Factories depend on significant investments in machinery, production equipment, buildings, vehicles and other assets. These assets support daily operations, but they also represent substantial amounts of money that must be properly recorded, monitored and accounted for.
Over time, machinery wears out, equipment becomes outdated and buildings require maintenance. These changes affect the value of assets reported in the financial statements and the cost of producing goods. If a factory does not maintain accurate fixed asset records or calculate depreciation correctly, its financial statements may overstate asset values, understate expenses or provide management with an inaccurate picture of the business.
International Accounting Standard 16 (IAS 16), Property, Plant and Equipment, provides the accounting requirements for recognising, measuring and depreciating these assets. For manufacturers, applying the standard properly is essential for reliable financial reporting, cost management and asset control.
1. Understand Which Factory Assets Fall Under IAS 16
IAS 16 applies to tangible assets held for use in production or the supply of goods and services, for rental to others, or for administrative purposes, and expected to be used during more than one reporting period.
In a factory, these may include:
- Production machinery and processing equipment.
- Factory buildings and warehouses.
- Generators, boilers and other utility equipment.
- Forklifts, delivery vehicles and material-handling equipment.
- Office furniture, computers and administrative equipment.
- Production tools and other qualifying equipment.
An item is recognised as property, plant and equipment when it is probable that future economic benefits associated with it will flow to the business and its cost can be measured reliably.
This distinction matters because not every purchase made by a factory should be recorded as a fixed asset. Materials consumed during production, routine repairs and low-value items may need different accounting treatment depending on their nature and the company’s capitalisation policy.
For example, purchasing a new production machine that will be used for several years would generally qualify for recognition as property, plant and equipment. However, purchasing lubricants or replacement cleaning materials for daily operations would normally be treated as an expense or inventory item rather than a fixed asset.
Correct classification helps prevent operating expenses from being incorrectly capitalised and ensures that qualifying assets are not overlooked.
2. Maintain an Accurate Fixed Asset Register
A fixed asset register is a detailed record of the assets owned or controlled by a business. It provides information about each asset, including its cost, location, condition, useful life and depreciation.
For a factory, the register should be more than a list of equipment purchased. It should allow management and finance teams to identify individual assets, understand their financial value and monitor their movement throughout the business.
Important information to maintain includes:
- Asset description and unique identification number.
- Purchase date and date the asset became available for use.
- Supplier details and supporting purchase documents.
- Original cost and any qualifying directly attributable costs.
- Factory location, department or production line.
- Asset category and depreciation method.
- Estimated useful life and residual value.
- Accumulated depreciation and carrying amount.
- Disposal date and details, where applicable.
For example, a factory may own several similar industrial machines across different production lines. Without unique asset identification numbers and location details, it may be difficult to establish which machine is being repaired, transferred or replaced.
An accurate register helps the business compare its accounting records with the physical assets on site. It also supports insurance reviews, maintenance planning, audit preparation and decisions about replacing ageing equipment.
3. Get the Initial Cost of Each Asset Right
Under IAS 16, an item of property, plant and equipment is initially measured at cost. This includes more than the price paid to the supplier. The cost may also include import duties, non-refundable purchase taxes and costs directly attributable to bringing the asset to the location and condition necessary for it to operate as management intends.
For a factory importing production machinery into Ghana, qualifying costs may include:
- The purchase price, after deducting trade discounts and rebates.
- Import duties and non-refundable purchase taxes.
- Freight and delivery costs.
- Site preparation and installation.
- Assembly and testing costs.
- Professional fees directly related to bringing the asset into operation.
- An estimate of dismantling and site restoration costs where the business has an obligation to incur them.
For example, a manufacturer may purchase a machine for GH¢500,000 and incur GH¢30,000 in freight, GH¢20,000 in installation and GH¢10,000 in testing costs. If all these costs qualify under IAS 16, the initial cost of the machine would be GH¢560,000.
However, not every cost incurred after purchasing an asset should be added to its value. Staff training, general administration, opening a new facility and initial operating losses are generally expensed rather than capitalised. Routine servicing and repairs are also normally recognised as expenses when incurred.
