Non-financial assets are resources controlled by an entity that generate benefits through use, production, rental or administrative activity rather than through contractual rights to receive cash. They include inventories, property, plant and equipment (PPE), intangible assets, investment property, biological assets and assets classified as held for sale. Their accounting is strategically important because recognition and measurement affect profit, asset values, depreciation, impairment, borrowing capacity, taxation and performance indicators.

This chapter applies the principal requirements of IFRS Accounting Standards, especially IAS 2, IAS 16, IAS 23, IAS 36, IAS 38, IAS 40, IAS 41, IFRS 5 and IAS 20. Local legislation and sector-specific requirements may modify application, so professional judgement and current standards must always be consulted.

Learning objectives

1. A conceptual framework for asset measurement

An asset is recognised when it is probable that future economic benefits will flow to the entity and the item has a cost or value that can be measured reliably. Recognition is not justified merely because an item is valuable: control, past events and reliable measurement are also relevant.

Basis	Meaning	Typical application
Historical cost	Amount paid or fair value of consideration given, adjusted for directly attributable costs	PPE, many intangible assets, inventories
Fair value	Price received to sell an asset in an orderly transaction between market participants at the measurement date	Investment property; some biological assets
Value in use	Present value of future cash flows expected from continuing use and disposal	Recoverable amount testing under IAS 36
Net realisable value	Estimated selling price less completion and selling costs	Inventories
Revalued amount	Fair value at revaluation date less subsequent depreciation and impairment	PPE and certain intangible asset classes

Measurement bases should not be selected to manage earnings. The selected policy must reflect the relevant standard, the asset’s economic substance and consistent application within an appropriate class.

2. Inventories: IAS 2

Inventories comprise assets held for sale, assets in production for sale and materials or supplies consumed in production or service delivery. They are initially measured at cost. Cost includes purchase costs, conversion costs and other costs incurred to bring inventories to their present location and condition. Abnormal waste, unnecessary storage, administrative overhead unrelated to production and selling costs are excluded.

For manufactured goods, conversion cost includes direct labour and a systematic allocation of variable and fixed production overhead. Fixed overhead is allocated using normal production capacity. Idle capacity should not inflate inventory cost.

Cost formulas include specific identification for non-interchangeable items and FIFO or weighted average for ordinarily interchangeable items. LIFO is not permitted under IFRS. The weighted-average cost after each purchase or at period end depends on the entity’s inventory system.

Inventories are measured at the lower of cost and net realisable value (NRV). NRV is:

The formula applies to an individual item or, where appropriate, a group of similar items. It must reflect conditions existing at the reporting date. Write-downs are recognised as an expense; reversals are recognised when NRV increases, but only up to the original cost.

Worked example: inventory valuation

A product has a cost of $48 per unit. Its expected selling price is $55, completion costs are $3 and selling costs are $6. NRV is $55 − $3 − $6 = $46. The required carrying amount is therefore $46, and the write-down is $2 per unit. For 2,000 units, the expense is $4,000.

3. Property, plant and equipment: IAS 16

PPE consists of tangible items held for production, supply, rental or administration and expected to be used for more than one period. Recognition requires probable future benefits and reliably measurable cost. Cost includes purchase price, directly attributable costs of bringing the asset to the location and condition necessary for operation, and the present value of dismantling, removal or site-restoration obligations where applicable.

Repairs and routine maintenance are expensed. Replacement of a significant component is capitalised when recognition criteria are met, and the carrying amount of the replaced component is derecognised. Major inspections may be treated similarly.

Subsequent measurement

The policy is applied to an entire class of PPE. Revaluations must be sufficiently regular to ensure that carrying amount does not differ materially from fair value. A revaluation increase is generally recognised in other comprehensive income and accumulated in equity, except to the extent it reverses a previous decrease in profit or loss. A revaluation decrease is generally recognised in profit or loss, except to the extent of an existing revaluation surplus for that asset.

