Anthony DeStefano Breaks Down GAAP and IFRS for Property, Plant, and Equipment
Anthony DeStefano, CPA, published an analysis in Accounting Today comparing GAAP and IFRS treatment of property, plant, and equipment. His breakdown covers the major differences between ASC Topic 360 and IAS 16, from initial recognition through disposal.
The technical distinctions he identifies matter significantly for companies with international operations. They also matter for any organization trying to maintain accurate fixed asset records across different reporting frameworks.
After years of helping companies manage fixed assets across multiple jurisdictions, we have seen how these accounting differences create practical challenges. DeStefano's article provides the technical foundation.
What follows adds the operational context that determines whether your fixed asset accounting actually works.
Initial Recognition: Where GAAP and IFRS Start to Diverge
DeStefano notes that both frameworks initially record fixed assets at cost. The cost method under GAAP includes acquisition costs plus all expenditures to bring the asset to its intended condition and location.
IFRS uses similar criteria but specifies additional capitalizable costs. These include employee benefits for workers constructing the asset, dismantling costs, import duties, and testing expenses.
The Practical Implications for Asset Records
The differences in capitalizable costs mean your fixed asset register needs to capture more data points if you report under IFRS. Many companies discover this gap during their first IFRS conversion.
A company building a new manufacturing facility under IFRS might capitalize costs that would be expensed under GAAP. This affects the initial basis, future depreciation calculations, and gain/loss computations at disposal.
Subsequent Measurement: The Revaluation Model Difference
DeStefano highlights one of the most significant divergences between the two frameworks. GAAP requires continued use of the cost model. IFRS offers a choice between cost and revaluation.
Under the IFRS revaluation model, assets can be adjusted to fair value. Upward adjustments flow to comprehensive income and equity through a revaluation surplus account. Downward adjustments hit the profit and loss statement.
Why This Matters for Fixed Asset Management
Companies using the revaluation model need systems capable of tracking both historical cost and current fair value. They also need processes for obtaining reliable fair value measurements through appraisals or market data.
The accumulated depreciation adjustment adds another layer of complexity. IFRS provides two methods:
- Proportionally adjust accumulated depreciation so net book value equals fair value
- Eliminate accumulated depreciation entirely and restart depreciation at the new fair value
Either approach requires fixed asset software that can handle these adjustments without corrupting historical records needed for tax and audit purposes.
Component Depreciation: A Critical Recordkeeping Distinction
DeStefano covers depreciation methods, noting that both frameworks allow straight-line, declining balance, units of production, and other approaches. What he touches on briefly deserves more attention: the component depreciation requirement under IFRS.
IFRS requires that significant components of an asset with different useful lives be depreciated separately. GAAP allows component depreciation but does not require it. Most U.S. companies depreciate assets as whole units.
A Real-World Example
Consider a commercial building with a 40-year useful life. Under GAAP, you might depreciate the entire structure over 40 years. Under IFRS, you would need to separate and depreciate:
- The roof (perhaps 20 years)
- HVAC systems (15 years)
- Elevators (25 years)
- The building shell (40 years)
This component approach provides more accurate expense matching over time. It also dramatically increases the number of asset records your system must maintain and the complexity of your depreciation schedules.
Land, Improvements, and Special Situations
DeStefano correctly notes that neither framework depreciates land. The differences appear in how each framework handles related costs.
Under GAAP, demolition costs for existing structures, site clearing, and leveling are added to land value and never depreciated. IFRS lacks this specific provision, potentially leading to different treatments.
Both frameworks agree that land improvements with finite useful lives should be recorded separately and depreciated. Classifying costs between land and depreciable improvements requires judgment and should be documented consistently.
Impairment and Recovery: The Reversal Question
Both frameworks require testing for impairment when indicators suggest an asset's value has declined below its carrying amount. The recognition and measurement approaches differ, but the more significant operational difference involves what happens afterward.
