long-lived assets under US GAAP, similar triggers apply, including a significant decrease in market value or adverse changes in the manner or extent of asset use.[50] The testing process requires annual impairment reviews for assets with indefinite useful lives, such as goodwill and certain intangible assets, and whenever indicators of impairment arise for other fixed assets, as prescribed by IAS 36 under IFRS and ASC 360 under US GAAP.[48][49] Entities must first assess recoverability at the individual asset level where possible, or at the cash-generating unit (CGU) level for assets that do not generate independent cash inflows under IFRS; under US GAAP, testing occurs at the asset group level if the individual asset's cash flows are not identifiable.[48][50] Value in use is calculated as the present value of estimated future cash flows expected to arise from the continuing use of the asset and from its disposal at the end of its useful life, discounted using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset.[48] Cash flow projections for this calculation should be based on reasonable and supportable assumptions that represent management's best estimate, typically covering a period up to five years with a terminal value beyond that, and excluding cash inflows or outflows from financing activities or income tax receipts or payments.[51] If the recoverable amount is less than the carrying amount, an impairment loss is recognized immediately in profit or loss, reducing the asset's carrying amount to the recoverable amount, with any excess allocated pro-rata to goodwill first under IFRS.[48] Under IFRS, impairment losses for assets other than goodwill may be reversed in subsequent periods if there is an indication that the impairment has decreased or no longer exists, limited to the carrying amount that would have been determined had no impairment been recognized; however, US GAAP generally prohibits reversals for long-lived assets, except in limited cases for assets held for sale.[50] For goodwill, neither IFRS nor US GAAP allows reversal of impairment losses.[52] Examples of impairment include a manufacturing company recognizing a loss on machinery when a factory shutdown due to economic downturn reduces expected future cash flows below the asset's carrying amount, or a firm impairing a trademark's value following a significant drop in brand recognition from competitive market shifts.[48][49]Disposal Processes
Fixed assets are disposed of through various methods, including sale, scrapping (also known as retirement or abandonment), exchange, or other forms of derecognition, when they no longer provide future economic benefits to the entity. Under International Financial Reporting Standards (IFRS), IAS 16 requires derecognition of property, plant, and equipment (PPE) upon disposal or when no future economic benefits are expected from its use or disposal. Similarly, under U.S. Generally Accepted Accounting Principles (GAAP), ASC 360 governs the disposal of long-lived assets, classifying them as held for sale if specific criteria are met, such as management commitment and active marketing at a reasonable price. The carrying amount at disposal reflects the asset's original cost less accumulated depreciation and any prior impairment losses, which may reduce the basis if the asset was previously written down. The primary accounting steps for disposal involve removing the asset's cost and accumulated depreciation from the balance sheet and recognizing any resulting gain or loss in the income statement. The gain or loss is calculated as the difference between the net disposal proceeds (fair value of consideration received) and the carrying amount:Gains and losses are reported in profit or loss from continuing operations, unless the disposal qualifies as a discontinued operation. For example, if a machine with a carrying amount of $8,000 is sold for $5,000, the entity recognizes a $3,000 loss in the income statement. Conversely, if sold for $10,000, a $2,000 gain is credited to income. In the U.S., sales generating gains may trigger tax implications, including depreciation recapture, where previously deducted depreciation is taxed as ordinary income at rates up to 25% for real property or the taxpayer's ordinary rate for personal property, rather than capital gains rates. Retirement without proceeds, such as scrapping or abandonment, results in a loss equal to the carrying amount; this is common for fully depreciated assets, where the carrying amount is zero and no loss is recorded. Exchanges of fixed assets, typically non-monetary transactions, are accounted for at the fair value of the asset received, with any difference between the fair value and carrying amount of the asset given up recognized as a gain or loss. If the exchange lacks commercial substance (i.e., no significant change in future cash flows) or fair value cannot be reliably measured, the acquired asset is recorded at the carrying amount of the asset surrendered, with no gain or loss recognized. Cash settlements, known as "boot," adjust the calculation: the recipient of boot recognizes a partial gain based on the proportion of cash received relative to total consideration, while the payer may recognize a full gain or loss. Under U.S. GAAP (ASC 845), commercial substance is determined by evaluating changes in entity-specific cash flows; exchanges with it are recorded at fair value. Gains and losses from disposals must be disclosed in the financial statements, including the amount, line item in the income statement, and any significant circumstances. Environmental considerations are critical, particularly for assets containing hazardous materials like machinery with oils or electronics with heavy metals; disposal must comply with regulations such as the U.S. Resource Conservation and Recovery Act (RCRA), which governs hazardous waste treatment, storage, and disposal to prevent environmental harm. Entities often engage certified recyclers or follow guidelines from the Environmental Protection Agency (EPA) to ensure proper handling and minimize liabilities.