Fixed assets are properties and equipment acquired by a company for use in its production operations and for long-term purposes. Accordingly, here’s a detailed look at the standards for fixed assets and the accounting treatment of fixed assets with examples:

1. Initial Recognition of Fixed Assets

Recording at Cost:

For example, if a company purchases production equipment worth SAR 100,000, with additional shipping and installation costs of SAR 5,000:

Total cost = SAR 100,000 (purchase price) + SAR 5,000 (additional costs) = SAR 105,000

Accordingly, the asset is recorded in the books as follows:

• Debit: Equipment (SAR 105,000)

• Credit: Cash (SAR 105,000)

This is the first step in the accounting treatment of fixed assets.

2. Depreciation

Straight-Line Method:

For example, if the equipment has a useful life of 10 years and a salvage value of SAR 5,000:

Annual Depreciation = (Total Cost – Salvage Value) / Useful Life

= (SAR 105,000 – SAR 5,000) / 10 years = SAR 10,000 annually

The annual depreciation is recorded as:

• Debit: Depreciation Expense (SAR 10,000)

• Credit: Accumulated Depreciation (SAR 10,000)

This method is commonly used as part of the accounting treatment for allocating asset cost over time.

Accelerated Depreciation Method (Declining Balance Method):

For example, if the accelerated depreciation rate is 20%:

1st Year:

Depreciation = SAR 105,000 × 20% = SAR 21,000

• Debit: Depreciation Expense (SAR 21,000)

• Credit: Accumulated Depreciation (SAR 21,000)

2nd Year:

Depreciation = (SAR 105,000 – SAR 21,000) × 20% = SAR 16,800

• Debit: Depreciation Expense (SAR 16,800)

• Credit: Accumulated Depreciation (SAR 16,800)

These are alternative approaches to the accounting treatment of depreciation based on the asset’s usage pattern.

3. Maintenance and Improvements

Routine Maintenance:

For example, if the company spends SAR 2,000 on equipment maintenance:

• Debit: Maintenance Expense (SAR 2,000)

• Credit: Cash (SAR 2,000)

Routine maintenance is expensed as part of regular accounting treatment.

Capital Improvements:

If the company adds a new component to the equipment costing SAR 10,000 to improve efficiency:

• Debit: Equipment (SAR 10,000)

• Credit: Cash (SAR 10,000)

Such enhancements are capitalized under the appropriate accounting treatment rules.

4. Derecognition of Assets

1. Sale of the Asset:

For example, if the equipment is sold for SAR 50,000 after being depreciated for 5 years with a total depreciation of SAR 50,000:

Book Value = SAR 105,000 – SAR 50,000 = SAR 55,000

2. Gain or Loss:

Loss on Sale = SAR 50,000 – SAR 55,000 = -SAR 5,000

3. Recording the Sale:

• Debit: Cash (SAR 50,000)

• Debit: Accumulated Depreciation (SAR 50,000)

• Credit: Equipment (SAR 105,000)

• Credit: Loss on Sale of Fixed Assets (SAR 5,000)

4. Full Depreciation:

If the asset is fully depreciated and no longer usable:

• Debit: Accumulated Depreciation (SAR 105,000)

• Credit: Equipment (SAR 105,000)

This is a key element in the accounting treatment for removing assets from the books.

5. Disclosure

Disclosure in Financial Statements: Fixed asset details must be disclosed in financial reports, including:

• Total cost

• Accumulated depreciation

• Net book value

• Any significant changes in fixed assets

Relevant Accounting Standards

• IAS 16: Property, Plant, and Equipment

• IAS 36: Impairment of Assets

• IAS 40: Investment Property

In conclusion, adhering to these standards helps companies ensure compliance and transparency in presenting fixed assets in their financial statements. Proper accounting treatment of fixed assets is essential for accurate reporting and decision-making.