Understanding Fixed Assets in Singaporean Accounting
Where a company owns non-current tangible assets such as equipment, property or plant, those assets are most commonly referred to as fixed assets. Every company will inevitably purchase some equipment, plant or property necessary to the running of the business and resulting in generating revenue. Any item purchased for this purpose used in the business’ operations for a period longer than a year – in other words, any asset whose full value will not be realised within the same Year of Assessment – is considered to be a fixed asset.
Ottavia has prepared this article as a broad overview of the standards by which fixed assets and the relevant impairment losses and depreciation charges are recognised in Singapore and how their carrying amounts are determined. Ottavia can assist small to medium enterprises in Singapore with a range of cost-effective and reliable outsourcing services covering your business’ accounting needs.
While Section 16 of the Singapore Financial Reporting Standards does outline provisions for the accounting treatment of an enterprise’s fixed assets, the standards are not applicable to fixed assets that are:
- held for sale
- biological assets
- investment properties; or
- mineral rights
The Nature of Fixed Assets
To qualify as a fixed asset, an asset must be tangible, that is having a physical substance, must be utilised in the operation of the business, and must have a long life – defined as being economically useful to the company for a period longer than single Year of Assessment.
Fixed assets are defined as any property, equipment or plant that
- the company expects to use for longer than a single accounting period; and
- are retained for rental for others, for utilisation in the production or supply of services or goods, or for administrative purposes
Recognising Fixed Assets
To be recognised as a fixed asset, property, equipment or plant must satisfy the following conditions:
- he cost of the asset can be reliably measured; and
- any future economic benefits associated with the asset will probably flow to the owning enterprise.
To be recognised, the certainty of future economic benefits resulting from the asset should be firmly established and the benefits assured to pass to the company by right of ownership.
Where the asset has been externally acquired, accurately measuring costs can be easily done. However, satisfying that criteria where the asset has been internally created can be more complex. Companies are advised to determine the cost of the asset using the prescribed measurement methods. These costs include any initial costs attached to acquiring such an asset as well as any subsequent costs for enhancing its economic value.
- Service equipment and spare parts are usually realised in Profit & Loss statements. That said, major spare parts and service equipment may qualify for recognition as fixed assets where
- These items are economically useful over multiple Years of Assessment or
- The item can only be used with other, pre-existing fixed assets
- An enterprise may acquire items for safety or environmental reasons, not because they contribute economically to the business. These items may qualify for recognition as fixed assets where they are required to access the economic benefits embodied in fixed assets the organisation already owns.
- Day-to-day maintenance is not considered to be a subsequent cost – e.g. a company owning a refrigerated truck may not count the daily parts and labour costs of maintaining and cleaning the truck as a subsequent cost, and must be recognised in the Profit & Loss Statement. However, were the truck’s refrigerating unit to be replaced, the cost of replacement would qualify as cost (carrying amount) of fixed asset, pending meeting the recognition criteria. Remaining carrying amount from any replacement that was previously recognised shall be derecognised.
- Similarly, costs of inspections required to clear the asset for continued operation (such as inspections carried out on aircraft, watercraft or oil rigs) will also be considered as cost (carrying amount) of the fixed asset. Likewise, any remaining carrying amount from inspection costs that were previously recognised shall be derecognised.
Determining the carry amount
Measurement upon recognition as a fixed asset
Upon being recognised as a fixed asset, an item or plant, property or equipment will be initially measured at its cost, and subsequently measured by applying the Singapore Financial Reporting Standards’ Cost Model or Revaluation Model. The model chosen shall be adopted as the company’s accounting policy and equally applied to measuring the entire asset class.
Upon recognition as a fixed asset, the equipment, property or plant must be initially measured at its cost.
Upon initial recognition, the cost of a fixed asset is comprised of:
- The purchase price of the item less applicable rebates and discounts
- Any attached import duties, transportation or handling costs, non-refundable taxes, or cost of assembling, installing, testing or dismantling the asset
- Professional fees paid
Expenses incurred in pursuit of the following do not factor into the cost of the fixed asset:
- Opening a new facility
- Introducing new products or services i.e. advertising and marketing costs
- Conducting business in a new location
- Administration and other general overhead costs
In cases where the assets were acquired externally, the cost of the asset is considered to be the price paid in cash against purchase. Where the price of purchase was not paid in cash, the ‘cash price equivalent’ is to be recorded as the asset’s cost.
