Fixed Assets in Egypt: Recognition, Capitalisation and Depreciation

Executive summary

• The current text of Egyptian Accounting Standard 10, "Fixed Assets and their Depreciation," was issued by Prime Ministerial Decree 883 of 2023, in force from 7 March 2023; the revaluation-model option it added applies to financial periods beginning on or after 1 January 2023 (paragraph 80), and no later decree had amended it by 29 September 2026.
• Cost is recognised as an asset only if future economic benefits are probable and the cost is reliably measurable (paragraph 7); routine maintenance is expensed at once, while the cost of replacing a part or of a major periodic inspection is capitalised when it meets those two conditions (paragraphs 12–14).
• Each significant-cost component is depreciated separately (paragraph 43), and useful life, residual value and method are reviewed at least at each financial year-end (paragraphs 51 and 61).
• An entity chooses the cost model or the revaluation model for an entire class of assets (paragraph 29); revaluing land and buildings needs a valuer registered with the Financial Regulatory Authority (paragraph 32).
• An asset is derecognised on disposal or when no future benefit is expected; the difference between net proceeds and carrying amount is a gain or loss, never revenue (paragraphs 68 and 71).

Recognition and what enters the cost

Fixed assets, as paragraph 6 defines them, are tangible items held for use in production or supply, for rental to others, or administratively, and expected to be used for more than one period. Cost is recognised as an asset "only when: (a) it is probable that future economic benefits associated with the item will flow to the entity, and (b) the cost of the item can be measured reliably" (paragraph 7). Cost comprises the purchase price net of discounts, plus every cost directly attributable to bringing the asset to the condition needed for it to operate as management intends — site preparation, delivery, installation, testing and professional fees — plus the initial estimate of the costs of dismantling and removing the asset and restoring the site where an obligation exists (paragraphs 16–17). Capitalisation stops once the asset reaches that condition: initial operating losses and relocation costs are excluded (paragraph 20).

Each part with a cost significant relative to the item's total cost is depreciated separately (paragraph 43) — an aircraft's airframe and engines, say, where useful lives differ; parts sharing a useful life and method may be grouped (paragraphs 44–47). Routine maintenance is expensed as incurred, but the cost of replacing a part, or of a major periodic inspection on which continued operation depends, is capitalised when it meets the recognition criteria, derecognising the carrying amount of whatever it replaces whether or not that part had been depreciated separately; where that carrying amount cannot practicably be determined, the cost of the replacement may serve as an indication of the replaced part's cost when it was acquired (paragraphs 12–14 and 70).

Depreciation method and the annual review

The depreciable amount is allocated systematically over the estimated useful life (paragraph 50), and residual value and useful life must be reviewed at least at each financial year-end, any change accounted for as a change in estimate under Egyptian Accounting Standard 5 (paragraph 51). Depreciation continues even where fair value exceeds carrying amount, so long as residual value does not, and repairs and maintenance do not stop it (paragraph 52); depreciation begins once the asset is available for use and does not stop merely because it is idle, unless already fully depreciated (paragraph 55).

The methods the standard names include straight-line, diminishing balance and units of production (paragraph 62); the one chosen must reflect the expected pattern in which the asset's economic benefits are consumed, and the method is reviewed at least at each financial year-end, like useful life (paragraphs 60–61). A depreciation method based on the revenue generated by an activity that uses the asset is not appropriate, because revenue reflects factors such as price and volume unrelated to how the asset itself is consumed (paragraph 62A). For tax, depreciation is computed at rates the law sets for each class of asset, not over an estimated useful life (article 25 of Law No. 91 of 2005) — a recurring source of difference from the accounting charge.

The cost model and the revaluation model

An entity chooses the cost model or the revaluation model as a policy for an entire class of assets, not a single item (paragraph 29). Under the revaluation model, fair value must be measurable reliably, and revaluations must be frequent enough that the carrying amount does not differ materially from it (paragraph 31):

When one item is revalued, its whole class is revalued, either simultaneously or on a rolling basis completed within a short period (paragraphs 36 and 38). The revaluation surplus may transfer to retained earnings when realised on disposal, or progressively as the asset is used, by the difference between depreciation on the revalued amount and on original cost — this transfer is never made through profit or loss (paragraph 41) — and the amount transferred is net of the related deferred tax (Egyptian Accounting Standard 24, paragraph 64).

Derecognition and the fixed-asset register

An item is derecognised on disposal, or when no future economic benefit is expected from it (paragraph 67). The gain or loss is the difference between net disposal proceeds and carrying amount, recognised in profit or loss on derecognition and never classified as revenue (paragraphs 68 and 71). An entity that routinely sells assets it had held for rental to others transfers them to inventory at carrying amount once the rental stops, recognising the sale proceeds as revenue rather than a derecognition gain (paragraph 68A).

The standard's disclosure requirements set out what an entity's records must produce for each class: the measurement basis, depreciation method, useful life or rate, gross cost and accumulated depreciation at the start and end of the period, and a full reconciliation between the two showing additions, disposals, and the effect of revaluation, impairment and depreciation (paragraph 73). In practice, each asset's own record therefore carries its description and location; acquisition date and cost elements; the useful life, method and residual value adopted and each year's review of them; accumulated depreciation to date; any revaluation, with its amount, date and valuer; and its derecognition date and proceeds once disposed of — together with any restriction on title or pledge over it (paragraph 74).

What this requires

• Keeping a detailed record for each asset that ties its initial cost to its elements, not to one aggregate figure.
• Identifying the significant-cost parts of every composite asset and depreciating them separately from first recognition.
• Reviewing each asset's useful life, residual value and depreciation method before every financial year-end closes.
• Checking a valuer's registration with the Financial Regulatory Authority before relying on any revaluation report for land or buildings.
• Derecognising the carrying amount of a replaced part at the time of replacement, not at the next year-end count.
• Distinguishing maintenance, expensed at once, from a replacement or major periodic inspection, which is capitalised when it meets the recognition criteria.

The firm's Accounting & Bookkeeping Department designs the fixed-asset register, reviews the basis for capitalising and depreciating each class against Egyptian Accounting Standard 10, and documents any revaluation carried out by a valuer registered with the Financial Regulatory Authority.

Nehal Saied, Partner
Chartered Accountant, Ministry of Finance, Egypt

Member, Egyptian Tax Society
Member, Egyptian Society for Public Finance and Taxation

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