Fixed Assets: Definition, Examples & Depreciation

A fixed asset is a long-term resource your business holds to use in its operations, not primarily for resale. Fixed assets (also known as property, plant and equipment or PPE) are governed by AASB 116 and ASIC guidance in Australia. This guide explains what fixed assets are, how to recognise and measure them, how depreciation and impairment work, and what the tax and record-keeping implications are.

What is a fixed asset?

A fixed asset is an item of value expected to provide economic benefits for more than one accounting period. Key characteristics:

• Long-term: expected to provide economic benefits for more than one accounting period.
• Used in operations: employed to produce goods or services or to rent out.
• Tangible or intangible: most commonly physical items (machinery, buildings), but some intangible items (e.g., purchased software with a finite useful life) are treated similarly.
• Not held for resale: differs from inventory or trading assets.

Under AASB 116 (Property, Plant and Equipment), an item qualifies as a fixed asset when it is probable that future economic benefits will flow to the entity and its cost can be reliably measured. The primary accounting measurement framework is AASB 116; tax treatment is guided by ATO rulings.

Common examples of fixed assets

Fixed assets vary by industry. Typical categories include:

• Land and buildings (owned premises, leasehold improvements)
• Plant and equipment (manufacturing machinery, printing presses)
• Vehicles (delivery vans, trucks, company cars)
• Furniture and fittings (retail shelving, office desks)
• IT hardware and purchased software licences
• Agricultural machinery, tractors and farm implements
• Heavy vehicles, trailers and specialised equipment

Industry-specific examples:

• Agriculture: tractors, irrigation systems, grain silos.
• Retail: point-of-sale terminals, store fit-outs, display shelving.
• Professional services: office fit-out, servers, licensed software.

Fixed assets vs current assets vs other non-current assets

Classification matters for financial reporting and ratios:

• Current assets: cash, inventory, receivables — expected to convert to cash within 12 months.
• Fixed assets (non-current): long-lived tangible or intangible assets used in operations.
• Other non-current assets: long-term investments, deferred tax assets, intangible assets with indefinite life.

Why classification matters:

• Affects working capital and liquidity ratios (current ratio).
• Influences depreciation, impairment testing and disclosures.
• Impacts investor analysis — a business with large fixed assets may have different capital intensity and return expectations.

Initial recognition and measurement

Recognition criteria (AASB 116):

• It is probable the asset will generate future economic benefits.
• The cost of the asset can be reliably measured.

Costs to capitalise (include when directly attributable):

• Purchase price (less trade discounts).
• Import duties and non-refundable taxes.
• Costs directly attributable to bringing the asset to working condition: delivery, installation, testing.
• Professional fees (architects, engineers) where related to the asset.
• Dismantling and restoration costs if a legal obligation exists.

Costs to expense (do not capitalise):

• Routine repairs and maintenance.
• Training costs.
• Start-up losses or operational inefficiencies.

Practical rule: if the cost extends the asset's useful life, capacity or performance materially, capitalise; otherwise expense.

Subsequent measurement: cost model vs revaluation model

After initial recognition, AASB 116 allows two models:

• Cost model: carrying amount = cost less accumulated depreciation and impairment. Simpler and commonly used by SMEs.
• Revaluation model: asset measured at fair value at revaluation date, less subsequent depreciation and impairment. Revaluations must be reliable and applied to entire asset classes; gains or losses go to other comprehensive income (OCI) or profit and loss depending on circumstances.

Considerations:

• Cost model: predictable, low admin burden.
• Revaluation: reflects current values (useful for property-heavy businesses) but requires regular valuations, increased disclosure and potential volatility in equity.

Disclosure requirements include measurement basis, depreciation method, useful lives or rates, and reconciliation of carrying amounts per AASB 116.

Depreciation (how it works and common methods)

Depreciation allocates an asset's depreciable amount over its useful life.

• Depreciable amount = cost minus residual value.
• Useful life = expected period the asset provides benefit.
• Residual value = estimated amount at disposal.

Journal entry for periodic depreciation:

• Dr Depreciation expense (P&L)
• Cr Accumulated depreciation (contra asset on Balance Sheet)

Straight-line (prime cost)

Annual depreciation = (Cost − Residual value) / Useful life (years)

Example:

• Cost = $120,000
• Residual value = $10,000
• Useful life = 8 years

Annual depreciation = ($120,000 − $10,000) / 8 = $12,500

Journal each year:

• Dr Depreciation expense $12,500
• Cr Accumulated depreciation $12,500

Carrying amount after 3 years = $120,000 − ($12,500 × 3) = $17,500

Diminishing value (reducing balance)

Annual depreciation = Carrying amount at start of year × Rate

Example:

• Cost = $120,000
• Diminishing rate = 25% p.a.

Year 1 depreciation = $120,000 × 25% = $10,000 Carrying amount after Year 1 = $10,000

Year 2 depreciation = $10,000 × 25% = $12,500

Journal entries follow the same pattern as straight-line.

Units of production

Depreciation per unit = (Cost − Residual) / Estimated total units

Example:

• Expected total hours = 80,000
• Cost = $120,000
• Residual = $10,000
• Depreciation per hour = ($120,000 − $10,000) / 80,000 = $1.25/hour

If the machine runs 10,000 hours in year 1, depreciation = 10,000 × $1.25 = $12,500.

Units method matches expense to actual economic use.

Impairment of fixed assets

When indicators suggest carrying amount may not be recoverable, test for impairment per AASB 136. Indicators include:

• Significant declines in market value.
• Adverse changes in technology or market.
• Evidence of physical damage.
• Underperformance versus expected cash flows.