If the price was settled in instalments over several accounting periods, the business must record the present values of the cash payment. The difference between the purchase price and the total amount of payment to date shall be recognised as interest.
Where a fixed asset is acquired through exchange for a non-monetary asset(s) or in exchange for a combination of non-monetary and monetary assets, the item cost shall be measured at its fair value unless the cost is not reliably measureable, or if the transaction lacks commercial substance.
The commercial substance of a transaction shall be determined by its ability to impact the cash flow of the enterprise and the enterprise’s operations, and the resulting difference in value. Fair Value measured shall be considered to be reliable where any variations in the range of fair value estimates for the asset are insignificant and these estimates can be said to have been reasonably assessed in estimating fair value.
Where the fair value of the asset acquired in exchange for another non-monetary asset cannot be determined, the cost is measured at the carrying amount of the asset surrendered.
Determining the cost of a self-constructed asset utilises the same principles as any acquired asset. Expenses relating to abnormal amounts of wasted materials, labour or any other resources expended in the acquisition of the self-constructed asset is not included in the cost.
The company may elect to choose the Cost Model or the Revaluation Model as its accounting policy, and must apply this to an entire class of plant, property and equipment.
A company using the cost model carries a fixed asset item at its cost less any impairment loss or accumulated depreciation.
Under this model a fixed asset item is to be carried at a revalued amount – defined as the asset’s fair value in the market at the time the revaluation was made, minus accumulated depreciation or impairment loss.
Revaluations must be made on sufficiently regular intervals to ensure that the carrying amount accurately reflects the value that would be determined via fair value at the balance sheet date. Where the fair value of the asset differs significantly from the relevant carrying amount, the asset is required to undergo further revaluation.
When fair value cannot be determined due to a lack of comparable transactions in the market to use as a model, the controlling entity may need to estimate the fair value of the asset using a depreciated replacement or income cost approach.
Should the fair value of the equipment, plant or property be highly volatile by nature than annual revaluation is required.
Accumulated depreciation of a fixed asset should either be:
- Restated accordingly through changing the gross carrying amount so that it is equal to the revalued amount of the asset or
- Eliminated against the gross carrying amount and restated to the revalued amount
If the carrying amount of an asset is found to have increased upon revaluation the increase in value shall be credited to equity under the heading ‘revaluation surplus’. This is only to be done after reversing any revaluation decrease of the same fixed asset that was previously recognised in a loss or profit.
Conversely, where the asset’s carrying amount decreases on revaluation it shall be recognised as a loss in profit and loss. This only done after debiting the decrease to equity under ‘revaluation surplus’ to the extent that any credit balance exists for the same fixed asset under that heading.
Revaluation surplus may be transferred to retained earnings where the asset is disposed of or retired. That said, partial transfer of surplus into retained earnings is permitted as the asset continues to be used by the entity. In these cases, the surplus amount to be transferred is the difference between the depreciation on revalued carrying amount and the depreciation of the asset’s original cost.
When a fixed asset is revalued, the entire class of plant, property and equipment to which that asset belongs must be revalued, and that revaluation carried out simultaneously or completed within a short period of time, when done on a rolling basis.
Taxes incurred on any income generated by the fixed asset will be treated according to the standards governing income tax.
Accounting for asset depreciation
Depreciation refers to the systematic allocation of a tangible asset’s cost over its useful life. With the exception of freehold land, all fixed assets have a limited useful life meaning they are subject to depreciation. A fixed asset begins depreciating the moment it is put to use by the owner and this process does not stop until the asset has been fully depreciated and reaches the end of its life, or the asset has been subsequently classified as ‘held up for sale’.
When computing the depreciation, a component approach is prescribed. Therefore, each part of the fixed asset shall be depreciated separately. The cost of these part should be significant in relation to the asset’s total cost. Significant parts of the asset exhibiting similarities in regards to useful life expectancy and depreciation method can be grouped when determining the depreciation charge.
Any remaining parts whose individual costs are insignificant in relation to the total cost of the asset may be depreciated separately. In the event of variation of expectation of the items remaining, approximation techniques should be applied in order to accurately represent the remaining useful life of the parts.
