What are fixed assets?
Fixed assets (also called property, plant and equipment, or PP&E) are long-lived tangible assets a business uses to produce goods or deliver services, not for resale. Under IFRS (IAS 16) and US GAAP (ASC 360), fixed assets are capitalised on the balance sheet at cost and depreciated over their useful life.
What qualifies
- Tangible: physical assets: buildings, machinery, vehicles, computers, office equipment.
- Long-lived: expected useful life longer than one accounting period (typically more than 12 months).
- Used in operations: not held for sale or investment.
- Capitalisable cost threshold: set by company policy (commonly $1,000–$5,000); below the threshold, items are expensed.
Fixed assets vs. related categories
- Fixed assets vs. current assets: current assets convert to cash within 12 months; fixed assets are held for the longer term.
- Fixed assets vs. intangibles: intangibles (software licences, patents, goodwill) are non-physical: accounted for under IAS 38 / ASC 350.
- Fixed assets vs. inventory: inventory is held for resale; fixed assets are held for use.
Depreciation
The capitalised cost is allocated as a non-cash expense over the asset’s useful life. Common methods: straight-line (equal annual charge: most common), declining-balance, units-of-production. The method must be reviewed periodically per IAS 16; changes are accounted for prospectively.
Why founders should care
Fixed-asset additions are capital expenditure (capex), not operating expense: they flow through the cash flow statement investing section. Heavy capex without matching revenue growth compresses free cash flow even when the income statement looks healthy.
Do: maintain a fixed-asset register with each item’s acquisition date, cost, useful life and accumulated depreciation; review impairment annually.
Don’t: expense large purchases that should be capitalised: it overstates current-period loss and understates future depreciation.
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