Fixed assets are among the most crucial long-term resources used by businesses across industries, from manufacturing plants to logistics companies, construction firms, technology providers, retail operations, and more. These assets support the productive capacity of an organization and play a significant role in revenue generation, operational efficiency, and competitive advantage. However, fixed assets do not maintain their value indefinitely. Economic forces, technological changes, environmental exposure, and physical deterioration all contribute to a gradual or sudden fall in value. Accounting standards require businesses to recognize and properly record these value reductions to ensure transparent, reliable, and decision-useful financial reporting.
Under IFRS, particularly IAS 16 (Property, Plant and Equipment), IAS 36 (Impairment of Assets), and IFRS 13 (Fair Value Measurement), entities must assess whether the carrying value of an asset reflects its recoverable amount. Failure to do so may lead to overstated assets and inflated profits, which create misleading financial statements. Under US GAAP, ASC 360 (Property, Plant, and Equipment) provides detailed guidance on impairment indicators and measurement. Across jurisdictions, regulators and auditors closely examine whether companies have accurately reflected declines in asset values.
The following expanded article provides deep practical, technical, and global insights into why fixed assets fall in value, how to account for depreciation and impairment, how to assess recoverable amounts, the journal entries required under different standards, the impact on financial statements, and the strategic implications for management. Real-world industry examples, IFRS/GAAP references, auditor perspectives, internal control recommendations, and practical decision-making frameworks are included to enhance understanding.
1. Reasons for a Fall in Value of Fixed Assets
A fall in the value of fixed assets can be gradual—over many years—or immediate due to sudden events. Understanding the source of the value reduction is essential because it determines whether the decline should be handled through depreciation, impairment testing, or revaluation adjustments under IFRS.
A. Depreciation
Depreciation is the systematic allocation of an asset’s cost over its useful life. As the asset is used, its value decreases. Depreciation reflects wear and tear, consumption of economic benefits, and loss of utility due to age. Under IAS 16 and ASC 360, the depreciation method must reflect the pattern in which economic benefits are consumed.
Common depreciation methods:
- Straight-line method — used when the asset’s benefits are consumed evenly.
- Reducing balance method — used when benefits decline over time (e.g., computers, machinery).
- Units of production — used when usage levels vary significantly year to year.
IFRS Note: Depreciation alone does NOT account for sudden value drops. If an event drastically reduces value, an impairment test is required—even if depreciation is already being applied.
B. Obsolescence
Technological advancements may render assets outdated, leading to a decrease in their usefulness and market value. Examples include manufacturing robots replaced by AI-driven models, medical equipment superseded by advanced alternatives, and outdated IT infrastructure.
Example Industries Highly Exposed to Obsolescence:
- Telecommunications (e.g., 3G networks replaced by 4G/5G)
- Healthcare (rapid evolution of diagnostic machines)
- Automotive manufacturing (robotic automation)
- Aerospace and defense (new avionics systems)
C. Wear and Tear
Physical deterioration due to regular use or aging causes assets to lose value over time. Heavy equipment (forklifts, cranes), vehicles, industrial plants, and office equipment all degrade with use.
Key Factors:
- Intensity of usage
- Maintenance practices
- Exposure to harsh environmental conditions
- Poor quality of materials or construction
D. Market Conditions
Changes in economic conditions, such as property price fluctuations, may affect the value of fixed assets. For example, industrial land may drop in value when local manufacturing declines, or commercial real estate may fall during economic downturns.
IFRS 13 Requirement: Market-based valuation must use observable inputs whenever possible. When market conditions decline, fair value may drop accordingly.
E. Damage or Impairment
Unexpected events like accidents, fire, or natural disasters can cause a sudden reduction in asset value. Under IAS 36 and ASC 360, such events trigger an immediate impairment test.
Impairment Trigger Examples:
- Fire damaging factory equipment
- Flood destroying inventory storage systems
- Earthquake causing structural building damage
- Significant reduction in market demand for products produced by a given asset
2. Accounting for the Fall in Value of Fixed Assets
When an asset’s value falls, proper accounting ensures the financial statements remain faithful to economic reality. The accounting treatment varies depending on the reason behind the value drop—whether it is due to regular depreciation, market-based revaluation, or impairment.
A. Depreciation Accounting
Depreciation is recorded annually to reflect the decrease in asset value due to normal usage. It is an expense recognized in the income statement and accumulates in the Accumulated Depreciation account.
