Property, plant and equipment can remain on a fixed asset register long after the business has stopped using it or the economic benefit associated with it has disappeared. For Hong Kong companies applying full HKFRS Accounting Standards, year-end closing should therefore extend beyond calculating depreciation to a disciplined review of whether each material asset still exists, remains available for use and is carried at an amount the company expects to recover.
The review is particularly important where equipment has become idle or obsolete, premises have closed, leases have expired, assets are missing or management has committed to disposal or relocation. These circumstances can affect impairment, useful life, depreciation, derecognition and the accuracy of the fixed asset register.
Look for impairment indicators beyond physical damage
An asset can retain its physical form while losing much of its economic value. A specialised machine may remain mechanically sound after the company discontinues the product it was designed to make, while a production line may operate at such low capacity that its carrying amount can no longer be supported by expected cash flows.
HKAS 36 Impairment of Assets requires an entity to assess at each reporting date whether there is any indication that an asset may be impaired. Internal indicators include obsolescence or physical damage, an asset becoming idle, plans to discontinue or restructure the operation in which it is used, plans to dispose of it earlier than expected and operating performance that is worse than forecast.
External changes can be equally relevant, including an adverse shift in technology, customer demand, regulation, market prices or other economic conditions. When an impairment indicator exists, management should estimate the asset’s recoverable amount under the applicable requirements rather than continue depreciating the existing carrying amount without further analysis.
Challenge obsolete, idle and missing assets
The fixed asset register should be reviewed with department heads, site managers and other operational staff who know whether the assets remain in use. Accounting records alone may not reveal that machinery has been dismantled, equipment has moved to another location or an asset connected with a discontinued activity no longer contributes to the business.
The review should focus on:
- Idle machinery and equipment operating substantially below capacity.
- Assets associated with discontinued products, services or operations.
- Equipment replaced by newer technology but still recorded in the ledger.
- Damaged assets or items that can no longer operate economically.
- Assets located at closed factories, shops, offices or warehouses.
- Items missing from the location shown on the fixed asset register.
- Assets that management intends to sell, scrap or abandon.
Each item should be traced to physical evidence and an identified user or custodian. Where an asset cannot be located or no future economic benefits are expected from its use or disposal, management should determine whether impairment, derecognition or another adjustment is required, supported by the relevant facts rather than by the age of the asset alone.
Reassess leasehold improvements when premises are vacated
Leasehold improvements are easily overlooked because they may remain embedded in an office, shop, warehouse or factory after the company has left. Partitioning, flooring, electrical installations, built-in fixtures, plumbing and ceiling works can continue to appear on the register even though the company no longer occupies the premises or can no longer obtain benefit from them.
If the related lease has expired and the improvements have been abandoned, management should assess whether the remaining carrying amount still meets the requirements for recognition as an asset. Where the company no longer controls or expects to obtain economic benefits from the improvements, continuing to depreciate them over the original accounting life can overstate PPE; depending on the facts, impairment or derecognition may be required.
Align useful life with the period of expected use
HKAS 16 Property, Plant and Equipment defines useful life by reference to the period over which an asset is expected to be available for use by the entity, and it requires legal or similar limits, including the expiry dates of related leases, to be considered. The useful life of a leasehold improvement is therefore not determined solely by its physical durability.
The IFRS Interpretations Committee has observed that where an entity does not expect to use non-removable leasehold improvements beyond the related lease term, their useful life will generally be the same as that lease term. A longer useful life may require evidence that the company expects to retain access to and benefit from the improvements beyond the existing term.
Management should review useful lives and residual values at least at each financial year end. If expectations have changed, the effect is accounted for prospectively as a change in accounting estimate rather than left uncorrected until the asset becomes fully depreciated.
Act when relocation or closure becomes known
The accounting issue can arise before a lease expires or premises are physically handed back. A decision to relocate, close a branch or terminate a lease may shorten the period over which leasehold improvements and other location-specific assets are expected to remain available for use.
Once management has approved a plan and the relevant facts support a change in expected use, finance teams should reconsider the remaining useful life, depreciation and impairment indicators at that point. Waiting for the final handover date can defer an adjustment that should have been recognised earlier.
Use fully depreciated assets to test previous estimates
A fully depreciated asset that remains in daily use does not automatically indicate an accounting error, although a pattern of such assets may show that previous useful-life estimates were shorter than the periods over which similar assets are actually used. That experience should inform the estimates applied to newer assets.
The reverse pattern also deserves attention: an asset with a significant net book value may have stopped operating, become obsolete or lost its commercial purpose. In that situation, the existence of an unexpired depreciation period does not establish that the carrying amount remains recoverable.
Check when construction projects became available for use
Assets under construction and recent additions should be reconciled to contracts, invoices, completion records and operational handover documents. Under HKAS 16, depreciation begins when an asset is available for use, meaning that it is in the location and condition necessary to operate as management intended, rather than necessarily when commercial production reaches its target level or the final supplier invoice arrives.
Long-standing projects in the capital-work-in-progress account should be challenged with operational teams to determine whether they are genuinely incomplete, already in use, suspended or abandoned. The answer may affect the commencement of depreciation, impairment assessment or write-off of costs that no longer qualify as an asset.
Reconcile additions and disposals to supporting evidence
Significant additions should be traced to approved capital expenditure, supplier invoices, payment records and evidence that the costs meet the recognition criteria for PPE. Repairs and routine maintenance should not remain capitalised merely because they were recorded through a capital expenditure process.
Disposals, scrapping and transfers should be supported by sale agreements, disposal approvals, proceeds, destruction records or transfer documentation as applicable. The fixed asset register, general ledger and physical records should agree on the asset description, location, cost, accumulated depreciation and disposal date.
Complete the year-end PPE review with operational teams
Before closing the books, finance teams should ask operational managers:
- Which assets are no longer being used or are operating below expectations?
- Has any equipment been scrapped, sold, transferred or replaced?
- Have any factories, shops, offices or warehouses closed?
- Has machinery become technologically or commercially obsolete?
- Are any assets associated with discontinued products or activities?
- Have leases expired, been terminated or become subject to relocation plans?
- Do capitalised leasehold improvements relate to premises already vacated?
- Are assets physically present at the locations recorded in the register?
- Have construction projects become available for use or been abandoned?
The answers should be reconciled with the fixed asset register and supported by site records, disposal documentation, lease information and impairment analysis. Entities applying another Hong Kong reporting framework should confirm the recognition, depreciation and impairment requirements applicable to their circumstances.
Make the register reflect assets the business can still use
A fixed asset register should describe the resources the business controls and can still use or recover, rather than preserve the history of everything it has purchased. Resolving obsolete assets, expired leasehold improvements, delayed disposals and outdated useful lives before the audit begins gives management a more reliable PPE balance and a defensible record of the judgements made at year end.