Treatment of Fixed Assets in Singapore

Non-current tangible assets such as property, plant and equipment owned by an enterprise are commonly referred to as fixed assets. Every business entity purchases some equipment or plants in order to run the business operations that result in revenue generation. The items thus purchased are generally used in the business operations for longer period, that is, at least more than a year.

Section 16 of Singapore Financial Reporting Standards (FRS) contains the provisions for the accounting treatment of fixed assets of an enterprise. However the standards are not applicable to fixed assets that are held for sale, investment properties, biological assets and mineral rights.

Nature of Fixed Assets

Fixed assets are tangible, physical objects. For an object to qualify as a fixed asset, the plant, property or equipment must be used in the business operations and it must have a long life, that is, they ought to be economically useful to the enterprise over several accounting periods.

Fixed assets are defined as 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
  • are expected to be used during more than one period

Recognition of Fixed Assets

A property, plant, or equipment shall be recognised as a fixed asset if the following conditions are satisfied:

  • there is a probability that future economic benefits associated with the item will flow to the entity
  • the cost of the item can be measured reliably

The certainty of the future economic benefits arising from the fixed assets should be strongly established and such benefits should pass to the enterprise by its right of ownership of the assets.

If an asset is acquired externally, the second criterion on accurate cost measurement can be easily met. However, if an asset is created internally, the cost of the same should be determined by adopting the prescribed measurement methods. The costs include initial costs of acquiring such item and any subsequent costs incurred for enhancing the economic value of such items.

Do note that:

  • Spare parts and service equipment are usually shown in Profit and Loss statements, but major spare parts and service equipment may qualify as fixed assets if
    • the items are economically useful over multiple accounting periods
    • the items can be used only with other existing fixed assets
  • Some items that do not contribute economically to an enterprise will be acquired for safety or environmental reasons. Such items may also be recognised as fixed assets if they are required to derive the economic benefits embodied in the existing fixed assets of an organisation.
  • Subsequent cost does not include the cost of day-to-day maintenance. For example, if a company owns a refrigerator truck, the daily cost of cleaning and maintaining the truck cannot be recognised as a subsequent cost, such daily costs are instead, recognised in the Profit & Loss Statement. But if the refrigerating unit in the truck is replaced, this replacement cost will qualify as cost (carrying amount) of fixed asset, provided it meets the recognition criteria. And any recognition given to previous replacement cost and remaining carrying amount will be withdrawn.
  • Likewise the cost of inspection carried out to meet the condition for continued operation of an entity’s asset (for example, inspections carried out for oil rigs, aircrafts etc) shall also qualify as cost (carrying amount) of the fixed asset. Any remaining carrying amount from the previously recognised inspection costs will also be derecognised.

Determination of Carrying Amount

Measurement on Recognition

An item of property, plant or equipment that is recognised as fixed asset shall be initially measured at its cost. Subsequently, it shall be measured by applying Cost Model or Revaluation Model. The model chosen should be adopted as the entity’s accounting policy and should be applied to measuring the entire class of asset.

Initial Measurement

Upon recognition of property, plant or equipment as a fixed asset it must be measured initially at its cost.

Elements of cost

The cost of a fixed asset item at its initial recognition is comprised of

  • the item’s purchase price less any discounts and rebates
  • the import duties, non-refundable taxes, transportation and handling costs and cost of dismantling, assembling, installation and testing
  • any professional fee paid

The following does not constitute cost

  • costs of opening a new facility
  • costs of introducing a new product or service such as marketing and advertising costs
  • costs of conducting business in a new location and
  • administration and other general overhead costs

Measurement of cost

In case of assets acquired externally, the price paid in cash against purchase is the cost of the asset. Where purchase price is not paid in cash, the ‘cash price equivalent ‘ shall be recorded as cost.

Where the purchase price is settled in instalments over several accounting periods, the present values of the cash payment shall be recorded and the difference between the purchase price and total payment is recognised as interest.

If an item of fixed asset is acquired in exchange for a non-monetary asset or assets, or a combination of monetary and non-monetary assets, the cost of the item acquired shall be measured at its fair value unless it is not reliably measureable or the transaction lacks commercial substance.

