What Is a Fixed Assets Audit and How Is It Conducted in the UAE?

What Fixed Assets Are and Why They Require a Dedicated Audit

Fixed assets — also called property, plant and equipment (PP&E) — are the tangible, long-term assets a business uses in its operations rather than sells in the ordinary course of trade. Land, buildings, machinery, vehicles, office equipment, and leasehold improvements are all fixed assets. They differ from current assets in two important ways: they are expected to generate economic benefits for more than one accounting period, and they are carried on the balance sheet at values that must be systematically and accurately maintained over time through depreciation, revaluation, and impairment assessment.

The reason fixed assets require a dedicated audit procedure — rather than simply being captured in the overall financial statement audit — is precisely because of this ongoing value maintenance obligation. A fixed asset acquired five years ago may be listed at a carrying value that no longer reflects its actual condition, remaining useful life, or recoverable amount. An asset may appear on the register but have been disposed of, scrapped, or removed without a corresponding accounting entry. A depreciation method may have been applied incorrectly for years, producing an accumulated error that flows through every financial statement in which those assets appear.

In the UAE context, fixed asset accuracy carries additional weight since the introduction of Corporate Tax. Under Federal Decree-Law No. 47 of 2022, depreciation expenses reduce taxable income — meaning an incorrectly recorded or depreciated fixed asset creates not just a financial reporting error but a Corporate Tax calculation error, directly affecting the tax liability reported to the FTA.

The Accounting Framework — IAS 16 Property, Plant and Equipment

Fixed asset accounting for UAE businesses follows IAS 16, Property, Plant and Equipment, the applicable IFRS standard governing how PP&E is recognized, measured, depreciated, and derecognized in financial statements. Understanding IAS 16’s requirements is the foundation of a fixed assets audit, since the audit tests whether the business’s accounting complies with these requirements.

Recognition

An item of property, plant and equipment is recognized as an asset when it is probable that future economic benefits will flow to the entity, and the cost of the item can be measured reliably. Initial recognition is at cost — the purchase price plus any directly attributable costs of bringing the asset to the location and condition necessary for its intended use: installation costs, professional fees, and import duties, net of trade discounts.

Subsequent Measurement — Cost Model or Revaluation Model

After initial recognition, IAS 16 allows two measurement models:

• Cost model — the asset is carried at cost less accumulated depreciation and any accumulated impairment losses. This is the most commonly used model and the simpler to audit
• Revaluation model — the asset is carried at revalued amount (fair value at the date of revaluation) less subsequent accumulated depreciation and impairment. Where revaluation is used, it must be applied to the entire class of assets, not selectively to individual items, and must be kept sufficiently up to date that the carrying amount does not differ materially from fair value

Depreciation

Depreciation is the systematic allocation of a depreciable asset’s cost over its useful life. IAS 16 requires:

• Each significant component of an asset to be depreciated separately where it has a different useful life from the rest of the asset
• The depreciation method to reflect the expected pattern of consumption of the asset’s future economic benefits — straight-line, reducing balance, and units of production are the most common methods
• The useful life, residual value, and depreciation method to be reviewed at each financial year-end and adjusted prospectively where expectations change

Impairment

Where there are indicators that a fixed asset may be impaired — physical damage, obsolescence, significant decline in market value, or a change in planned use — the business must assess whether the asset’s carrying amount exceeds its recoverable amount, and if so, write the asset down. IAS 36 governs impairment testing; IAS 16 specifies when the test is triggered.

Derecognition

An asset is removed from the balance sheet when it is disposed of, or when no future economic benefits are expected from its use. The gain or loss on disposal — the difference between the net disposal proceeds and the carrying amount — is recognized in profit or loss.

