Treating Fixed Assets in Singapore
Such tangible assets that are non-current like plant, machinery and property whose owner is a company or an enterprise are basically known as ‘fixed assets’. With an attempt to run business efficiently while generating revenue, every business acquires plants or equipments entirely. Thereafter, these items are used specifically to operate business for a long span of time, at least, for about a whole year.
In this article, you are about to get the insight of standards that are used for the identification of fixed assets, depreciation to be charged, calculation of carrying amounts of them and recognition of impairment losses in acquisition of fixed assets. Whether you are a small-scale or medium scale business in Singapore, we are the leading providers of a complete array of affordable and reliable account outsourcing solutions throughout the country.
Character of Fixed Assets
Because of having physical structure like property, plant or machinery, fixed assets are tangible in nature. In addition, fixed assets are required to have longevity and should be used completely in operations of the business. Hence, they have to be functional economically for the company for several financial years.
Fixed assets are tangible and can be elaborated as plant, machinery and property which are:
- Used entirely for the production of goods and supply of goods or services, for administrative or for other causes; and
- Planned to be in working for more than a specific period
Identification of Fixed Assets
These conditions should be fulfilled to consider machinery, plant or property as a fixed asset
- Potential financial benefits related to the item is subject to pass to the entity; and
- Price of product to be determined reliably
Possibility of financial benefits in future is generally growing from fixed assets that are required to be established permanently and enterprise will enjoy such advantages with its authority of assets’ ownership.
In case when asset is acquired externally, the former condition, accurate measurement of cost, is subject to be met easily. However, if asset is created internally, cost of the asset is required to be calculated by using predefined methods of measurement. Actual cost consists of start-up cost in acquisition of a particular item and other costs they are paid to improve the monetary value of that item.
Measurement on Recognition
Any item (recognized as fixed asset) related to plant, property or machinery will be measured initially will subsequently be measured in its cost with the application of Revaluation Model or Cost Model. The selected model is required to be recognized as accounting policy of the entity and applied in the measurement of the whole asset’s class.
During recognition of plant, machinery or property to register it as a fixed asset should be assessed in its cost initially.
The Main Elements of cost
Cost of each item related to fixed asset consists of these things in its starting recognition:
- The purchase price of the item minus any rebate or discount
- Non-refundable taxes, import duties, handling and transportation charges and testing, installation, assembling and disassembling cost.
- Professional fee that is incurred, if any
These costs doesn’t represent cost
- Starting up a new facility
- Launching a new service or product like advertising and marketing campaigns
- Starting business in new area
- General overhead and administration fees
In case the price is paid in spite of purchase and acquisition of assets, that price will be recognized as the cost of asset. If purchase price is not incurred in the form of cash, it will be recognized as a cost.
In case where price of purchasing is paid partly over several financial years, the existing amount of payment by cash will be recorded and difference among total payment and purchase price shall be recorded as interest.
In case any item related to fixed asset is bought in lieu of any priceless asset(s) or the blend of priceless and monetary assets, cost of that commodity will be determined in its actual value unless it remains not measurable reliably or commercial substance is lost in the transaction.
The commercial substance of the transaction will be measured with its effect on entity’s flow of cash as well as its operations along with resulting changes in its value. Measurement of Fair Value is supposed to be reliable in case of unimportant changes in fair value ranges for any recognized asset and certainties of several calculations that have been measured reliably in the determination of Fair Value.
In case fair market value of a fixed asset which is bought in lieu of another non-monetary asset is not possible to be calculated, the cost of this asset will be calculated at its carried forward amount that is given.
Same principles will be applied to determine the self-made asset’s cost that is used to measure the bought asset. Cost of labor, irregular waste or any other resource that is used to acquire self-made asset shall not be added in the asset’s actual cost.
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.
Under the Cost Model a fixed asset item is carried at its cost minus accumulated depreciation or impairment loss.
According to the Revaluation Model, the item related to fixed asset will be carried forward in its revalued amount and it will be recognized as Fair Market Value of fixed asset when it comes to revaluation. Accumulated loss of impairment or depreciation, if any, will be excluded.
With proper regularity, revaluation of the asset will be made in order to make sure that the amount that is carried forward should be the same materially from which it will be calculated by taking fair market value in record of balance sheet date. In case fair market value of asset that is revalued is changed remarkably from the carrying amount of the asset, it will be the matter of next revaluation.
