accounting standards board february frs 15 · financial reporting standard 15 ‘tangible fixed...

ACCOUNTING STANDARDS BOARD FEBRUARY 1999 FRS 15F

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TANGIBLE

F IXED ASSETS

ACCOUNTINGSTANDARDSBOARD

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Financial Reporting Standard 15‘Tangible Fixed Assets’ is issued by the Accounting Standards Board in respectof its application in the United Kingdomand by the Institute of CharteredAccountants in Ireland in respect of itsapplication in the Republic of Ireland.

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TANGIBLE

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ACCOUNTINGSTANDARDSBOARD

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©The Accounting Standards Board Limited 1999ISBN 1 85712 079 5

Financial Reporting Standard 15 is set out in paragraphs 1-110.

The Statement of Standard Accounting Practice, whichcomprises the paragraphs set in bold type, should beread in the context of the Objective as stated in paragraph 1 and the definitions set out in paragraph 2and also of the Foreword to Accounting Standards andthe Statement of Principles for Financial Reportingcurrently in issue.

The explanatory paragraphs contained in the FRSshall be regarded as part of the Statement of StandardAccounting Practice insofar as they assist in interpreting that statement.

Appendix IV ‘The development of the FRS’ reviewsconsiderations and arguments that were thought significant by members of the Board in reaching theconclusions on the FRS.

C O N T E N T S

ParagraphsSUMMARY

FINANCIAL REPORTING STANDARD 15

Objective 1Definitions 2Scope 3-5Initial measurement 6-41

Cost 6-18Finance costs 19-30Disclosures—finance costs 31Recoverable amount 32-33Subsequent expenditure 34-41

Valuation 42-76Frequency 43-52Valuation basis 53-60Class of assets 61-62Reporting gains and losses on revaluation 63-71Reporting gains and losses on disposal 72-73Disclosures 74-76

Depreciation 77-102Depreciable amount 77-92Review of useful economic life and residual value 93-96Renewals accounting 97-99Disclosures 100-102

Date from which effective and transitional arrangements 103-108

Amendment to SSAP 19 and withdrawal of SSAP 12 109-110

ACCOUNTING STANDARDS BOARD FEBRUARY FRS

ADOPTION OF FRS 15 BY THE BOARD

APPENDICES

I RICS DEFINITIONS

II NOTE ON LEGAL REQUIREMENTS

III COMPLIANCE WITH INTERNATIONAL ACCOUNTING STANDARDS

IV THE DEVELOPMENT OF THE FRS


S U M M A R Y

General

Financial Reporting Standard ‘Tangible FixedAssets’ sets out the principles of accounting for theinitial measurement, valuation and depreciation oftangible fixed assets, with the exception of investmentproperties. Investment properties continue to beaccounted for in accordance with ‘Accountingfor investment properties’, but are being consideredfurther in the light of other Board projects and theinternational project on investment properties.

The codifies much of existing accounting practice.Its objective is to ensure that tangible fixed assets areaccounted for on a consistent basis and, where a policyof revaluation is adopted, that revaluations are keptup-to-date.

Initial measurement

Whether acquired or self-constructed, a tangible fixedasset should initially be measured at its cost. Onlycosts that are directly attributable to bringing the assetinto working condition for its intended use should beincluded. Such costs should be capitalised only for theperiod in which the activities that are necessary to getthe asset ready for use are in progress.

The capitalisation of finance costs, including interest,is optional. However, if an entity adopts such a policythen it should be applied consistently. All financecosts that are directly attributable to the constructionof a tangible fixed asset should be capitalised as part ofthe cost of that asset, subject to the proviso that the

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total amount of finance costs capitalised during aperiod should not exceed the amount of finance costsincurred during the period. The also sets limitson the period of capitalisation and specifies certaindisclosure requirements.

If the amount recognised when a tangible fixed asset isacquired or constructed exceeds its recoverableamount, it should be written down to recoverableamount. However, on initial recognition the assetneeds to be reviewed for impairment only if there isan indication of impairment, in accordance with ‘Impairment of Fixed Assets and Goodwill’.