The Five Core Steps of a Fixed Assets Audit

Step 1 — Existence and Completeness Check

The auditor obtains the company’s fixed asset register, which lists every asset, its description, acquisition date, cost, accumulated depreciation, net book value, depreciation method, and useful life. The audit verifies two directions simultaneously:

• Existence — assets on the register actually exist. A sample of items is physically inspected to confirm they are present, identifiable, and in the condition implied by their carrying values
• Completeness — assets that exist are on the register. Physical inspection of the business’s premises identifies assets not appearing on the register, which may have been acquired without being properly recorded

The auditor also reconciles the closing balance on the register to the balance sheet figure, confirming the two agree and that no items have been lost in the transfer from the detailed register to the summarized financial statements.

Step 2 — Analytical Procedures

Analytical procedures compare current-year fixed asset balances and ratios against prior years, budgets, and industry benchmarks to identify fluctuations that require explanation. Specific comparisons typically include:

• The depreciation charge for the year as a percentage of the gross asset base — a significant change may signal a change in useful life estimates, a change in depreciation method, or a recording error
• The additions-to-disposals ratio — unusual additions relative to the business’s capital expenditure plans, or disposals that don’t appear in cash flow records, can indicate misclassification or unrecorded transactions
• The net book value of assets against replacement cost estimates — where assets are being carried at values significantly different from current market or replacement values, this warrants investigation

Any variance that cannot be explained by a legitimate business event is treated as a potential misstatement and investigated further.

Step 3 — Documentation Review

A sample of asset acquisitions is tested against the supporting documentation — purchase invoices, import declarations, installation cost records, and approval authorizations — to confirm that:

• The cost recorded matches the actual purchase price plus directly attributable acquisition costs
• VAT on the acquisition has been correctly treated — capital assets above certain values are subject to the UAE VAT Capital Assets Scheme, under which input VAT is recovered over an adjustment period of 5 years for moveable assets and 10 years for immoveable assets, rather than all at once in the period of acquisition
• Revenue expenditure has not been incorrectly capitalized, and capital expenditure has not been incorrectly expensed — both of these errors directly affect the profit and loss account and the balance sheet simultaneously

Similarly, disposals are tested against disposal documentation — sale agreements, scrapping records, and transfer documents — to confirm that the gain or loss on disposal has been correctly calculated and recorded.

Step 4 — Physical Inspection and Condition Assessment

The auditor physically inspects selected assets to verify existence, confirm their identification against the asset register (using asset tags, serial numbers, or location records), and assess their condition relative to the remaining useful life shown in the depreciation schedule.

Where an asset is visibly damaged, obsolete, or in significantly worse condition than its carrying value implies, this triggers an impairment assessment. An asset that has been fully depreciated but is still in active use should also be noted — IAS 16 requires that a fully depreciated asset’s residual value be reviewed, and where it has a material positive residual value, depreciation may have been calculated on an incorrect basis throughout the asset’s life.

Step 5 — Depreciation Recalculation

The auditor selects a sample of assets and independently recalculates the depreciation charge for the period, using the method, rate, and useful life recorded in the asset register. This recalculation tests:

• Whether the depreciation method applied is consistent with the accounting policy stated in the financial statement notes
• Whether the depreciation rate correctly reflects the asset’s assessed useful life
• Whether changes in useful life estimates or depreciation methods during the period have been correctly applied prospectively rather than retrospectively
• Whether the depreciation calculation contains mathematical errors

Any difference between the recalculated depreciation and the recorded charge is assessed for materiality and its effect on the financial statements.

The Corporate Tax and VAT Dimensions of Fixed Asset Accuracy

Corporate Tax

Under Federal Decree-Law No. 47 of 2022, depreciation on fixed assets is a deductible expense in computing taxable income, provided the asset is used in generating taxable income and the depreciation is calculated in accordance with the applicable accounting standard. An asset that is incorrectly capitalized, incorrectly valued, or depreciated over the wrong useful life produces an incorrect depreciation charge — which directly flows through to an incorrect taxable income figure and therefore an incorrect Corporate Tax liability.

The FTA can review fixed asset records during a Corporate Tax audit to confirm that depreciation deductions are supported by properly recorded assets at appropriate values. An asset register that cannot be reconciled to the financial statements, or that contains assets that no longer exist, creates immediate audit exposure.