Depreciation

Depreciation allocates depreciable amount systematically over useful life. The core relationship is:

These formulas assume a constant pattern of consumption and a non-zero useful life. Depreciation begins when the asset is available for use and ceases on derecognition or classification as held for sale, whichever occurs earlier. Significant components are depreciated separately. The method, useful life and residual value are reviewed at least annually; changes are changes in accounting estimates.

Worked example: component depreciation

An aircraft costs $10 million. Its engine component costs $2 million, has a useful life of five years and a residual value of $200,000. The remaining structure costs $8 million, has a useful life of 20 years and a residual value of $800,000. Annual depreciation is:

4. Borrowing costs: IAS 23

Borrowing costs directly attributable to acquiring, constructing or producing a qualifying asset form part of that asset’s cost. A qualifying asset requires a substantial period to become ready for intended use or sale. Other borrowing costs are expensed.

Capitalisation begins when all three conditions exist: expenditure is incurred, borrowing costs are incurred, and activities necessary to prepare the asset are in progress. It is suspended during extended interruptions and stops when substantially all activities necessary for intended use or sale are complete.

For a specific borrowing, capitalisable cost is normally actual borrowing cost less investment income from temporary investment of the borrowing. For general borrowings, an entity applies a weighted-average capitalisation rate to qualifying expenditure, subject to the ceiling of actual borrowing costs incurred.

5. Intangible assets: IAS 38

An intangible asset is an identifiable non-monetary asset without physical substance. Identifiability exists when an asset is separable or arises from contractual or other legal rights. Control means the entity can obtain benefits and restrict others’ access to those benefits.

Research expenditure is expensed as incurred. Development expenditure is capitalised only when the entity demonstrates technical feasibility, intention and ability to complete and use or sell the asset, probable future benefits, adequate resources and reliable measurement of costs. Internally generated goodwill, brands, mastheads, publishing titles and customer lists are not recognised.

Finite-life intangible assets are amortised systematically from the date available for use and tested for impairment when indicators exist. Indefinite-life assets are not amortised but are tested for impairment annually and when indicators arise. The cost and revaluation models are available only where an active market exists for the relevant class; active markets are uncommon for unique intangibles.

6. Investment property: IAS 40

Investment property is land or a building held to earn rentals, for capital appreciation, or both. Owner-occupied property is PPE, while property held for sale in the ordinary course of business is inventory. Mixed-use property is separated when portions can be sold or leased separately; otherwise classification depends on the significance of owner occupation.

After recognition, an entity generally chooses either the fair-value model or the cost model for its investment property. Under the fair-value model, gains and losses from changes in fair value are recognised in profit or loss and depreciation is not charged. Under the cost model, the property is depreciated and tested for impairment, while fair value is disclosed. Transfers occur only when there is evidence of a change in use, not merely a change in management intention.

7. Biological assets: IAS 41

Biological assets are living animals or plants; agricultural produce is the harvested product. Biological assets are generally measured at fair value less costs to sell, both initially and at each reporting date, unless fair value cannot be measured reliably in limited circumstances. Changes in fair value less costs to sell are recognised in profit or loss. Agricultural produce at the point of harvest becomes inventory measured at fair value less costs to sell, which becomes its deemed cost under IAS 2.

Biological transformation—growth, degeneration, production and reproduction—creates measurement volatility. Disclosures should explain classes of assets, reconciliation of movements, restrictions, risks and valuation methods. Management must distinguish market-price changes from physical changes because both may affect performance but have different managerial implications.

8. Government grants: IAS 20

Government grants are recognised only when there is reasonable assurance that the entity will comply with conditions and receive the grant. Grants related to assets may be presented as deferred income recognised systematically in profit or loss, or deducted from the asset’s carrying amount. Grants related to income are presented separately or as a deduction from the related expense, consistently applied.

A grant is not recognised merely because an application has been submitted. Repayment of a grant is accounted for as a change in estimate: the liability or adjustment is recognised when repayment becomes payable. Disclosure should cover accounting policy, nature, extent and unfulfilled conditions.