If deficiency of similar transactions is the main cause of non-determination of the fair value in the market, the entity might be required to calculate the fair market value with depreciated replacement cost or income approach.
If nature of the item related to plant, property or machinery making the fair value more volatile, then it is mandatory to make annual revaluation.
An item of fixed asset can be impacted with accumulated depreciation that is either:
- Repeated as per the changes in gross carry amount in order to make revalued amount equal to the revalued asset’s carrying amount.
- Repeated to the amount of revalued asset and exempted off the gross carry amount.
When it comes to the revaluation, the carrying amount will be credited, if it increases, to the equity according to the “revaluation surplus” heading. But it is done only when revaluation reduction is reversed of the asset that is recognized before in profit/loss.
On the other side, in case asset’s carried amount is reduced when it comes to revaluation, it will be considered as loss in Profit & Loss account. But it is done only when reduction in equity is debited under “Revaluation Surplus” heading with the scope of credit balance, if any, for the asset within its heading.
In case an asset is retired or disposed off, you can transfer surplus of revaluation in retained earnings. But separate surplus transfer shall be allowed in retailed earning as an asset which will be used continually through the entity. In these types of cases, the amount of surplus that is shifted will be the distinction among the depreciation on asset’s actual cost and on the carrying amount that is revalued.
Accounting for Depreciation
Depreciation is actually a methodical portion of amount that is depreciable to a fixed asset over the lifespan of it. Except freehold property, all the fixed assets are subject to limited life of use. This is why they all are depreciated. Depreciation of a fixed asset item starts just from when it started using by the entity and will continue running unless it is “held up to be sold” or fully depreciated.
In calculation of the depreciation, it is suggested to use component approach. As per this approach, depreciation will be charged on each part of fixed asset. Related to the assets’ total cost, the cost of each part will be different. Same methods of depreciation will be applied on these parts of the asset as they have same lifespan and they can also be collaborated with each other when it comes to determine the depreciation.
Other parts whose cost is individually not equal to the total cost will be the subject to separate depreciation. In case when remainder items are expected to see variation, the lifespan of the parts will be faithfully shown by applying the approximation techniques.
Otherwise, all the parts of a fixed asset item will be depreciated individually which will be in relation with the actual cost of fixed asset item.
Adjacent to the asset’s carrying amount, the depreciation is subject to be determined on increased part of assets’ fair value. Depreciation of the asset is required to be recognized on capitalized cost of replacement and repair of parts and their maintenance that is added to the asset and it will improve the financial benefits or the actual lifespan of fixed assets.
Here are the major aspects in accounting of depreciation:
- Amount to be depreciated
- Actual lifespan
- Method of calculating depreciation
- Amount of depreciation
Amount of depreciation will be recognized as the original asset’s cost minus residual value. It is actually an amount realized by the entity by asset’s disposal by the end of lifespan. But this value is insignificant of the asset. Hence, residual value of the asset is always considered as zero when it comes to determine the amount of depreciation.
One should review the asset’s residual value while reporting and when it goes up as compared to carrying amount. That is why depreciation is not recognized for the subsequent year and it will not stay recognized until and unless the residual amount of the asset reduces continuously to the cost that is below the carrying amount of the asset.
For a subsequent period, the charge of depreciation will be recorded as profit/loss. In some circumstances, depreciation will also be added in carrying amount of asset. For instance, cost of inventory conversion may also include manufacturing plant’s depreciation.
Actual lifespan of a fixed asset can be explained as the expected utility of the asset to an entity. It can be affected by the experience of entity with particular assets and it can be judged according to that factor. The lifespan of the asset may be shorter than the economic life of the asset. The following factors may affect the actual lifespan of asset:
- Entity’s policy on management of asset
- Estimated asset’s usage like physical output or expected capacity
- Estimated wear and tear
- Obsolescence (whether commercial or technical)
- Method of depreciation
- Limits on usage of asset like expiration date on relevant lease
The method of depreciation will represent the method with which potential financial benefits can be enjoyed by the entity. At least at every FY end, one should review the depreciation of the asset. Some of the most sought-after methods of depreciation calculation are “Units of Production”,”Diminishing Balance” and “Straight-Line” Method. Straight Line method is used when asset is consistently used in its actual life. Residual value of the asset is not charged in this method as amount of constant depreciation is charged. If entity uses asset more often in the starting years of its life, they have to apply diminishing balance method which resulting in reduced charge of depreciation in its shelf life. Depreciation charge is based upon output or expected use when it is calculated according to units of production approach.