Journal Entry for Depreciation:
Debit: Depreciation Expense
Credit: Accumulated Depreciation
IFRS Note: Depreciation does NOT attempt to reflect fair value—it only allocates cost. Fair value changes require revaluation or impairment testing.
B. Revaluation Loss
If an asset is revalued downward due to market conditions, the decrease is recorded as a Revaluation Loss. Under IAS 16, revaluation decreases reduce the revaluation reserve first (if related to previous upward revaluations) and then affect profit or loss.
Journal Entry for Revaluation Loss:
Debit: Revaluation Reserve (if available)
Debit: Impairment Loss (if no reserve)
Credit: Fixed Asset Account
Example: A commercial building is revalued downward because property prices fall due to a recession. The portion reversing previous gains hits equity; the excess hits profit or loss.
C. Impairment Loss
An impairment loss occurs when an asset’s recoverable amount is lower than its book value. Under IFRS, the recoverable amount is the higher of:
- Fair value less costs of disposal
- Value in use (present value of future cash flows)
Formula:
Impairment Loss = Book Value – Recoverable Amount
Journal Entry for Impairment:
Debit: Impairment Loss
Credit: Fixed Asset Account
Difference between Revaluation Loss and Impairment Loss:
| Revaluation Loss | Impairment Loss |
|---|---|
| Occurs during revaluation under IAS 16 | Occurs when recoverable amount is below carrying value under IAS 36 |
| May reverse previous revaluation surplus | Generally cannot be reversed under GAAP (limited reversal allowed under IFRS) |
| Based on fair value | Based on recoverable amount (fair value or value in use) |
3. Example of Fixed Asset Value Reduction
The following scenarios show practical applications of depreciation and impairment.
Scenario 1: Depreciation
A business purchases a machine for $50,000 with a useful life of 10 years and no residual value.
Annual Depreciation = $50,000 ÷ 10 = $5,000 per year
Journal Entry:
Debit: Depreciation Expense $5,000
Credit: Accumulated Depreciation $5,000
Practical Insight: Depreciation helps match the cost of the asset to the revenue it generates, adhering to the matching principle under IFRS and GAAP. It does NOT reflect fair market value but ensures systematic cost allocation.
Scenario 2: Impairment Loss
The same machine is damaged and its recoverable amount is now $30,000, while its book value is $40,000.
Impairment Loss = $40,000 – $30,000 = $10,000
Journal Entry:
Debit: Impairment Loss $10,000
Credit: Fixed Asset Account $10,000
Key Auditor Insight: Auditors must verify impairment indicators such as declining production, physical damage, or unfavorable regulatory changes. IAS 36 requires annual testing for certain asset classes (e.g., goodwill, intangible assets with indefinite lives) even without indicators.
4. Impact of a Fall in Value on Financial Statements
Value reductions directly affect profitability, equity, asset balances, and future financial ratios. Understanding these impacts is critical for management, investors, lenders, and auditors.
A. Balance Sheet
- Asset values decrease, reducing total assets.
- Accumulated depreciation increases.
- Impairment losses lower net asset value.
Additional Effects:
- Debt-to-equity ratio may worsen.
- Return on assets (ROA) may improve due to lower asset base.
- Collateral value for loans may drop.
B. Income Statement
- Depreciation and impairment expenses reduce net profit.
IFRS/GAAP Note: Impairment losses can significantly reduce profit in the period recognized, potentially triggering covenant violations or affecting executive bonus calculations.
C. Cash Flow Statement
- Depreciation and impairment are non-cash expenses added back in operating activities.
Strategic Note: Although non-cash, impairment can hurt investor confidence and reduce stock prices.
5. Preventing a Rapid Fall in Asset Value
- Regular maintenance and servicing.
- Timely upgrades to avoid obsolescence.
- Proper insurance coverage.
Expanded Best Practices:
- Conduct annual impairment testing.
- Use predictive maintenance (IoT, AI sensors).
- Develop asset lifecycle management plans.
- Maintain documentation for insurance claims and audits.
Managing the Fall in Fixed Asset Value
Businesses must account for the fall in value of fixed assets through depreciation, impairment, or revaluation. Proper recording ensures financial statements reflect the true economic value of assets and prevent overstatement of financial position.
Ultimately, effective asset management reduces financial risks, enhances operational planning, and strengthens compliance with IFRS, GAAP, and regulatory expectations. Companies that proactively monitor asset values remain better positioned for informed decision-making, accurate reporting, and long-term financial stability.
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