How Are Fixed Assets Accounted for Under IFRS in the UAE?

What Fixed Assets Are and Why Their Accounting Treatment Matters

Fixed assets, referred to as Property, Plant and Equipment (PP&E) under IFRS, are tangible assets held by a business for use in production, supply of goods or services, rental, or administrative purposes, and expected to be used over more than one accounting period. They include land, buildings, machinery, vehicles, computers, and leasehold improvements : any physical asset that contributes to the business over multiple years rather than being consumed within a single period.

The accounting treatment of fixed assets is significant for UAE businesses on two levels. First, it directly affects the balance sheet (carrying values of assets and associated depreciation) and the income statement (depreciation charge and impairment losses). Second, since UAE Corporate Tax under Federal Decree-Law No. 47 of 2022 is calculated from IFRS accounting net profit, the depreciation and disposal treatment of fixed assets flows directly into the taxable income calculation.

The Governing IFRS Standards for Fixed Assets in the UAE

Fixed assets in UAE businesses are governed by four primary IFRS standards, each addressing a different category or aspect of asset accounting:

Recognition: When Is an Asset Capitalised Rather Than Expensed?

Under IAS 16, a fixed asset is recognised on the balance sheet (capitalised) when two criteria are met simultaneously:

• It is probable that future economic benefits associated with the asset will flow to the entity
• The cost of the asset can be measured reliably

An asset that does not meet both criteria is expensed immediately in the income statement rather than capitalised. For practical purposes, most UAE businesses establish a capitalisation threshold below which items are expensed regardless of their expected useful life. A common threshold for UAE businesses is AED 1,000 to AED 5,000 per item, though the appropriate level depends on materiality relative to the business’s total asset base.

The initial cost of a fixed asset includes not just the purchase price but all costs directly attributable to bringing the asset to the location and condition necessary for its intended use. For a piece of machinery, this includes freight, import duties, installation costs, and any testing costs before the asset is ready for use. Separately purchased components that have different useful lives from the main asset should be recognised and depreciated separately under the component approach in IAS 16.

Subsequent Measurement: Cost Model vs Revaluation Model

After initial recognition, IAS 16 permits a business to choose between two measurement models, applied consistently to each class of fixed assets:

• Cost model: the asset is carried at its original cost less accumulated depreciation and accumulated impairment losses. This is the most common model for UAE businesses because it is simpler, requires no periodic valuations, and produces a more stable balance sheet presentation
• Revaluation model: the asset is carried at its fair value at the date of revaluation, less subsequent accumulated depreciation and impairment losses. Revaluations must be performed with sufficient regularity that the carrying amount does not differ materially from fair value. Increases in value are recognised in other comprehensive income (as a revaluation surplus in equity), not the income statement, unless the increase reverses a previously recognised impairment. The revaluation model is most commonly applied to land and buildings where fair values are readily determinable

Depreciation: Methods, Useful Lives, and Residual Values

Depreciation is the systematic allocation of the depreciable amount of a fixed asset over its useful life. The depreciable amount is cost (or revalued amount) less residual value. Depreciation begins when the asset is available for use and ceases when the asset is derecognised or classified as held for sale under IFRS 5.

IAS 16 permits three principal depreciation methods, each producing a different pattern of expense recognition:

• Straight-line method: the depreciable amount is divided equally over the useful life. An asset costing AED 120,000 with a residual value of AED 20,000 and a useful life of 5 years is depreciated at AED 20,000 per year. This method is appropriate where the asset generates economic benefits evenly over its life
• Diminishing balance method: depreciation is calculated as a fixed percentage of the asset’s carrying value at the start of each period. The depreciation charge is higher in early years and decreases over time, reflecting that many assets (particularly technology and vehicles) lose value more rapidly when new
• Units of production method: depreciation is calculated based on actual output or usage. An asset used to produce 1,000,000 units over its life is depreciated at cost per unit produced in each period. This method is most appropriate for assets where wear and tear is driven by usage rather than time

The method, useful life, and residual value must be reviewed at each financial year end. Where a review indicates that the estimate has changed materially, the change is applied prospectively as a change in accounting estimate, not a prior period error.

