Asset Classification Guide in Ireland

Assets are resources controlled by a company that provide or are expected to provide economic benefits in the future. In accounting, assets are divided into current (short-term) and non-current (long-term) based on their nature and useful life. Below, we explore their classification, write-off rules, depreciation methods, and tax benefits available in Ireland.

1. Asset Classification

1.1. Current (Short-Term) Assets

Current assets are assets expected to be used, sold, or converted into cash within one year. They ensure the company’s day-to-day operations due to their high liquidity. Examples include:

• Cash: Cash on hand and bank account balances.

• Accounts Receivable: Amounts owed by customers for goods sold or services rendered.

• Inventory: Raw materials, work-in-progress, and finished goods intended for sale or production within the next year.

• Short-Term Investments: Investments in liquid assets planned to be sold or used within a year.

1.2. Non-Current (Long-Term) Assets

Non-current assets are intended for long-term use and are not meant for quick sale. They support the core activities of a company and can generate economic benefits over a long period. Examples of long-term assets include:

• Fixed Assets: Buildings, equipment, machinery, and vehicles used in business operations. Their value is depreciated over their useful life.

• Tools: If their cost and expected lifespan exceed one year, tools are considered long-term assets; otherwise, they may be classified as expenses.

• Intangible Assets: Patents, trademarks, copyrights, and other forms of intellectual property.

• Investments in Subsidiaries: Long-term investments in shares or equity of other companies.

• Long-Term Financial Investments: Investments in securities or other assets that are planned to be held for more than one year.

2. Assets in Ireland

In Ireland, assets are classified similarly to other countries. However, the minimum value at which a purchased item is considered an asset is not legislated and may vary depending on a company’s accounting policy. Companies independently set this threshold, which often ranges from €500 to €1,000, but it may differ.

3. Asset Write-Off Rules in Ireland

The write-off of assets is governed by national accounting standards and tax legislation. Key aspects include:

3.1. Depreciation

Depreciation is the process of allocating the cost of a long-term asset over its useful life. In Ireland, companies can use various depreciation methods, such as the straight-line method or the declining balance method.

3.2. Impairment

If an asset loses its value due to damage, obsolescence, or other factors, its carrying amount must be reduced through an impairment procedure.

3.3. Tax Aspects and Capital Allowance

In Ireland, taxpayers can benefit from Capital Allowances, which allow the cost of acquired assets to be written off over a specified period, reducing taxable profits.

Key Points:

• Plant and Machinery Allowance: Typically, these assets are depreciated at 12.5% per year over 8 years.

• Industrial Buildings Allowance: This allowance is granted at 4% annually over 25 years.

• Accelerated Capital Allowances: Certain assets, such as energy-efficient equipment, may be eligible for 100% write-off in the first year.

Example: If a company purchases manufacturing equipment worth €50,000, it can write off 12.5% of its cost (or €6,250) annually over 8 years, reducing taxable profits.

4. Main Methods of Depreciation and Write-Off

4.1. Straight-Line Method

• Description: The cost of the asset is spread equally over its useful life.

• Example: An asset costing €10,000 with a useful life of 5 years would have €2,000 depreciated each year.

4.2. Declining Balance Method

• Description: A larger portion of the asset’s value is depreciated in the early years of use, and depreciation is calculated on the remaining value.

• Example: If an asset worth €10,000 is depreciated at a rate of 20%, €2,000 is written off in the first year, and subsequent years’ depreciation is based on the remaining value (€8,000).

4.3. Units of Production Method

• Description: Based on the actual usage or output of the asset.

• Example: If a machine is designed for 10,000 hours of use and operates for 1,000 hours in a year, 10% of its cost would be depreciated.

4.4. Accelerated Depreciation

• Description: Allows for faster write-off of asset costs, reducing taxable income in the early years.

4.5. Impairment Method

• Description: Used when an asset’s value has significantly declined.

4.6. Partial Write-Off

• Description: Applies when part of an asset is no longer used or has partially lost its value.

4.7. Immediate Expense

• Description: Applies to low-value assets that can be immediately expensed.

5. Recommendations

The choice of depreciation and write-off method depends on the company’s accounting policy, asset type, and legal requirements. It is recommended to consult an accountant or financial advisor to ensure proper and efficient asset management in compliance with regulations.