IFRS Fixed Assets: Recognition, Measurement, and Impairment

Under IFRS, fixed assets accounting is governed primarily by IAS 16 Property, Plant and Equipment, which sets out when a tangible long-lived asset goes on the balance sheet, how it is measured at purchase, how its cost is spread across its useful life through depreciation, when it must be written down, and how it comes off the books at the end. Related standards handle specific situations: IAS 23 for borrowing costs during construction, IAS 20 for government grants, IAS 36 for impairment, and IFRS 5 for assets classified as held for sale.¹

What Counts as a Fixed Asset

A tangible item goes on the balance sheet as Property, Plant, and Equipment (PPE) only when two conditions are both met at the same time. The asset must probably deliver future economic benefits to the entity, and its cost must be measurable reliably. If either test fails, the amount is expensed rather than capitalized.¹

Spare parts sit on the boundary between PPE and inventory. Under IAS 16, they qualify as PPE when they are expected to be used for more than one reporting period and satisfy the same two recognition criteria. A major turbine blade held in reserve for a power plant is PPE even before it is fitted, because it is ready for its intended use as a replacement. Routine consumable spares stay in inventory.²

What Goes Into the Initial Cost

Once the recognition tests are passed, the asset is measured at cost. Cost is more than the invoice price. It is everything the entity spends to get the asset to its location and into working condition for its intended purpose.

The purchase price is recorded net of trade discounts and rebates. Non-refundable import duties and purchase taxes are added on top. Directly attributable costs are capitalized: wages of employees involved in construction or installation, professional fees paid to architects or engineers, site preparation, and delivery and handling.

Testing costs also form part of the initial measurement. If a new machine is run to confirm it functions correctly, those testing costs are capitalized. Any revenue earned from items produced during that testing reduces the capitalized amount rather than flowing to profit or loss.²

Dismantling and site restoration obligations catch many preparers off guard. If there is a legal or constructive obligation to tear the asset down and restore the site at the end of its life, the present value of that expected future cost is added to the asset’s initial measurement and a matching liability is recognized.¹

Some costs are never capitalized. Advertising or promotional spending for a new facility, operating losses incurred while demand builds up, and costs of running the asset below capacity once it is already capable of operating all go straight to profit or loss.

Borrowing Costs and Government Grants

Two things can adjust the initial cost figure: interest on money borrowed to build the asset, and cash received from a government to help pay for it.

When constructing PPE takes a substantial period of time, IAS 23 requires borrowing costs directly attributable to that asset to be capitalized rather than expensed. A qualifying asset is one that necessarily takes a substantial period to get ready for its intended use or sale, such as a manufacturing plant or a power generation facility. Assets that are ready for use when acquired do not qualify.³

Capitalization begins on the date three conditions are met at once: expenditures are being incurred on the asset, borrowing costs are being incurred, and the activities necessary to prepare the asset for use are underway. It stops when substantially all preparation activities are complete. For funds borrowed specifically for the asset, the capitalizable amount is the actual borrowing cost incurred during the period, less any investment income earned from temporarily investing those borrowed funds. For general borrowings, a weighted-average capitalization rate is applied to the expenditures on the asset.³

For government grants related to an asset, IAS 20 allows two presentations. The grant can be set up as deferred income and released to profit or loss on a systematic basis over the asset’s useful life, or it can be deducted from the asset’s carrying amount, which reduces the depreciation charge over the same life. Both methods produce the same net effect on profit or loss; the difference is whether the balance sheet shows the full asset cost with a separate liability, or a lower gross carrying amount. Whichever approach is chosen, it should be applied consistently across similar grants.⁴

Cost Model vs. Revaluation Model

After initial recognition, IAS 16 offers a choice between two ongoing measurement models. The choice is made for each class of PPE, not for individual items within a class.¹

The cost model is the more common choice. The asset is carried at original cost less accumulated depreciation and any accumulated impairment losses. The carrying amount stays anchored to the original transaction price, and the book value declines predictably over the useful life.

The revaluation model restates the carrying amount to fair value at the revaluation date, typically with the involvement of an independent appraiser. Revaluations must be performed often enough that the carrying amount never strays materially from fair value. For volatile assets that may mean annual revaluation; for stable assets, every three to five years can suffice.²

The mechanics of a revaluation matter. An increase in value is credited to Other Comprehensive Income and accumulated in equity as a revaluation surplus. That surplus is not recycled through profit or loss; it transfers directly to retained earnings, either gradually as the asset is used (the difference between depreciation on the revalued amount and depreciation on historical cost) or when the asset is derecognized.

A revaluation decrease is expensed in profit or loss immediately, unless it reverses a previously recognized surplus on the same asset. In that case, the decrease first draws down the existing surplus in OCI, and only the excess hits profit or loss. The reverse case works symmetrically: an increase following a prior decrease is credited to profit or loss to the extent an expense was previously recognized, with the remainder going to OCI.¹

Depreciation Under IFRS

Depreciation allocates the depreciable amount of an asset over its useful life. The depreciable amount is the cost (or revalued amount) minus the residual value. Every PPE item is depreciated except land, which generally has an indefinite useful life.

The method must reflect the pattern in which the asset’s economic benefits are consumed. IAS 16 accepts three:

Straight-line, a constant charge each period, which is by far the most common choice.
Diminishing balance, a higher charge in earlier years that decreases over time, useful for assets that deliver most of their value early.
Units of production, a charge based on actual usage or output, which fits assets like mining equipment where wear tracks with activity.