A transaction’s commercial substance is determined by its impact on the cash flow of the entity and its operations and the resultant difference in value. Fair value measurement is said to be reliable. If there is insignificant variations in the range of fair value estimate for the said asset and the probabilities of various estimates have been reasonably assessed in estimating the fair value.

If the fair value of the asset acquired in exchange of another asset cannot be determined, its cost is measured at the carrying amount of the asset given up.

The cost of a self-constructed asset is determined using the same principles as for an acquired asset. The cost of abnormal amounts of wasted material, labour, or other resources incurred in self-constructed asset is not included in the cost of the asset.

Subsequent Measurement 

Cost Model or Revaluation Model shall be chosen as the accounting policy of the entity and shall be applied to an entire class of property, plant and equipment.

Cost Model

Under the Cost Model a fixed asset item is carried at its cost minus accumulated depreciation or impairment loss.

Revaluation Model

Under the Revaluation Model a fixed asset item is carried at its re-valued amount, which is the fair value of the asset in the market at the time of revaluation, less any accumulated depreciation or impairment loss.

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 balance sheet date. When the fair value of the re-valued asset differs significantly from its carrying amount the asset shall be subjected to further revaluation.

If fair value of an item cannot be determined due to lack of comparable transactions in the market, an entity may need to estimate fair value using an income or a depreciated replacement cost approach.

If the fair value of an item of property, plant or equipment is highly volatile due to its nature then annual revaluation is necessary.

Accumulated depreciation of a fixed asset item is either

  • restated accordingly by changing the gross carrying amount  so that the carrying amount of the re-valued asset is equal to the re-valued amount or
  • eliminated against the gross carrying amount of the asset and restated to the re-valued amount

On revaluation, if the carrying amount of an asset increases it shall be credited to equity under the heading ‘revaluation surplus’, but only after reversing any revaluation decrease of the same asset previously recognized in profit or loss.

On the contrary if the carrying amount of an asset decreases on revaluation it shall be recognized as loss in profit & loss, but only after debiting the decrease to equity under the heading ‘revaluation surplus’ to the extent of any credit balance existing for the same asset under that heading.

Revaluation surplus can be transferred into retained earnings if an asset is disposed or retired. However partial transfer of surplus into retained earning is permitted as the asset is continued to be used by the entity, in such cases the surplus amount transferred is the difference between the depreciation on re-valued carrying amount and the depreciation on the original cost of the asset.

Do note that if an item of fixed asset is re-valued, the entire class of property, plant and equipment to which that asset belongs shall be re-valued and such revaluation must be carried out simultaneously or must be completed within a short period, if done on a rolling basis.

The taxes incurred on the income generated by the fixed asset shall be treated according to the standards relating to Income Tax.

Accounting for Depreciation

Depreciation is the systematic allocation of the depreciable amount to an asset over it useful life. All fixed assets, except freehold land, have limited useful life, therefore subjected to depreciation. An item of fixed asset starts depreciating the moment it is put to use by an entity and will not stop unless it is fully depreciated or the asset is classified as ‘held up for sale’.

A component approach is prescribed in computing the depreciation. Accordingly each part of a fixed asset shall be depreciated separately. The cost of the parts should be significant in relation to the total cost of the asset. Such significant parts of an asset exhibiting similarities in terms of useful life and depreciation method may be grouped in determining the depreciation charge.

The remaining parts, the individual cost of which are insignificant in relation to the total cost, may be depreciated separately. In case of variation in expectation of the remainder items, approximation techniques must be applied to faithfully represent the useful life of the parts.

Alternatively an entity may choose to depreciate separately the parts of an item that do not have a cost that is significant in relation to the total cost of the item.

Depreciation is to be recognised on the incremental portion of the fair value of the asset against the carrying amount of the asset. The depreciation must also be recognised on capitalised cost of repairs or replacement of parts and maintenance carried out on the asset that will result in enhancing the economic benefits or prolonging the useful life of the fixed assets.

The following are the key concepts in depreciation accounting

  • Depreciable amount
  • Useful life
  • Depreciation method

Depreciation Amount

Depreciation amount is the actual cost of an asset less its residual value. Residual value is the amount the entity will realize upon disposal of the asset at the end of its useful life. However the residual value of an asset is often insignificant therefore it is always deemed to be zero while computing the depreciation amount.