GAAP prohibits reversal of impairment losses on fixed assets. Once written down, an asset's reduced value becomes the new cost basis. IFRS allows reversal of impairment losses (except for goodwill) when conditions change.
This difference means IFRS reporters need ongoing monitoring systems that can identify recovery situations. Their fixed asset records must preserve original cost information even after impairment, in case reversal becomes appropriate.
Idle Assets and Disposal Considerations
DeStefano mentions that IFRS specifies depreciation continues during idle periods (except for units of production method). GAAP has similar provisions but adds requirements for impairment review and disclosure.
GAAP also addresses assets held for sale as a distinct category. These assets are reclassified, no longer depreciated, and carried at the lower of carrying amount or fair value less costs to sell.
For fixed asset management purposes, this means tracking asset status changes and adjusting depreciation calculations accordingly. A manufacturing line taken out of service needs different treatment than one actively producing.
What This Means for Your Fixed Asset System
DeStefano's comparison provides the technical framework. The operational reality is that companies operating under both standards, or transitioning between them, face significant data management challenges.
Your fixed asset system needs to handle:
- Multiple valuation methods running in parallel
- Component-level tracking with different useful lives
- Revaluation adjustments that preserve historical data
- Impairment tracking with potential reversal capability
- Asset status changes that affect depreciation calculations
Spreadsheet-based fixed asset tracking breaks down quickly under these requirements. The risk of errors increases with each additional complexity layer.
The Convergence Question
FASB and IASB have worked toward convergence for years, but differences in fixed asset accounting persist. The SEC continues to require GAAP for domestic registrants while allowing foreign private issuers to use IFRS.
For practical purposes, companies with international operations or global stakeholders should plan for ongoing differences. Building fixed asset processes and systems that can accommodate both frameworks provides flexibility that pure GAAP or pure IFRS approaches cannot match.
DeStefano's article serves as a reminder that accounting standards are technical requirements with real operational consequences. The companies that handle these complexities effectively are typically those with robust fixed asset management infrastructure in place.
The Bottom Line for Finance Teams
DeStefano's Accounting Today article gives finance professionals a solid technical reference for understanding GAAP and IFRS treatment of property, plant, and equipment. The differences he outlines between ASC Topic 360 and IAS 16 have direct implications for how companies structure their fixed asset records.
For organizations managing fixed assets under either framework, or both, the key is having systems that support the specific requirements of each standard.
Whether that means tracking component-level depreciation, managing revaluation adjustments, or preserving historical cost data for potential impairment reversals, the underlying fixed asset records need to be accurate and complete.
Frequently Asked Questions
What is the main difference between GAAP and IFRS for fixed assets?
The most significant difference is in subsequent measurement. GAAP requires the cost model, where assets remain at historical cost less accumulated depreciation. IFRS allows companies to choose between the cost model and the revaluation model, which permits adjustments to fair value.
Can you reverse an impairment loss under GAAP?
No. GAAP prohibits reversal of impairment losses on fixed assets. Once an asset is written down, the reduced amount becomes the new cost basis. IFRS allows reversal of impairment losses (except for goodwill) when conditions that caused the impairment no longer exist.
Is component depreciation required under GAAP?
No. GAAP allows component depreciation but does not require it. Most U.S. companies depreciate fixed assets as whole units. IFRS requires that significant components with different useful lives be identified and depreciated separately.
How do GAAP and IFRS treat land differently?
Neither framework depreciates land. GAAP specifically states that demolition costs, site clearing, and leveling are added to land value and not depreciated. IFRS lacks this specific provision. Both frameworks agree that land improvements with finite useful lives should be recorded separately and depreciated.
What happens to depreciation when an asset is idle?
Under both GAAP and IFRS, depreciation generally continues during idle periods. The exception is the units of production method, where depreciation would naturally stop when production stops. GAAP requires idle asset disclosure and impairment review. Assets held for sale are reclassified and no longer depreciated under GAAP.
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