Revenue-based depreciation is explicitly prohibited. IAS 16 was amended in 2014 to make clear that PPE cannot be depreciated on the basis of revenue the asset generates, because revenue reflects pricing and demand that have nothing to do with the physical consumption of the asset.²

Component Accounting

When a single PPE item has significant parts with different useful lives, each part is depreciated separately. An aircraft might have one schedule for the airframe, another for the engines, and a third for the interior cabin fittings. When a component is replaced, the old part is derecognized and the new one is capitalized as a fresh asset.¹ This is where IFRS departs most visibly from US GAAP, which does not require the same granularity.

Annual Review of Useful Life and Residual Value

Both the useful life and the residual value of every PPE item are reviewed at least once a year, at the end of each reporting period. If expectations have changed materially, depreciation is adjusted going forward only. The change is treated prospectively as a change in accounting estimate under IAS 8, affecting the current and future periods without restating prior periods. The nature and financial effect of the change must be disclosed.¹

Impairment

At the end of every reporting period, the entity assesses whether any indicators suggest the carrying amount of a PPE item may be too high. Unlike goodwill and indefinite-life intangibles, which require an annual impairment test regardless, PPE only needs a formal test when indicators are present.⁵

External indicators include a sharp decline in market value, adverse changes in the technological or regulatory environment, and rising interest rates that affect the discount rate used in value-in-use calculations. Internal indicators include physical damage, evidence of obsolescence, and internal reports showing the asset is performing worse than expected.

When an indicator is present, the recoverable amount is estimated. That is the higher of two figures: fair value less costs of disposal, and value in use. Fair value less costs of disposal is what an orderly sale would produce, net of the direct costs of getting the asset sold. Value in use is the present value of the future cash flows the asset is expected to generate, discounted at a pre-tax rate that reflects the time value of money and the risks specific to the asset.⁵

If an individual asset does not generate cash flows on its own, it is grouped with other assets into the smallest identifiable unit that produces largely independent cash inflows, called a cash-generating unit. The impairment test is then performed at that level.⁵

If the carrying amount exceeds the recoverable amount, the difference is recognized as an impairment loss in profit or loss. For revalued assets, the loss first draws down any revaluation surplus related to that specific asset before the remainder hits profit or loss. Depreciation is then recalculated going forward based on the revised carrying amount and remaining useful life.

Impairment losses on PPE can be reversed. At each reporting date, the entity reassesses whether conditions have changed enough to justify reversal. If the recoverable amount has genuinely increased due to changed estimates, the loss is reversed in profit or loss, or as a revaluation increase for revalued assets. There is a ceiling: the reversed carrying amount cannot exceed what the asset would have been carried at, net of depreciation, had the impairment never been recognized.⁵

Held for Sale, Disposals, and Exchanges

When management commits to selling a PPE item and the sale is highly probable within twelve months, IFRS 5 takes over from IAS 16. The asset must be available for immediate sale in its present condition, subject only to terms that are customary for that type of asset. From the date of classification as held for sale, depreciation stops. The asset is measured at the lower of its existing carrying amount and fair value less costs to sell, with any shortfall recognized as an impairment loss. It is also presented separately on the balance sheet from ongoing PPE.⁶

Derecognition happens when the asset is disposed of, or when no future economic benefits are expected from its use or disposal. The gain or loss equals net disposal proceeds minus carrying amount, and it goes to profit or loss.²

Two disposal patterns need special handling. When PPE is acquired through an exchange of assets, the incoming asset is measured at fair value unless the exchange lacks commercial substance or neither fair value can be reliably measured. An exchange has commercial substance when the expected pattern of future cash flows from the new asset is meaningfully different from the old. When commercial substance is absent, the new asset is carried at the carrying amount of the asset given up, and no gain or loss is recognized.²

In a sale and leaseback, IFRS 16 restricts the gain the seller-lessee can recognize. If the sale qualifies as a genuine transfer under IFRS 15, only the portion of the gain relating to the rights actually transferred to the buyer-lessor is recognized. The right-of-use asset arising from the leaseback is measured at the proportion of the previous carrying amount that corresponds to the right of use retained. The rest of the gain is effectively deferred through that right-of-use asset.⁷

Disclosures

For each major class of PPE, the financial statements disclose the measurement basis (cost or revalued amount), the depreciation methods, and the useful lives or depreciation rates used. A movement schedule reconciles the carrying amount from the start to the end of the period, showing additions, disposals, acquisitions through business combinations, impairment losses and reversals, depreciation for the period, and net exchange differences from translating foreign-currency balances.¹

Entities using the revaluation model disclose more. They state the effective date of the most recent revaluation, whether an independent valuer was involved, and the carrying amount that would have been reported under the cost model. Movements in the revaluation surplus during the period are shown. Contractual commitments to acquire PPE that have not yet been recognized are disclosed separately.

1
IFRS. IAS 16 Property, Plant and Equipment
2
IFRS Foundation. IAS 16 Property, Plant and Equipment
3
IFRS Foundation. IAS 23 Borrowing Costs
4
IFRS Foundation. IAS 20 Accounting for Government Grants and Disclosure of Government Assistance
5
IFRS. IAS 36 Impairment of Assets
6
IFRS Foundation. IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
7
IFRS Foundation. IFRS 16 Sale and Leaseback With Variable Payments