Fixed assets and their depreciation under national and international accounting law – an outline

This article addresses the following questions:

• What qualifies as fixed assets?
• How to perform an initial measurement of fixed assets?
• How to depreciate a fixed asset?

There are differences between national¹ accounting regulations and international financial reporting standards, both in terms of definitions and subsequent operations performed on fixed assets. To avoid errors when keeping the accounting books of a Polish company, it is therefore worth examining the key issues related to the measurement, depreciation, and impairment of fixed assets.

What are fixed assets?

Under international accounting law, depreciation begins when a fixed asset is fit for use in accordance with the entity's intentions.

According to the definition provided by the Polish Accounting Act, Article 3(1)(15), fixed assets are "tangible non-current assets and their equivalents, with an expected economic useful life of more than one year, complete, fit for use and intended for the entity needs."

Therefore, according to Polish regulations, fixed assets include, among others:

1. real estate (this includes land, perpetual usufruct rights to land, structures and buildings, as well as premises owned separately, cooperative ownership rights to residential premises and cooperative rights to commercial premises),
2. machinery, equipment, means of transport,
3. improvements in third-party fixed assets,
4. livestock.

However, according to International Accounting Standard 16² (IAS 16), property, plant and equipment are those fixed assets that are held:

1. for use in the production or supply of goods and services,
2. for rental to other entities under a rental agreement,
3. for administrative purposes (and with the expectation that they will be used for more than one period).

Initial measurement of fixed assets

Under Polish accounting law, fixed assets are measured at acquisition price, production cost, or revalued amount, less depreciation and impairment losses. Fixed assets under construction, on the other hand, are measured at the total costs directly attributable to their acquisition or production, less impairment losses.

The following formula is used to determine the net carrying amount of a given fixed asset:

Net carrying amount = all costs incurred for the acquisition or production of a given fixed asset + all its improvements (modernisations) + reversals of impairment write-offs – depreciation write-offs – impairment losses

Under IAS 16, fixed assets may be measured using either the cost model or the revaluation model³. In the case of the cost model, the net carrying amount of a fixed asset is calculated using the following formula:

Net carrying amount = purchase price or production cost – accumulated depreciation – accumulated impairment losses

For the revaluation model the following formula applies:

Net value = fair value (after revaluation) − accumulated depreciation − accumulated impairment losses

The purchase price should be understood as the amount due to the contractor, increased by the costs of transport, loading, unloading, assembly, insurance costs, stamp duties and other directly attributable costs.

How to depreciate fixed assets?

Depreciation according to Polish regulations

According to Polish accounting law, depreciation charges are made systematically, in accordance with the planned distribution of the initial value over a specific depreciation period, taking into account the economic useful life (Article 32(1) and (2) of the Polish Accounting Act.

Furthermore, depreciation of a fixed asset begins no earlier than in the month following the month in which the asset is put into use. Fixed assets are generally recognised at the end of the month in which the last expenditures related to the asset were incurred before it was put into use. Importantly, the depreciation period, rate, and method are also determined immediately on the date of putting the asset into use.

Throughout the depreciation period, the adopted depreciation rates should be periodically reviewed in relation to the economic useful life of a given fixed asset. National Accounting Standard 11 requires entities to systematically review the adopted economic useful lives and depreciation rates for fixed assets, no later than at the end of each reporting period. These regulations prevent depreciation from ending too early or extending beyond the period in which the asset generates economic benefits.

Depreciation ends either when accumulated depreciation equals the asset’s initial value or when the asset is designated for disposal.

Depreciation of fixed assets under IAS

According to international accounting law, depreciation begins when a fixed asset is fit for use in the manner intended by the entity. Furthermore, depreciation cannot continue beyond the period during which the asset is recognised in the balance sheet, and it should also cease when the asset is held for sale (in accordance with IFRS 5). Regarding depreciation review obligations, IAS 16 requires an entity to annually verify the accuracy of depreciation rates, useful lives and depreciation methods.

It is important to underline that IAS 16 places great emphasis on the so-called depreciable amount, i.e. the asset’s initial value less its residual value.

A more detailed analysis of the provisions of the Polish Accounting Act, Article 32(2)(5), leads to the conclusion that Polish regulations allow (and even implicitly encourage) the use of residual value (although the Act does not explicitly mention it). This conclusion is even more reasonable considering that by using residual value, any potential revenues from the liquidation (sale) of an asset will largely correspond to its undepreciated (residual) value, so it will not affect other operating costs/income and will not distort the structure of the profit and loss account.

