Fixed Assets Management: Acquisition, Depreciation and Disposal

Fixed assets — machinery, vehicles, buildings, equipment — represent major investments that must be managed carefully over their useful lives. Poor fixed asset management leads to inaccurate financial statements, tax problems, and uninformed replacement decisions. Here is the complete guide to doing it right.

What Are Fixed Assets?

Fixed assets (also called Property, Plant & Equipment or PP&E) are long-term tangible assets used in business operations — not held for sale. They appear on the balance sheet and are capitalized (recorded as assets) rather than expensed immediately, because their benefits extend over multiple years.

Examples: vehicles, manufacturing machinery, computers, office furniture, buildings, leasehold improvements.

Capitalization Policy

Not every purchase should be capitalized. Set a capitalization threshold — typically EGP 2,000–10,000 depending on business size. Items below the threshold are expensed immediately. Items above are capitalized and depreciated. Consistent application of this policy is important for financial statement comparability.

The Fixed Asset Register

Every capitalized asset should be recorded in a fixed asset register with:

• Asset description and category
• Acquisition date and cost
• Supplier and location
• Useful life estimate
• Depreciation method
• Accumulated depreciation to date
• Net book value (cost minus accumulated depreciation)
• Asset tag or serial number

Depreciation Methods

Straight-Line Depreciation

The most common method. Annual depreciation = (Cost − Residual Value) ÷ Useful Life in Years. Equal expense every year. Suitable for assets that provide equal benefit throughout their life — buildings, furniture, equipment with consistent use patterns.

Example: Vehicle purchased for EGP 200,000, estimated residual value EGP 20,000, useful life 5 years. Annual depreciation = (200,000 − 20,000) ÷ 5 = EGP 36,000/year.

Declining Balance Depreciation

Higher depreciation in early years, lower later. Reflects the reality that many assets lose more value early (vehicles lose value rapidly in first years). Rate is applied to the net book value each year, not original cost.

Units of Production

Depreciation based on actual usage (hours run, units produced). Makes sense for machinery where wear is directly tied to use rather than time.

Asset Impairment

If an asset's market value falls significantly below its book value (due to damage, obsolescence, or market changes), an impairment write-down is required. This reduces the asset's carrying value to its recoverable amount and records an impairment loss on the income statement.

Asset Disposal

When an asset is sold, scrapped, or fully depreciated:

1. Remove the asset cost from the fixed asset register
2. Remove accumulated depreciation
3. Record any proceeds received
4. The difference between net book value and proceeds = gain or loss on disposal (recorded in P&L)

Physical Asset Verification

Conduct annual physical verification of all registered assets. Discrepancies — assets not found, or assets found not in the register — must be investigated and resolved. This exercise also triggers write-offs of stolen or obsolete assets from the financial statements.