Residual value of an asset should be reviewed at the time of reporting and if the residual value is higher than the carrying amount, then no depreciation is recognised for that year and remains unrecognised unless and until its residual value subsequently decreases to an amount below the asset’s carrying amount.

The depreciation charge for a period is usually recognised in profit or loss.  But in some cases it can also be included in the cost (carrying amount) of another asset. For example, depreciation of a manufacturing plant may be included in the costs of conversion of inventories.

Useful Life

Useful Life of an Asset is defined as the asset’s expected utility to the entity. It is a matter of judgment and is influenced by an entity’s experience with similar assets and an asset’s useful life can be shorter than its economic life. It is determined by the following factors:

  • Asset management policy of the entity
  • Expected usage of the asset such as expected capacity or physical output.
  • Expected physical wear and tear
  • Technical or commercial obsolescence
  • Legal or similar limits on the use of the asset, such as the expiry dates of related leases.

Depreciation Method

The depreciation method shall reflect the manner in which the entity consumes the future economic benefits arising from a fixed asset item. The depreciation method chosen shall be reviewed at least once at the end of each financial year-end. If there is any changes expected in the pattern of consumption of the economic benefits embodied in a financial asset then the entity must change to a suitable method to reflect the change in consumption. Any change shall be accounted for as a change in an accounting estimate in accordance with FRS 8.

Straight-Line Method, Diminishing Balance Method and the Units of Production Method are the commonly used depreciation methods. If an asset is used uniformly throughout its life by the entity then a straight-line depreciation method shall be applied, under this a constant depreciation amount is charged over the useful life if the asset’s residual value does not change. If an asset is used more intensively during the initial years of its useful life, the diminishing balance method is applied and it results in a decreasing depreciation charge over the useful life. Under the units of production method, depreciation is charged based on the expected use or output.

Do note that in the case of assets that are measured using revaluation model, the re-valued amount of an asset instead of the cost of the asset is used for determining the depreciation of assets that carried in re-valued amount. The residual value of re-valued asset must be reviewed at the end of each accounting period. Thus when the asset is re-valued, the depreciable amount must be calculated based on the re-valued amount and the newly estimated residual value. The amount thus calculated is allocated to the asset over its remaining useful life.

Impairment Loss

FRS 36, Impairment of Assets, provides the standards for review of carrying amount of an asset, determination of recoverable amount of an asset and recognition or reversal of an impairment loss.

If the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset should be reduced to its recoverable amount. This reduction is an impairment loss.

Measuring Recoverable Amount

Recoverable amount is an asset’s or a cash-generating unit’s fair value less costs to sell or its value-in-use whichever is higher. Value-in-use, is the present value of projected future cash flow from the asset.  If either of these amounts exceeds the asset’s carrying amount, the asset is not impaired. In the absence of an active market to determine a reliable fair value of an asset an entity may use the asset’s value-in-use as its recoverable amount.

Recoverable amount should be determined for the individual assets. If it is not possible to do so, the standards require the recoverable amount to be determined for the cash-generating unit to which the asset belongs.

At each reporting date an entity shall test its assets for any indication of impairment. If there is any indication of impairment then the recoverable amount must be estimated.

Indication Of Impairment

Several events may indicate an impairment of asset some of them are

  • significant decrease in the market value of an asset
  • significant change in the extent or manner in which an asset is used
  • significant adverse change in legal factors or in the business climate that affects the value of an asset
  • Accumulation of costs significantly in excess of the amount originally expected to acquire or construct an asset
  • Projection or forecast that demonstrates continuing losses associated with an asset
  • Obsolescence or damage

Recognizing Impairment Loss

An impairment loss should be recognised as an expense in the income statement immediately, unless the asset is carried at re-valued amount. In the case of assets carried at re-valued amount any impairment loss should be treated as a revaluation decrease and is recognised directly against any revaluation surplus for the asset to the extent that the impairment loss does not exceed the amount in the revaluation surplus. Any excess impairment loss is recognized as expense in Profit & Loss.

If the estimated impairment loss is greater than the carrying amount then a liability must be recognized if, and only if, another Financial Reporting Standard requires such recognition.