9. Assets held for sale: IFRS 5

A non-current asset or disposal group is classified as held for sale when its carrying amount will be recovered principally through sale rather than continuing use. The asset must be available for immediate sale in its present condition, management must be committed to a plan, an active programme to locate a buyer must have begun, the sale must be highly probable and normally expected within one year, and the asset must be actively marketed at a reasonable price.

After classification, the asset is measured at the lower of carrying amount and fair value less costs to sell. Depreciation and amortisation cease. Assets and liabilities in a disposal group are presented separately. If the criteria cease to be met, the asset is reclassified and measured under the applicable standard, subject to specific limits.

10. Impairment: IAS 36

An asset is impaired when its carrying amount exceeds recoverable amount. Recoverable amount is the higher of fair value less costs of disposal and value in use:

Value in use is the present value of future cash flows expected from continuing use and ultimate disposal. A general present-value expression is:

Here CF_t is the cash flow in period t, r is the pre-tax discount rate reflecting time value and asset-specific risks, TV is terminal disposal value or terminal cash flow, and n is the final forecast period. Cash flows must be internally consistent with the discount rate, exclude financing cash flows and income taxes, and be based on reasonable, supportable assumptions. Growth beyond a stable period must not exceed defensible long-term growth assumptions.

An impairment loss is recognised in profit or loss unless the asset is carried at revalued amount, in which case the treatment follows the revaluation rules. For a cash-generating unit (CGU), the loss is allocated first to goodwill and then pro rata to other assets, subject to safeguards preventing an asset from falling below its individual recoverable amount, zero or the highest of fair value less costs of disposal and value in use when determinable.

Goodwill is allocated to CGUs or groups of CGUs expected to benefit from synergies and tested annually. Impairment losses for goodwill are never reversed. Other assets are reviewed for reversal when indications exist; reversal cannot increase carrying amount above the amount that would have existed without the earlier impairment.

Worked example: impairment

A machine has a carrying amount of $1.2 million. Its fair value less costs of disposal is $900,000 and its value in use is $1.05 million. Recoverable amount is $1.05 million, so the impairment loss is $150,000. The machine is reported at $1.05 million after the loss.

11. Integrated illustrative case: Meridian Foods Ltd

Background

Meridian Foods Ltd constructs a processing plant, owns orchards and operates a warehouse leased to a third party. At year end, management proposes capitalising all expenditure connected with the business and revaluing selected assets to improve its debt covenant.

Problem and analysis

The plant includes a replacement furnace costing $600,000, routine repairs of $90,000 and borrowing costs during an eight-month construction period. The furnace is a separately depreciable component; repairs are expensed. Borrowing costs are capitalised only while qualifying construction activities are in progress. The plant is depreciated when available for use, not when production reaches target capacity.

The orchards are biological assets measured at fair value less costs to sell. Harvested fruit becomes inventory at its harvest-date measurement. The warehouse, held for rental, is investment property. If Meridian selects the fair-value model, movements go to profit or loss and depreciation is not charged.

A product line has inventory cost of $740,000 and NRV of $690,000. A write-down of $50,000 is required. A discontinued factory is available for immediate sale, actively marketed and expected to sell within nine months. It is classified as held for sale, depreciation stops, and measurement is at the lower of carrying amount and fair value less costs to sell.

Finally, the plant’s CGU has a carrying amount of $8.4 million, fair value less costs of disposal of $7.6 million and value in use of $7.9 million. Recoverable amount is $7.9 million and impairment is $500,000. Management cannot avoid the loss by assigning optimistic forecasts unsupported by evidence.

Outcome and learning points

The appropriate solution separates assets by nature and standard, applies consistent policies, documents assumptions and records losses when required. Covenant pressure is not a valid basis for selective revaluation or delayed impairment. Independent valuation, board oversight and sensitivity analysis improve reliability.

12. Professional judgement, governance and contemporary practice

Asset accounting contains significant estimates: useful lives, residual values, production capacity, NRV, fair values, discount rates, biological growth, disposal costs and forecast cash flows. Governance should require documented valuation models, approval of assumptions, evidence for market inputs, independent review of material valuations and clear separation between preparers and valuers.