Example of machine depreciation

An entity purchased a machine with an initial cost of PLN 200,000. The machine was put into use on 1 January 2026, so the first depreciation charge was recognised in January 2026. Additionally, the entity plans to use the machine for five years, after which it will most likely be sold. The approximate value of a five-year-old machine of the same type is PLN 80,000. Therefore, the depreciable amount is PLN 120,000 (PLN 200,000 – PLN 80,000), and the annual depreciation will be calculated at PLN 24,000.

Compared with the Accounting Act, IAS 16 provides clear guidance on depreciation methods. Furthermore, it addresses rationality and adherence to one of the overarching principles of reporting – the matching principle (matching of revenues and expenses) – and thus allows for the use of the "natural" method, based on the number of units produced using a given fixed asset.

Applying depreciation methods other than the straight-line or declining balance method (e.g. a method based on the number of units produced) in financial statements prepared in accordance with the Polish Accounting Act is still reasonable if it improves the quality of financial reporting and supports compliance with the overarching principles of accounting law.

When discussing depreciation, it is worth mentioning the following issues:

• depreciation of groups of fixed assets (often individually immaterial, yet material in aggregate),
• depreciation of the main part and components separately,
• no depreciation when a fixed asset is not in use.

These topics receive significantly more attention in IAS 16 than in the Polish Accounting Act, giving preparers of the financial statements and management greater flexibility to enhance reporting quality and enable users to draw accurate conclusions from financial data.

Impairment of fixed assets

According to IAS 36, an asset is impaired when there is evidence that the asset has lost its usefulness or has been physically damaged.

Impairment indicators also include situations in which significant adverse changes have occurred (or are likely to occur in the near future) during the reporting period regarding the extent or manner in which the asset is used. Such changes include:

• underutilisation of the asset,
• plans to discontinue or restructure the business in which the asset is used,
• plans for early disposal of a fixed asset,
• change of the useful life of a fixed asset from indefinite to definite.

An additional factor to consider impairment is evidence from internal reporting that the economic performance of an asset is (or will be) worse than expected.

Under Polish National Accounting Standard 4, impairment is considered when:

• the decline in the asset’s market value during the reporting period is significantly greater than expected from the passage of time or normal use,
• adverse changes (of an economic, market, technological or legal nature) have occurred (or will occur in the near future) in the environment in which the entity operates or in the markets served by the asset,
• market interest rates or other market rates of return have increased during the reporting period, likely affecting the discount rate used to calculate the asset’s value in use (which may significantly reduce its present value),
• there is evidence that physical damage to tangible assets has occurred (e.g. based on physical inventory counts or production reports).

In both Polish and international accounting law, it is crucial to first identify internal and external indicators suggesting potential impairment of a fixed asset. The next step is to conduct an impairment test for fixed assets, which involves comparing the asset's carrying amount with its recoverable amount, defined as the higher of its value in use and fair value less costs to sell.

The situation in which impairment occurs can be illustrated by the following formula:

Carrying amount > max (fair value; value in use)

Example of a machine impairment write-down

The entity owns a machine with a significant carrying amount of PLN 1,000 (representing 75% of the balance sheet total). However, due to planned political changes, the entity expects a substantial decline in transactions with foreign counterparties, and the machine – previously generating economic benefits – may no longer be fully utilised. Forecasts of future cash flows, based on a new budget approved by the entity’s management, are as follows:

• PLN 240 (in year 1), PLN 205 (in year 2), PLN 170 (in year 3), PLN 100 (in year 4) and PLN 100 (in year 5),
• After year 5, further decreases in cash flows of 10% annually are assumed, and after a total of 10 years the machine is expected to be sold for PLN 400.

What is the recoverable amount and the potential impairment loss if the fair value less costs to sell is determined at PLN 600?

Using Excel, we can easily calculate the value in use – i.e. the discounted cash flows – at nearly PLN 977. For comparison with the carrying amount of PLN 1,000, we therefore assume the value in use is higher than the fair value (PLN 600). Based on this, we observe that the carrying amount exceeds the recoverable amount by roughly PLN 23. Consequently – if material to the financial statements – an impairment write down should be recognised for this machine.

Monitoring the status of fixed assets is an important element of running a business

Fixed assets – and their measurement, depreciation, and impairment analysis – are a broad issue that could be the topic of numerous articles. However, the purpose of this study was merely to highlight and compare the differences and similarities between Polish accounting law and international standards, as well as to outline issues that are often overlooked, potentially leading to material misstatements in financial statements and the need for adjustments during an audit conducted by a statutory auditor.

¹ Later in this article, the term “national accounting regulations” refers to the Polish Accounting Act and the National Accounting Standards, while “international reporting regulations” refers to the International Financial Reporting Standards (hereinafter: IFRS).
² International Accounting Standards form part of IFRS, in accordance with the definitions presented in IFRS.
³ More information on the revaluation model can be found in the literature, for example here.