Retirement of fixed assets: concept and main characteristics

The write-off of a fixed asset occurs when an asset is permanently removed from the company’s balance sheet. This can result from a sale, donation, obsolescence, scrapping, loss, theft, damage, or payment in kind.

According to the CPC 27 — Fixed Assets, an asset should be written off when:

• Has been sold or transferred;
• No future economic benefits are expected from its use or disposal.

This means that write-off is not solely dependent on the physical removal of the asset. However, the company must demonstrate, through reliable documentation, that it has lost control over the asset or that the asset is no longer capable of generating economic benefits.

If the asset is merely idle but still belongs to the company and can be put back into use or sold, it should generally remain recorded on the balance sheet. In this case, it may be necessary to assess a potential impairment loss, in accordance with CPC 01.

Should a fully depreciated asset be written off?

Not necessarily.

Even if it is fully depreciated, the asset must remain on the books as long as it remains in use or under the company’s control. Full depreciation simply means that its entire depreciable value has already been recognized in the financial statements.

What documents are required for deregistration?

Every write-off must be supported by appropriate and reliable documentation that substantiates the reason for the asset's removal and allows the transaction to be traced.

Depending on the situation, the following may be used:

• Invoice for a sale, donation, transfer, or shipment;
• Purchase and Sale Agreement;
• Technical report on obsolescence or decommissioning;
• Statement of disposal, destruction, or scrapping;
• Asset Inventory Report;
• Internal investigation report;
• Police Report;
• Notice and report from the insurance company;
• Photographs and records of the property;
• Board of Directors' Approval Form;
• Agreement for Payment in Kind;
• Certificate of Environmental Disposal;
• Proof of delivery or receipt of the goods.

An invoice, when required, does not replace internal asset controls. Similarly, an internal document on its own may not be sufficient to substantiate the transaction to the tax authorities.

If the company is unable to justify the write-off, the loss may be considered non-deductible for purposes of calculating taxable income and the Social Security Contribution (CSLL). There is also a risk that the transaction could be interpreted as a sale without an invoice, a disguised donation, a benefit granted to third parties, or an unsubstantiated outflow.

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How do you calculate the gain or loss on a write-off?

The gain or loss is equal to the difference between the net amount received from the transaction and the net book value of the asset.

Net book value = cost of the asset – accumulated depreciation – impairment losses

Result of the write-off = net amount received – net book value

If the result is positive, there will be a gain. If it is negative, there will be a loss.

Calculation Example

A machine was purchased for R$ 50,000 and has accumulated depreciation of R$ 35,000.

In that case, its net book value is R$ 15,000.

If the machine is sold for R$ 20,000, we will have:

• Sale price: R$ 20,000;
• Net book value: R$ 15,000;
• Profit on the trade: R$ 5,000.

As provided in CPC 27, the gain or loss must be recognized in income for the period in which the disposal occurs.

 

What are the most common types of fixed asset write-offs?

The main reasons for the decline are:

• For sale;
• Obsolescence;
• Scrapping;
• Physical non-existence;
• Theft or robbery;
• Accident;
• Donation;
• Payment in kind.

Next, learn how each situation works.

Sale of Fixed Assets

A sale is one of the most common methods of asset disposal. In this case, the company must issue the applicable tax document, record the amount received, and remove the original cost and accumulated depreciation from the asset.

The difference between the net sales proceeds and the net book value will be recognized as a gain or loss.

Depending on the tax regime, the nature of the asset, and the length of time it remains on the balance sheet, the transaction may also have implications for IRPJ, CSLL, ICMS, PIS, and Cofins.

For this reason, the taxation of the sale must be analyzed on a case-by-case basis.

Obsolescence, decommissioning, or scrapping

An asset may become obsolete due to technological advances, wear and tear, changes in the production process, or the economic unfeasibility of repairs.

In these situations, it is recommended to prepare a technical report containing information such as:

• Identification and asset number;
• Location of the asset;
• Condition;
• Reason for decommissioning;
• Possibility of repair or reuse;
• Final destination;
• Those responsible for the analysis;
• Management approval.

If the asset is sold as scrap, the company must issue the corresponding tax document and calculate the gain or loss on the transaction.

In the event of destruction or disposal, it is important to keep contracts, photographs, reports, and certificates of environmental disposal. These documents help demonstrate that the asset has truly ceased to exist or to generate economic benefits.

Physical absence, loss, theft, or robbery

During the inventory count, the company may find assets that are still recorded in the books but cannot be physically located.

In this situation, the write-off should not be performed automatically. First, it is necessary to investigate:

• If the asset was transferred to another unit;
• If there has been a change in your asset identification;
• If it was discarded without notice;
• If a sale occurred without the corresponding write-off;
• If there was theft, robbery, or embezzlement;
• If there is an error in the asset registry.

The documentation may include an investigation report, a police report, an opinion from the department responsible for fixed assets, and management approval.

There is no general value threshold that allows for the automatic write-off of lost assets. The materiality of the loss may influence internal controls, but it does not eliminate the need to justify and document the occurrence.

Without adequate documentation, the company may face tax audits and have the loss deemed non-deductible.