Ethical risks include capitalising expenses to inflate profit, delaying impairment, selecting favourable discount rates, manipulating production capacity and using unsupported fair values. Auditors and accountants should apply professional scepticism and disclose estimation uncertainty.

Technology can improve asset registers, component tracking, satellite monitoring of biological assets, automated impairment alerts and scenario analysis. AI may identify anomalies or forecast maintenance needs, but it does not replace management’s responsibility for control, explainability, data quality and compliance. Model outputs require human validation, especially where markets are inactive or forecasts are highly judgemental.

Best practice includes maintaining a complete asset register, linking sub-ledgers to the general ledger, reviewing indicators quarterly, reconciling physical assets, documenting cash-generating units, performing sensitivity analysis and explaining policy choices transparently. Analysts should understand that a revaluation increase is not necessarily cash generation, while an impairment loss may reveal declining economic capacity even though it is non-cash at recognition.

Chapter Summary

Non-financial assets are measured according to their economic characteristics and the requirements of the relevant standard. Inventories use cost subject to NRV; PPE uses cost or revaluation with systematic component depreciation; borrowing costs are capitalised for qualifying assets; development expenditure is capitalised only after strict criteria are met; investment property may use fair value or cost; biological assets generally use fair value less costs to sell; grants require reasonable assurance; held-for-sale assets are measured at the lower of carrying amount and fair value less costs to sell; and impairment compares carrying amount with recoverable amount.

Reliable reporting depends on disciplined classification, consistent policies, defensible estimates, appropriate valuation evidence and ethical governance. Value in use, fair value, NRV and revalued amount are not interchangeable concepts. Their correct application allows users to distinguish operating performance, market movements, consumption of service potential and loss of recoverability.

Key Terms

Asset: A controlled resource arising from past events that is capable of producing economic benefits.

Carrying amount: The amount at which an asset is recognised after accumulated depreciation, amortisation and impairment.

Cash-generating unit: The smallest identifiable group of assets generating largely independent cash inflows.

Development expenditure: Expenditure incurred after research that may be capitalised when specified criteria are met.

Government grant: Assistance by government in return for past or future compliance with conditions.

Intangible asset: An identifiable non-monetary asset without physical substance.

Investment property: Property held for rental income, capital appreciation or both.

PPE: Tangible assets used in production, supply, rental or administration over more than one period.

Qualifying asset: An asset requiring a substantial period to become ready for intended use or sale.

Recoverable amount: The higher of value in use and fair value less costs of disposal.

Residual value: Estimated amount obtainable from disposal at the end of useful life, less disposal costs.

Revaluation model: Measurement at fair value less subsequent depreciation and impairment.

Value in use: Present value of future cash flows from continuing use and disposal.

Useful life: Expected period or output over which an asset is available for use.

Review Questions

Short Answer Questions

Long Answer Questions

Analytical / Application Questions

Multiple Choice Questions with Answers

Question 1

Which inventory cost formula is permitted by IFRS for ordinarily interchangeable items?

Question 2

An asset costs $500,000, has a residual value of $50,000 and a useful life of nine years. What is straight-line annual depreciation?

Question 3

Correct Answer: B. Higher of value in use and fair value less costs of disposal

Question 4

Question 5

B. Stops depreciation and measures it at the lower of carrying amount and fair value less costs to sell

Correct Answer: B. Stops depreciation and measures it at the lower of carrying amount and fair value less costs to sell

Question 6

A product costs $70,000, has estimated selling price $78,000, completion costs $3,000 and selling costs $6,000. What is its NRV?

Question 7

Correct Answer: C. Goodwill is tested annually and impairment losses are not reversed

Question 8

Under IAS 23, capitalisation of borrowing costs begins when borrowing costs, expenditure and:

Question 9

Under the fair-value model for investment property, fair-value changes are generally recognised in:

Chapter 4 Non-Financial Assets, Valuation and Impairment

Non-Financial Assets, Valuation and Impairment

Introduction and context