VAT — The Capital Assets Scheme

UAE VAT applies to capital asset acquisitions, and the input VAT recovery position is governed by the Capital Assets Scheme for significant assets. Under this scheme:

• Capital assets used for both taxable and exempt supplies must have their input VAT recovery adjusted annually over a 5-year adjustment period for moveable assets and a 10-year period for immoveable assets, as the proportion of taxable to exempt use changes
• Full input VAT cannot be recovered in the year of acquisition for assets used partly for exempt supplies — the initial recovery is proportionate, and adjustments are made annually

A fixed assets audit that doesn’t verify the VAT treatment of capital acquisitions risks leaving input VAT errors in the VAT returns for the adjustment period years.

Common Fixed Asset Audit Findings

• Ghost assets — assets on the register that no longer physically exist, have been disposed of without a formal entry, or have been stolen or scrapped without documentation
• Unrecorded assets — assets in active use that do not appear on the register, either because the acquisition was expensed rather than capitalized, or because it was never entered into the system
• Incorrect useful lives — depreciation rates that no longer reflect the asset’s actual remaining economic life, whether because the original estimate was inaccurate or because the asset’s condition has changed
• Revenue/capital misclassification — maintenance and repair costs capitalized as asset additions, or genuine capital improvements expensed as running costs
• Impairment not recognized — damaged, obsolete, or underutilized assets carried at values above their recoverable amounts without a write-down
• Incorrect disposal accounting — gains or losses on asset disposals not calculated or recorded correctly

Frequently Asked Questions (FAQs)

What is a fixed assets audit?

A fixed assets audit is an examination of a business’s property, plant and equipment records to verify that all assets on the register actually exist, all assets that exist are on the register, values and depreciation are correctly calculated in accordance with IAS 16, and any disposals have been properly recorded.

What accounting standard governs fixed assets in the UAE?

IAS 16, Property, Plant and Equipment, under IFRS — the mandatory financial reporting standard for UAE businesses. IAS 16 governs how fixed assets are recognized, measured after acquisition, depreciated, tested for impairment, and derecognized on disposal.

How do fixed asset errors affect Corporate Tax in the UAE?

Depreciation on fixed assets is deductible in computing taxable income under Federal Decree-Law No. 47 of 2022. An asset that is incorrectly valued, wrongly capitalized, or depreciated over the wrong useful life produces an incorrect depreciation charge, which flows directly into an incorrect taxable income figure and therefore an incorrect Corporate Tax liability.

What is the UAE VAT Capital Assets Scheme?

The Capital Assets Scheme requires businesses that use capital assets for both taxable and exempt supplies to adjust their input VAT recovery annually over a 5-year period for moveable assets and 10-year period for immoveable assets, rather than recovering all input VAT in the year of acquisition. A fixed assets audit should verify that this scheme has been correctly applied.

What are ghost assets in a fixed assets audit?

Ghost assets are items that appear on the fixed asset register but no longer physically exist — they have been scrapped, stolen, or disposed of without a corresponding accounting entry being made. Ghost assets overstate the balance sheet and produce depreciation charges on assets that are no longer in use.

How often should a UAE business audit its fixed assets?

A full fixed assets audit should be conducted annually, typically as part of or in coordination with the year-end financial statement audit. Businesses with large asset bases, frequent acquisitions and disposals, or a history of asset register discrepancies benefit from more frequent interim reviews between annual audits.

How Farahat & Co. Can Help

Farahat & Co. provides fixed assets audit services to businesses across the UAE, examining existence, completeness, valuation, depreciation accuracy, and IAS 16 compliance as part of both standalone fixed asset reviews and broader financial statement audits. Our team also verifies the Corporate Tax and VAT Capital Assets Scheme treatment of fixed asset acquisitions and disposals, ensuring that the accounting position is consistent across financial reporting and tax compliance.

Contact Farahat & Co. today to discuss your fixed assets audit requirements.