Subsequent expenditure undertaken to ensure that theasset maintains its previously assessed standard ofperformance, for example routine repairs andmaintenance expenditure, should be recognised in theprofit and loss account as it is incurred. Without suchexpenditure the depreciation expense would beincreased because the useful economic life or residualvalue of the asset would be reduced. However,subsequent expenditure should be capitalised in threecircumstances, where the expenditure:

(i) enhances the economic benefits of the asset inexcess of its previously assessed standard ofperformance; or

(ii) replaces or restores a component of the asset thathas been treated separately for depreciationpurposes and depreciated over its individual usefuleconomic life; or

(iii) relates to a major inspection or overhaul thatrestores the economic benefits of the asset thathave been consumed by the entity and havealready been reflected in depreciation.


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Valuation

An entity has the option of revaluing its tangible fixedassets. However, where such a policy is adopted itshould be applied consistently to all tangible fixedassets of the same class.

Where a tangible fixed asset is revalued its carryingamount should be its current value at the balancesheet date. Generally this requirement is achieved byperforming a full valuation at least every five years andan inter im valuation in year , with an inter imvaluation in the intervening years where it is likelythat there has been a mater ial change in value.Alternatively, for a portfolio of non-specialisedproperties, a full valuation may be performed on arolling basis over a five-year cycle, together with aninterim valuation on the remaining portfolio where itis likely that there has been a material change in value.For tangible fixed assets other than properties wherethere is an active second-hand market or appropriateindices, such that the entity’s directors can establish theasset’s value with reasonable reliability, an annualrevaluation by the directors may be sufficient, withoutnecessarily using the services of a qualified valuer.

Where tangible fixed assets are revalued the followingvaluation bases for unimpaired assets should be used:

• non-specialised properties—existing use value,*with the addition of notional directly attributableacquisition costs, where material

• specialised properties—depreciated replacementcost

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* As defined by the Royal Institution of Chartered Surveyors (RICS). Thesedefinitions are reproduced in Appendix I.

• properties surplus to an entity’s requirements—open market value,* after deducting expecteddirectly attributable selling costs, where material

• tangible fixed assets other than properties—marketvalue, or depreciated replacement cost wheremarket value is not available.

Revaluation gains are recognised in the statement oftotal recognised gains and losses except to the extentthat they reverse revaluation losses on the same assetthat were previously recognised in the profit and lossaccount, in which case they, too, should be recognisedin the profit and loss account, after adjusting forsubsequent depreciation.

All revaluation losses that are caused by a clearconsumption of economic benefits are recognised inthe profit and loss account. Other revaluation lossesare recognised in the statement of total recognisedgains and losses until the carrying amount of the assetfalls below depreciated historical cost. Revaluationlosses below depreciated historical cost are recognisedin the profit and loss account, except where it can bedemonstrated that the recoverable amount of the assetis greater than its revalued amount, in which case theloss is recognised in the statement of total recognisedgains and losses to the extent that the recoverableamount of the asset is greater than its revalued amount.

Profits and losses on the disposal of tangible fixedassets are treated in accordance with ‘ReportingFinancial Performance’—ie calculated as the differencebetween the net sale proceeds and the carryingamount and recorded in the profit and loss account inthe period in which the disposal occurs.


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* As defined by the Royal Institution of Chartered Surveyors (RICS). Thesedefinitions are reproduced in Appendix I.

Where an entity revalues its tangible fixed assets the requires specific disclosures about the valuation.

Depreciation

The fundamental objective of depreciation is to reflectin operating profit the cost of use of the tangible fixedassets (ie the amount of economic benefits consumedby the entity) in the per iod. Therefore, thedepreciable amount (ie cost, or revalued amount, lessresidual value) of a tangible fixed asset should berecognised in the profit and loss account on asystematic basis that reflects as fairly as possible thepattern in which the asset’s economic benefits areconsumed by the entity, over its useful economic life.

Where the tangible fixed asset comprises two or moremajor components with substantially different usefuleconomic lives, each component should be accountedfor separately for depreciation purposes anddepreciated over its individual useful economic life.