After the recognition of an impairment loss, the depreciation charge for the asset should be adjusted according to the revised carrying amount. If an impairment loss is recognised, any related deferred tax assets or liabilities are determined by comparing the revised carrying amount of the asset with its tax base.

Reversing Impairment Loss

An entity shall assess at each reporting date whether there is any indication that an impairment loss recognized in prior period for an asset may no longer exist or may have decreased.

Events like the following, may indicate an impairment reversal:

  • Increase in the asset’s market value
  • Significant favorable changes in the technological, market, economic or legal environment
  • Significant changes, with a favorable effect on the entity, have taken place during the period
  • Evidence available from internal reporting indicates that the economic performance of the asset is, or will be, better

If any such indication exists, the entity shall estimate the recoverable amount of that asset. The carrying amount of the assets shall be increased to match the estimated recoverable amount this is called reversal of impairment loss. The increase in carrying amount shall not exceed the carrying amount of the asset had no impairment loss been recognized for the asset in prior years.

Reversal of impairment loss of a cash-generating unit shall be allocated pro rated with the carrying amounts of the assets in the unit. While making such allocation care should be taken that the pro-rated reversal does not exceed the asset’s recoverable value or its carrying amount, has there been no impairment loss recognised previously, whichever is lesser.

Note:

  • Compensations received from third party for any impairment loss shall be included in profit or loss when the compensation becomes receivable. 

De-recognition

The carrying amount of a fixed asset item shall be derecognised on disposal or when no future economic benefits are expected from its use or disposal. The gain or loss shall be included in profit or loss when the item is derecognised.  The difference between the net proceeds from the disposal of the asset and its carrying amount is the gain or loss.

An item of fixed asset shall be disposed of in several ways such as sales, donation, leaseback etc. FRS 18 Revenue contains provision for recognising revenue from the sale of goods.  FRS 17 applies to disposal by a sale and leaseback. Gains shall not be classified as revenue.

Consideration receivable on disposal of an asset is recognised at its fair value. If the payment is deferred, the consideration received is recognised initially at the cash price equivalent and difference between the consideration amount and cash price equivalent is recognized as interest revenue in profit and loss statement.

Note:

  • In the case of de-recognition of re-valued assets the revaluation surplus can be directly transferred to retained earnings.

Disclosure

The financial statements shall disclose, for each class fixed asset:

General Requirements

  • the measurement bases used
  • the depreciation methods used;
  • the useful lives or the depreciation rates used;
  • he gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period; and
  • a reconciliation of the carrying amount at the beginning and end of the period showing
    • additions;
    • assets classified as held for sale or included in a disposal group classified as held for sale and other disposals;
    • acquisitions through business combinations;
    • increases or decreases resulting from revaluations and from impairment losses recognized or reversed
  • depreciation;
  • the net exchange differences arising on the translation of the financial statements from the functional currency into a different presentation currency
  • other changes.

Additional Disclosure

  • the existence and amounts of restrictions on title, and assets pledged as security for liabilities;
  • the amount of expenditures recognized in the carrying amount of an in the course of its construction;
  • the amount of contractual commitments for the acquisition of the assets
  • Compensations received for impairment of assets from third party

Disclosure for revaluation assets

  • the effective date of the revaluation;
  • whether an independent valuer was involved;
  • the methods and significant assumptions applied in estimating fair value
  • the extent to which the items’ fair values were determined directly by comparable market transaction or were estimated using other valuation techniques;
  • for each revalued class of asset, the carrying amount that would have been recognized had the assets been carried under the cost model; and
  • the revaluation surplus, indicating the change for the period and any restrictions on the distribution of the balance to shareholders.

On a Final Note

The primary objective of a business entity is to make profit and increase the wealth of its owners. In the attainment of this objective it is required that the management will exercise due care and diligence in applying the basic accounting concept of “Matching Concept”. Matching concept is simply matching the expenses of a period against the revenues of the same period. The use of assets in the generation of revenue is usually more than a year- that is long term. It is therefore obligatory that in order to accurately determine the net income or profit for a period depreciation is charged on the total value of asset that contributed to the revenue for the period in consideration and charge against the same revenue of the same period. This is essential in the prudent reporting of the net revenue for the entity in the period.

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