Calculation of Impairment Loss
Impairment of Assets, FRS 36, offers the standards to find out the asset’s carrying amount and recoverable amount can be determined of the asset.
In case carrying amount of the asset is less than recoverable one, the carrying amount will be deducted to the asset’s recoverable amount. This way, you can determine the impairment loss.
Calculation of Recoverable Amount
Recoverable amount is the fair value of money-generating unit or fixed asset minus value-in-use of an asset or resale value whichever is higher. Value-in-use is the current amount of expected cash flow in future from asset. In case both of these amounts exceed the carrying amount of asset, asset won’t be impaired. If active market is not present to estimate the asset’s fair value that is reliable.
For the sake of individual assets, it is important to determine the recoverable value. If you cannot do it, you need to determine standards for the recoverable value of money-making unit.
An entity will determine the indication of asset’s impairment in each date of reporting. If impairment shows any indication, then entity will have to estimate the recoverable amount of the asset.
There are a number of events indicating the assets’ impairment. Here are some events:
- Slight reduction in asset’s market value
- Slight differences in the manner or extent which is related to the usage of asset
- Slight change that is adverse in legal criteria or climate of business that may affect overall asset’s value
- Forecasting or projection of factors that can demonstrate the frequent losses related to the asset
- Damage or obsolescence
- Impairment losses recognition
Recognition of impairment loss must be done like an expenditure immediately on the income statement unless revalued amount of asset is carried upon. If any impairment loss occurs, it should be recognized as revaluation short in case of carrying assets at the amount of revaluation. It will be charged opposite to revaluation surplus so that impairment loss cannot exceed it. If impairment loss exceeds revaluation surplus, it will be considered as expenditure in Profit & Loss Statement.
If calculated impairment loss exceeds the asset’s carrying amount, then it must be recognized as liability only when such recognition is required by any other Financial Reporting Standard.
When impairment loss is recognized, the depreciation amount charged on the asset shall be adjusted as per the carrying amount that is revised. After recognition of impairment loss, the deferred tax liabilities or assets, if any, can be estimated with comparison of tax with the asset’s carrying amount that is revised.
Impairment Loss Reversal
In each date of reporting, entity will assess the indication of recognition of impairment loss for the asset that doesn’t exist or might be deducted.
These events are the indication of reversal of impairment loss:
- Hike in market value of an asset
- Substantial changes that are favorable in market, economic, legal or technological environ
- Favorable impacts made upon the period on the entity
- Internal reporting provides the evidence that shows the better performance of asset from economic point of view
If any of such type of sign exist, it is important for the entity to calculate the amount to be recoverable for the asset. Asset’s carrying amount will see increment in order to tally the amount that is recoverable and estimated. This process is known as impairment loss reversal. In the asset’s carrying amount, that increase will not be greater than the asset’s carrying amount with no recognition of impairment loss in previous years.
Impairment loss reversal of money-making unit will be prorated and allocated with asset’s carrying amount in that unit. When it comes to do this type of allocation, you should be careful to avoid prorated reversal to be greater than the recoverable value of the asset or carrying amount of the asset.
De-recognition of the Asset
Carrying amount of item that is related to fixed asset will be derecognized when it is disposed off or when there is no indication of financial benefits in future with its use. The profit/loss will be recorded in Profit or Loss whenever it is derecognized. Carrying amount of asset will be the profit or loss and asset’s disposal will be the net proceeds.
Disposal of Fixed asset item can be done in various ways like donation, leaseback and sales. The provision of recognition of revenue from goods’ sales is included in FRS 18. Leaseback and disposal with a sale is provisioned in FRS 17. Profits won’t be recognized as revenue.
On the disposal of asset, the considerable receivable will be considered as the fair value of it. The consideration receivable will be initially recognized when payment gets deferred at the same price and difference among the equal cash price and amount of consideration will be considered as the revenue of interest in Profit & Loss Statement.