An entity may alternatively elect to separately depreciate the parts of an asset whose cost is not significant in relation to the asset’s total cost.
Depreciation should be recognised on the incremental portion of the asset’s fair value against its carrying amount. Depreciation must also be recognised on capitalised cost of repairs or replacement of parts, as well as maintenance carried out to enhance the economic benefits or prolong the useful life of the asset.
There are three key concepts in depreciation accounting:
- Depreciable amount
- Useful life
- Depreciation method
A depreciation amount is an asset’s actual cost minus its residual value. Residual value refers to the amount an entity can realise upon disposal of the asset at the conclusion of its useful life. However, the residual value of an asset is frequently insignificant, meaning it is always deemed to be zero when computing the depreciation amount.
An asset’s residual value should be reviewed at the time of reporting. Where the residual value is higher than the carrying amount, depreciation cannot be recognised for that year and remains unrecognised unless and until the asset’s residual value decreases to an amount below the carrying amount of the asset.
Depreciation charges for a period are most frequently recognised as profits or losses. In some cases, charges can be included in the cost or carrying amount of another asset. An example of this would be including the depreciation of a manufacturing plant in the cost of inventory conversion.
An asset’s useful life is defined as the asset’s total expected utility to the user. This is a matter of judgement influenced by the user’s experience with similar assets. It is important to note than an asset’s useful life can be shorter than its economic life. A useful life is determined as follows:
- The asset management policy of the user
- The expected use of the asset such as its expected capacity or its physical output
- Expected physical wear and tear
- Commercial or technical obsolescence
- Legal, regulatory or similar limits on the use of the asset e.g. the expert dates of related leases
A depreciation method should reflect the manner in which the user consumes future economic benefits that will arise from the use of a fixed asset. The method chosen is required to be reviewed a minimum of once every financial year-end. Where there are changes expected by the user in the pattern of consumption of the economic benefits provided by the asset the user must change its depreciation method to reflect the change. All changes shall be accounted for as a change in an accounting estimate in compliance with Financial Reporting Standards 8.
The most commonly used depreciation methods are:
- Diminishing balance
- Units of production
Where an asset has been used uniformly throughout its life by a user then the straight-line depreciation method would be the most appropriate, whereby a consistent amount of depreciation is charged across the useful life of the asset where it’s residual value does not change. Should an asset be used more intensively during its initial years, the diminishing balance method shall be applied, resulting in a decreasing depreciation charge over its useful life. The units of production method charges depreciation based on expected output or use.
Where assets have been measured using the revaluation model, the revalued asset amount instead of the asset cost is used to determine the asset depreciation. Users must review the residual value of the revalued asset at the conclusion of every accounting period. Therefore, when the asset is revalued the depreciable amount the depreciable amount must be calculated based on the newly estimated residual value and the revalued amount. This amount is allocated to the asset for its remaining useful life.
Financial Reporting Standard 36 – Impairment of Assets – provides a set of standards for reviewing an asset’s carrying amount, determining its recoverable amount and recognising or reversing an impairment loss.
When the recoverable amount is less than the asset’s carrying amount, the carrying amount shall be reduced to the asset’s recoverable amount. This reduction is considered to be an impairment loss.
Measuring an asset’s recoverable amount
A recoverable amount is defined as the fair value less any costs to sell, or the value-in-use of an asset or cash-generating unit, whichever is higher. Value-in-use is the present valuation of projected future cash flow arising from the asset. Should either of these amounts exceed the value of the asset’s carrying amount, the asset is not considered to be impaired. Where there is no active market that enables the user to reliably determine the fair value of an asset, the user may instead utilise the asset’s value-in-use as its recoverable amount.
The recoverable amount needs to be determined for each individual asset. Where determining this amount separately is not possible, standards require that the user determine recoverable amount for the cash-generating unit to which the asset belongs.
On each reporting date the entity is required to test its assets for indication of impairment. Where there is indication, the recoverable amount must be estimated.