Impairment test (simplified):

1. Determine recoverable amount — the higher of fair value less costs of disposal, and value in use (discounted future cash flows).
2. If carrying amount > recoverable amount, recognise impairment loss:
   • Dr Impairment loss (P&L)
   • Cr Reduce carrying amount (or accumulated impairment)

Reversals: if circumstances change, impairment losses (except for goodwill) can be reversed under the cost model up to the original carrying amount.

Acquisition, disposal and derecognition

Acquisition: Record at cost and capitalise direct costs. If financed, disclose lease or loan terms. For financed purchases, consider equipment or asset finance options.

Partial disposals and derecognition:

• Remove the asset's carrying amount and related accumulated depreciation.
• Recognise proceeds received; gain or loss = proceeds minus carrying amount.

Typical disposal journal (simplified):

• Dr Cash (proceeds)
• Dr Accumulated depreciation (total to date)
• Cr Asset (cost)
• Dr/Cr Gain or Loss on disposal (P&L)

Tax treatment of sale proceeds and balancing adjustments must be considered under capital allowances rules.

Tax treatment and ATO considerations

Tax depreciation (decline in value) rules differ from accounting depreciation. Key points:

• ATO provides specific methods and rates for decline in value. The commonly used methods are prime cost (straight-line) and diminishing value. For current guidance, see ATO's page on depreciation and capital allowances: https://www.ato.gov.au/Business/Depreciation-and-capital-expenses-and-allowances/
• Accounting depreciation follows AASB; tax depreciation follows ATO. Differences require reconciling accounting profit to taxable income.
• Small business concessions (instant asset write-off and simplified depreciation pools) have applied historically; thresholds and eligibility change. Verify current ATO guidance before relying on them.
• Record-keeping: retain purchase invoices, contracts and calculations supporting decline in value claims. See ATO record-keeping guidance: https://www.ato.gov.au/Business/Record-keeping-for-business/

Worked example: accounting vs tax contrast

Asset cost $15,000, residual $1, useful life 5 years (accounting straight-line): annual accounting depreciation $1,000. ATO diminishing value rate may allow higher initial tax deductions; compute per ATO method and reconcile differences when completing the tax return.

For regulatory context, see AASB standards: https://www.aasb.gov.au/ and ASIC guidance on record keeping and corporate reporting: https://asic.gov.au/

Record-keeping and asset registers

Minimum records:

• Purchase invoice or contract (date, supplier, cost)
• Serial numbers or VINs
• Location and custodian
• Depreciation method, rates and useful lives
• Disposal details (date, sale price)
• Maintenance and improvement records

Recommended asset register fields:

Asset ID | Description | Category | Purchase date | Cost (AUD) | Supplier | Serial/VIN | Location | Useful life (yrs) | Depreciation method | Accumulated depreciation | Carrying amount | Custodian | Notes

Keep the register current and reconcile to the general ledger each period.

Key ratios and investor implications

Important ratios:

• Fixed asset turnover = Revenue / Average net fixed assets. Higher turnover suggests efficient use.
• Net fixed assets = Gross fixed assets minus accumulated depreciation.
• Return on assets (ROA) can be affected by capital intensity: large fixed assets may depress ROA initially.

Investors watch:

• Capital expenditure trends.
• Revaluation or impairment activity (may signal investment or trouble).
• Age profile of assets (older assets may require capex soon).

Practical checklist: managing fixed assets

• Before acquisition: decide whether to capitalise or expense; estimate useful life and residual value.
• On acquisition: record invoice, tag asset (ID or VIN), update asset register.
• Set depreciation policy (method, review frequency).
• Monthly or quarterly: post depreciation journals, reconcile register to general ledger.
• Annual: review useful lives, test for impairment.
• On disposal: document sale, update register, record gain or loss and tax implications.
• Keep supporting documentation for ATO and ASIC audits.

Worked examples

Example 1 — Straight-line depreciation

• Purchase entry:
  • Dr Plant & Equipment $120,000
  • Cr Cash/Payable $120,000
• Year 1 depreciation:
  • Dr Depreciation expense $12,500
  • Cr Accumulated depreciation $12,500

Example 2 — Diminishing value with tax comparison

Asset cost $10,000; example ATO diminishing value rate 37.5% (check current ATO). Year 1 tax deduction = $10,000 × 37.5% = $11,250; Year 1 accounting straight-line (5 years) = $1,000. Reconcile timing differences in the tax return.

Three-year comparison table:

Note: always use current ATO rates and rules.

FAQ

Key takeaways

Fixed assets are long-term resources used in your business operations, measured at cost and depreciated over their useful life under AASB 116. Proper recognition, measurement, depreciation and record-keeping are essential for accurate financial reporting and tax compliance. Australia's ATO and AASB rules differ in places, so reconcile accounting and tax treatment annually. Maintaining a current asset register and reviewing useful lives and impairment indicators annually protects your financial position and supports audit readiness.

Further reading

• AASB 116 — Property, Plant and Equipment: https://www.aasb.gov.au/
• ATO — Depreciation and capital allowances: https://www.ato.gov.au/Business/Depreciation-and-capital-expenses-and-allowances/
• ATO — Record keeping for business: https://www.ato.gov.au/Business/Record-keeping-for-business/
• ASIC — Record keeping and corporate reporting: https://asic.gov.au/

This article is general information only and is not legal, tax or financial advice.