Getting this calculation right matters because the initial asset cost affects future depreciation. If qualifying costs are omitted, the asset may be understated. If unrelated expenses are capitalised, both asset values and future depreciation charges may be overstated.
4. Understand Depreciation and Choose the Appropriate Method
Depreciation is the systematic allocation of an asset’s depreciable amount over its useful life. The depreciable amount is the asset’s cost, or another amount substituted for cost, less its estimated residual value.
IAS 16 requires businesses to select a depreciation method that reflects how the asset’s future economic benefits are expected to be consumed. Common methods include straight-line, diminishing balance and units of production. A revenue-based depreciation method is not permitted.
For a factory, the choice of method should reflect how equipment is used.
Straight-line method: This allocates the same depreciation expense over each year of the asset’s useful life, assuming the residual value does not change. It may be appropriate for factory buildings, office equipment or machinery expected to provide benefits relatively evenly over time.
Diminishing balance method: This applies a fixed rate to the asset’s carrying amount, resulting in higher depreciation charges in earlier years and lower charges later. It may be suitable where an asset’s economic benefits are expected to be consumed more heavily in its earlier years.
Units of production method: This calculates depreciation based on actual production or usage compared with the asset’s expected total production capacity. It may be appropriate for machinery whose wear and consumption are closely linked to the number of units produced.
Consider a factory machine with a capitalised cost of GH¢560,000, an estimated residual value of GH¢40,000 and a useful life of 10 years.
Using the straight-line method:
- Depreciable amount: GH¢560,000 − GH¢40,000 = GH¢520,000.
- Annual depreciation: GH¢520,000 ÷ 10 = GH¢52,000.
The factory would recognise GH¢52,000 in annual depreciation, assuming a full year of use and no change in estimates.
This calculation should be based on the expected useful life of the machine to the business, not simply a standard number of years applied to every asset category.
5. Account for Significant Components Separately
Some factory assets contain major components with different useful lives. IAS 16 requires each significant part of an asset’s cost to be depreciated separately where its cost is significant in relation to the total cost of the item.
For example, a production machine may contain a main structure, a motor and a control system. The main structure may be expected to last 15 years, while the motor may require replacement after five years. Applying one depreciation period to the entire machine could fail to reflect how its different components are consumed.
Component accounting helps a factory recognise the cost of replacing significant parts more accurately. When a qualifying replacement is capitalised, the carrying amount of the replaced component must also be derecognised, even if it was not previously depreciated separately. This prevents the business from continuing to report the old component alongside the new one.
Major inspections may also qualify for recognition as part of the asset’s carrying amount when the IAS 16 recognition criteria are met. The remaining carrying amount of the previous inspection component must then be derecognised.
For manufacturers with specialised production equipment, component accounting can make a meaningful difference to the accuracy of asset values and depreciation expenses.
6. Review Useful Lives, Residual Values and Depreciation Methods
Depreciation estimates should not remain unchanged simply because they were approved when the asset was purchased. IAS 16 requires useful lives and residual values to be reviewed at least at each financial year-end. Depreciation methods should also be reviewed at least at each financial year-end, with changes made where there has been a significant change in the expected pattern of consumption of the asset’s future economic benefits. Changes in estimates are accounted for prospectively under IAS 8.
In a factory, several factors may affect these estimates:
- Increased production volumes may cause machinery to wear out faster.
- New technology may make existing equipment commercially or technically obsolete.
- Poor maintenance may shorten the expected useful life of an asset.
- Changes in production processes may reduce how frequently certain equipment is used.
- Better maintenance or refurbishment may extend an asset’s expected service period.
For example, a machine originally expected to last 10 years may begin experiencing frequent breakdowns after six years because of heavier production demands. Management should assess whether its remaining useful life needs to be revised rather than continuing to apply the original estimate without review.
The opposite can also happen. A machine may remain in good condition and be expected to operate longer than originally anticipated. In either case, estimates should be supported by operational evidence, maintenance records and management assessment.