Asset Write-Off Due to a Loss Event

A write-off may occur in the event of an accident, fire, flooding, collision, total loss, or other events that render the asset unusable.

When an asset is insured, its write-off and the indemnity received must be accounted for separately.

First, the company must deduct the original cost and accumulated depreciation from its net assets. Then, it must recognize the right to compensation from the insurance company when there is reasonable assurance that it will be received.

The difference between the indemnity amount and the net book value of the asset will result in a gain or loss.

Example of a Claim

Consider a vehicle with:

• Net book value: R$ 30,000;
• Insurance payout: R$ 40,000.

In that case, the net result will be a gain of R$ 10,000.

If the compensation were R$ 25,000, the company would report a loss of R$ 5,000.

Tax implications must be analyzed based on the company’s tax regime and the characteristics of the event.

If there are ICMS credits associated with the asset, it will also be necessary to assess how the installments tracked in the CIAP are treated. Writing off the asset before the end of the accrual period may prevent the remaining installments from being utilized, in accordance with state law.

Donation of Fixed Assets

In a donation, the company transfers the asset without receiving payment. Even without financial consideration, the transaction must be formalized through a contract or donation agreement and the applicable tax document.

Consider the following example:

• Asset cost: R$ 25,000;
• Accumulated depreciation: R$ 20,000;
• Net book value: R$ 5,000.

The simplified journal entry would be:

Debit: donation expense — R$ 5,000

Debit: Accumulated Depreciation — R$ 20,000

Credit: Fixed assets — R$ 25,000

For accounting purposes, the net value of the asset is recognized as an expense. However, from a tax perspective, not all donations are deductible when calculating taxable income and the Social Contribution on Labor (CSLL).

A Law No. 9,249/1995 It establishes conditions and limitations for the deduction of certain donations. Therefore, each transaction must be analyzed based on the beneficiary, the purpose, and the legal requirements.

There may also be implications related to the ICMS, the ITCMD, and other state taxes.

Giving in payment

Payment in kind occurs when a creditor agrees to accept an asset in lieu of payment to settle a debt.

For the company transferring the asset, the accounting treatment is similar to that of a disposal. The following is required:

• Reduce the original cost of the asset;
• Decrease accumulated depreciation;
• Settle the corresponding obligation;
• Recognize any gain or loss;
• Issue the applicable tax document.

The amount used in the calculation must take into account the recorded cost, accumulated depreciation, any impairment losses, and other adjustments permitted by accounting standards.

The value of the asset should not simply be adjusted for inflation from the date of purchase until delivery, unless there is a specific rule applicable to the transaction.

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How do you record the write-off?

Consider a piece of equipment with:

• Purchase cost: R$ 80,000;
• Accumulated depreciation: R$ 60,000;
• Net book value: R$ 20,000;
• Net proceeds from the sale: R$ 25,000.

The simplified journal entry would be:

Debit: Cash or Accounts Receivable — R$ 25,000

Debit: Accumulated depreciation — R$ 60,000

Credit: Fixed assets — R$ 80,000

Credit: Gain on the disposal of fixed assets — R$ 5,000

If the sale price were R$ 15,000, there would be a loss of R$ 5,000, recorded as a debit in income.

The exact structure of the accounts may vary depending on the chart of accounts adopted by the company.

Tax Considerations When Writing Off Fixed Assets

Accounting write-offs and tax deductibility are not necessarily the same.

A loss may be recognized for accounting purposes but may need to be added to the tax base of the Net Income and CSLL when it does not meet tax requirements or is not properly substantiated.

Before writing off the asset, the company must verify:

• The reason and the date of the incident;
• Supporting documentation;
• Net book value;
• The need to issue an invoice;
• The calculation of the gain or loss;
• The effects on IRPJ and CSLL;
• The impacts on ICMS, PIS, and Cofins;
• Credit management in CIAP;
• Updating the fixed asset inventory;
• Entries in the ECD, ECF, and other ancillary obligations.

ICMS rules and regulations regarding the issuance of tax documents may vary from state to state. Therefore, it is important to check the laws of the state in which the company is located.

Why is asset control important?

Keeping an up-to-date record of fixed assets helps the company:

• Avoid recording nonexistent assets on the balance sheet;
• Calculate depreciation correctly;
• Identify idle or obsolete assets;
• Monitor transfers between units;
• Accurately calculate gains and losses;
• Reduce tax risks;
• Improve the quality of financial statements;
• Plan for replacements and new investments.

Conducting periodic physical inventories also makes it possible to compare existing assets with accounting records and correct discrepancies before they become a bigger problem.

Conclusion

The write-off of a fixed asset involves more than simply removing an asset from the fixed asset register. The procedure requires documentation, accounting analysis, determination of the net book value, and an assessment of the tax implications.

Each situation must be examined on a case-by-case basis, taking into account the reason for the write-off, the nature of the asset, the company’s tax regime, and the applicable state laws.

Errors in this process can lead to inconsistencies in the balance sheet, incorrect offsetting of credits, non-deductible expenses, and inquiries from the tax authorities.

A CLM Controller can help your company manage its assetsl, when recording the write-off and analyzing the accounting and tax implications. Talk to our experts and keep your asset records secure and up to date.