Impairment: IAS 36 and When It Applies

Under IAS 36, a fixed asset must be tested for impairment where there is an indication that its carrying value may exceed its recoverable amount. The recoverable amount is the higher of the asset’s fair value less costs to sell, and its value in use (the present value of future cash flows expected from the asset). Where the carrying value exceeds the recoverable amount, an impairment loss is recognised in the income statement.

Indicators requiring an impairment review include: significant decline in market value, physical damage to the asset, evidence of technological obsolescence, the asset being idle or plans to discontinue its use, and evidence that economic performance is worse than expected. For UAE businesses that have invested in significant assets, annual impairment indicators should be assessed as part of the year-end financial statement preparation process.

Disposal and Derecognition of Fixed Assets

A fixed asset is derecognised when it is disposed of, or when no future economic benefits are expected from its use or disposal. On derecognition, the difference between the net disposal proceeds and the asset’s carrying value is recognised as a gain or loss in the income statement for the period.

A gain arises where the sale proceeds exceed the carrying value (cost less accumulated depreciation). A loss arises where the carrying value exceeds the proceeds. Both are reflected in the IFRS income statement and therefore flow into the Corporate Tax computation. Gains on disposal of qualifying business assets may in some cases be treated as exempt income under the Corporate Tax Law, depending on the nature of the asset and the business’s tax position.

Fixed Assets and the UAE Corporate Tax Connection

Under Federal Decree-Law No. 47 of 2022, taxable income is derived from IFRS accounting net profit. The following fixed asset accounting items directly affect the Corporate Tax computation:

• Depreciation: depreciation charged in the income statement under IAS 16 is generally deductible for Corporate Tax purposes, as it represents a business cost incurred wholly and exclusively for the purposes of the business
• Impairment losses: impairment losses recognised under IAS 36 are generally deductible only when the asset is actually disposed of, not when the impairment is first recognised. This creates a timing difference between accounting profit and taxable income
• Disposal gains and losses: gains and losses on disposal of fixed assets are reflected in accounting net profit and therefore in taxable income. The treatment depends on the nature of the asset and whether any exemption applies
• Capital assets scheme for VAT: for assets with a VAT-inclusive cost above AED 5 million, the UAE Capital Assets Scheme requires VAT input tax recovery to be adjusted over 10 years (for real estate) or 5 years (for other capital assets) where the taxable use of the asset changes. This is separate from the IAS 16 depreciation treatment

Fixed Asset Register: What It Must Contain

A fixed asset register is the record of all capitalised assets owned by the business. It is a required component of the accounting records for both IFRS financial statement purposes and Corporate Tax record-keeping. A complete fixed asset register should record for each asset:

• Asset description, category, and unique asset identification number
• Date of acquisition and cost at initial recognition
• Location and custodian details
• Depreciation method, useful life, and residual value applied
• Accumulated depreciation to date and current carrying value
• Date and proceeds of disposal where applicable
• Any impairment losses recognised and reversed

The fixed asset register should be reconciled to the balance sheet at each period end. Physical verification of assets against the register should be performed at least annually to identify unrecorded disposals, theft, or damage not yet reflected in the accounts.

Frequently Asked Questions (FAQs)

How Farahat & Co. Can Help

Farahat & Co. assists UAE businesses with IFRS fixed asset accounting, including IAS 16 policy development, fixed asset register preparation and reconciliation, depreciation calculations, impairment testing under IAS 36, and the integration of fixed asset accounting with Corporate Tax computations. Our team also conducts fixed assets audits as part of statutory audit engagements.

Contact Farahat & Co. today to discuss your fixed assets accounting and IFRS compliance requirements.