7. Understand How Depreciation Affects Production Costs
Depreciation has a direct connection to the cost of manufacturing goods. It is not simply an annual accounting expense that management reviews at year-end.
Under IAS 16, depreciation of factory machinery and other production assets is generally included in the cost of converting inventory. It forms part of the production overhead allocated to goods manufactured. Depreciation of administrative assets, such as office computers, is generally recognised as an expense in the period.
This distinction matters because it affects inventory valuation, cost of sales and reported profit.
For example, if a factory produces furniture, depreciation on the machinery used to cut, shape and assemble the wood contributes to the cost of production. When the finished furniture is sold, the relevant production cost is recognised in cost of sales.
If production machinery depreciation is incorrectly treated entirely as an administrative expense, the factory may misstate its production costs and inventory values. Management may also make pricing decisions using incomplete cost information.
Manufacturers should therefore establish a consistent method for allocating production-related depreciation to the appropriate production costs.
8. Monitor Asset Impairment, Transfers and Disposals
A fixed asset register should reflect what the factory actually owns and uses. It should be updated whenever assets are purchased, transferred, significantly upgraded, impaired or disposed of.
IAS 16 requires an asset to be derecognised when it is disposed of or when no future economic benefits are expected from its use or disposal. Any resulting gain or loss is generally recognised in profit or loss. Impairment is assessed under IAS 36.
Consider a factory that replaces an old production machine with a more efficient model. The old machine should not remain in the fixed asset register as though it were still in use. Its cost and accumulated depreciation should be removed from the accounting records, and any difference between its carrying amount and disposal proceeds should be accounted for appropriately.
Management should also investigate assets that are damaged, idle for extended periods or no longer capable of generating the expected economic benefits. Such circumstances may indicate that an impairment assessment is necessary.
Physical asset verification is another important control. Finance and operations teams should periodically compare the fixed asset register with equipment on the factory floor. This helps identify missing assets, unrecorded purchases, incorrect locations and equipment that has been disposed of without the necessary accounting updates.
9. Prepare Accurate Fixed Asset Disclosures
IAS 16 requires financial statements to provide information that helps users understand an organisation’s investment in property, plant and equipment and changes in that investment.
For each class of property, plant and equipment, disclosures generally include the measurement basis, depreciation methods, useful lives or depreciation rates, gross carrying amount and accumulated depreciation and impairment losses. Businesses must also provide a reconciliation of carrying amounts from the beginning to the end of the reporting period, showing movements such as additions, disposals, depreciation and impairment losses.
For a factory, these disclosures help shareholders, lenders, auditors and other users understand how much has been invested in production facilities and equipment, how the assets have changed in value and how much depreciation has been recognised.
A complete fixed asset register makes this reporting process easier because the information needed for the financial statements is already organised and supported by relevant documentation.
It is also important to distinguish accounting depreciation under IAS 16 from tax capital allowances. They are not necessarily calculated using the same rates or useful lives. A factory should maintain appropriate accounting and tax records rather than assuming that its accounting depreciation automatically determines the tax deduction available.
Conclusion
Fixed asset management in a factory involves more than recording machinery purchases and calculating annual depreciation. Businesses must identify qualifying assets, determine their correct initial cost, maintain detailed registers and apply depreciation methods that reflect how assets are used.
IAS 16 also requires attention to significant components, useful life estimates, residual values, impairment, disposals and financial statement disclosures. When these requirements are overlooked, asset values, production costs and reported profits may become unreliable.
A well-maintained fixed asset register gives management a clearer view of the factory’s investment in equipment and infrastructure. Combined with consistent depreciation calculations and regular physical verification, it supports better financial reporting and more informed decisions about maintenance, replacement and future investment.
A cloud-based accounting and financial management platform such as FinovatePro can provide a central place to record business transactions, track expenses and review financial reports. Businesses should assess the platform’s capabilities against their specific fixed asset register and depreciation requirements.
Book a demo of FinovatePro to explore its accounting and financial reporting capabilities and see how they can support more organised financial management in your manufacturing business.