Indication of impairment
A number of events indicate an asset impairment. These can include:
- significant decrease in an asset’s market value
- significant change in manner or extent to which the asset is utilised
- significant adverse change in the business climate or in legal factors, either of which affect the asset
- significant excess accumulation of costs over the amount originally predicted in the pursuit of constructing or acquiring an asset
- forecast or projection demonstrating continuing losses associated with or resulting from the asset
- damage or obsolescence
Recognition of impairment loss
Impairment losses shall be recognised on the income statement as expenses immediately, unless where the asset is carried at a revalued amount. Where the asset has been carried at revalued amount, any impairment loss is required to be treated as a revaluation decrease and must be recognised directly against any revaluation surplus for the asset, but only to the extent that the impairment loss does not exceed the revaluation surplus amount. Excess impairment loss is to be recognised as an expense under Profit & Loss.
If and only if another Financial Reporting Standard requires the recognition, a liability must be recognised should the estimated impairment loss exceed the carrying amount.
After recognising an impairment loss, the asset’s depreciation charge must be adjusted to reflect the revised carrying amount. Additionally, and upon recognition, all related deferred tax assets or liabilities shall be determined through a comparison between the asset’s revised carrying amount and its tax base.
Reversal of impairment loss
Upon each reporting date, an entity shall assess whether there is an indication that a previously recognised impairment loss from a prior accounting period may have either decreased or ceased to exist.
What would decrease or eliminate an impairment loss will vary depending on your business, but events such as the following can be taken as a guide that an impairment reversal may have occurred:
- The asset’s market value has increased
- The legal, market, technological or economic environment has undergone significant favourable changes
- Other significant changes have taken place during the period that have a favourable effect on the entity
- The asset’s economic performance may or will be better according to evidence from internal reporting
Should this or any similar indication exist, the entity is obliged to estimate the asset’s recoverable amount. The asset’s carrying amount must be increased to equal the estimated recoverable amount in a process called reversal of impairment loss. The carrying amount increase is not to exceed the asset’s carrying amount should there have been no impairment loss recognised in prior years for the asset.
Where a cash-generating unit’s impairment loss is reversed, this reversal shall be allocated pro rata with the carrying amounts of the assets in the unit. Care should be taken whilst making the allocation that the pro rata reversal does not exceed the recoverable value or the carrying amount of the asset, has no impairment loss been previously recognised, whichever value is lesser.
Compensations received for an impairment loss from a third party shall be included in profit or loss when the compensation is receivable.
De-recognition of carry amount
A fixed asset’s carrying amount shall be derecognised either upon disposal or when no future economic benefits are expected either from its use or its disposal. Any gain or loss must be included in profit or loss when derecognised. The difference between the net proceeds resulting from the asset’s disposal and the asset’s carrying amount is the gain or loss.
Fixed assets may be disposed of in several ways such as by sale, donation or leaseback, et cetera. Financial Reporting Standard 18 outlines provisions for the recognition of revenue from the sale of goods. Financial Reporting Standard 17 covers disposal through leaseback or sale. Gains are not to be classified as revenue.
Consideration receivable from the disposal of an asset is to be recognised at fair value. Should the payment be deferred, consideration received is to be recognised initially at the equivalent cash price, and the difference between the cash price equivalent and the consideration amount to be recognised as interest revenue in the profit and loss statement.
Where a revalued asset has been derecognised the revaluation surplus may be directly transferred to retained earnings.
Financial statements shall disclose, for each class of property, plant and equipment:
- the measurement bases used to determine the gross carrying amount;
- the depreciation methods used;
- the depreciation rates or the useful lives used
- the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and the conclusion of the accounting period; and
- a reconciliation of the carrying amount at the beginning and end of the period showing:
- 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
- the net exchange differences arising on the translation of the financial statements from the functional currency into a different presentation currency
- other changes.
- 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.
A business entity’s primary objective is the making of profit and the increasing of its owners’ wealth. Through the process of attaining this objective the management of the entity is required and expected to exercise due care and diligence when applying the fundamental accounting concept of ‘matching concept’. This refers to the practice of matching the expenses of a period against the revenues of the same.
Assets are used for revenue generation for a period usually greater than a year – considered to be long term. Therefore, it is required that in order to accurately determine an entity’s net income or profit for a period, depreciation is charged on the total value of the asset that contributed to the entity’s revenue for the accounting period in consideration, and charged against the same revenue of the same period. This process is essential for prudent reporting of the entity’s net revenue for the period.