Subsequent expenditure on a tangible fixed asset thatmaintains or enhances the previously assessed standardof performance of the asset does not negate the needto charge depreciation, as, other than non-depreciableland, all tangible fixed assets have finite lives.However, where the remaining useful economic life ofa tangible fixed asset is estimated to be greater than 50years or where the depreciation charge is immaterialowing to a long useful economic life or high residualvalue, then, to ensure that the carrying amount can besupported, the tangible fixed asset should be subjectedto impairment reviews at the end of each reportingperiod, performed in accordance with .

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The useful economic life of a tangible fixed asset andits residual value (based on the price level that existedwhen the asset was purchased or last revalued) wherematerial, should be reviewed at the end of eachreporting period. If expectations are significantlydifferent from previous estimates, the change shouldbe accounted for prospectively over the tangible fixedasset’s remaining useful economic life, except to theextent that the asset has been impaired at the balancesheet date.

The requires specific disclosures about thedepreciation policies adopted by an entity and changesin those policies.


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F I N A N C I A L R E P O R T I N G S T A N D A R D 1 5

Objective

The objective of this is to ensure that:

(a) consistent principles are applied to the initialmeasurement of tangible fixed assets.

(b) where an entity chooses to revalue tangible fixedassets the valuation is performed on a consistentbasis and kept up-to-date and gains and losses onrevaluation are recognised on a consistent basis.

(c) depreciation of tangible fixed assets is calculated ina consistent manner and recognised as theeconomic benefits are consumed over the assets’useful economic lives.

(d) sufficient information is disclosed in the financialstatements to enable users to understand theimpact of the entity’s accounting policies regardinginitial measurement, valuation and depreciation oftangible fixed assets on the financial position andperformance of the entity.

Definitions

The following definitions shall apply in the and inparticular in the Statement of Standard AccountingPractice set out in bold type.

Class of tangible fixed assets:-

A category of tangible fixed assets having a similarnature, function or use in the business of the entity.

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Current value:-

The current value of a tangible fixed asset to thebusiness is the lower of replacement cost andrecoverable amount.

Depreciable amount:-

The cost of a tangible fixed asset (or, where an asset isrevalued, the revalued amount) less its residual value.

Depreciated replacement cost (of property):-

Has the same meaning as in the Appraisal and ValuationManual published by the Royal Institution ofChartered Surveyors (RICS). The definition isreproduced in Appendix I.

Depreciated replacement cost (of tangible fixed assets otherthan property):-

The cost of replacing an existing tangible fixed assetwith an identical or substantially similar new assethaving a similar production or service capacity, fromwhich appropriate deductions are made to reflect thevalue attributable to the remaining portion of the totaluseful economic life of the asset and the residual valueat the end of the asset’s useful economic life.

Costs directly attributable to bringing the tangiblefixed asset into working condition for its intended use,such as costs of transport, installation, commissioning,consultants’ fees, non-recoverable taxes and duties, areincluded in depreciated replacement cost. Thedeductions from gross replacement cost should takeinto account the age and condition of the asset,economic and functional obsolescence, andenvironmental and other relevant factors.


Depreciation:-

The measure of the cost or revalued amount of theeconomic benefits of the tangible fixed asset that havebeen consumed during the period.

Consumption includes the wearing out, using up orother reduction in the useful economic life of atangible fixed asset whether arising from use, effluxionof time or obsolescence through either changes intechnology or demand for the goods and servicesproduced by the asset.

Existing use value:-

Has the same meaning as in the Appraisal and ValuationManual published by the RICS. The definition isreproduced in Appendix I.

Finance costs:-

The difference between the net proceeds of aninstrument and the total amount of payments (orother transfers of economic benefits) that the issuermay be required to make in respect of the instrument.

The definition set out above is taken from ‘Capital Instruments’. Finance costs include:

(a) interest on bank overdrafts and short-term andlong-term debt;

(b) amortisation of discounts or premiums relating todebt; and

(c) amortisation of ancillary costs incur red inconnection with the arrangement of debt.


Impairment:-

A reduction in the recoverable amount of a tangiblefixed asset below its carrying amount.

The definition set out above is taken from ‘Impairment of Fixed Assets and Goodwill’.

Non-specialised properties:-


Open market value:-


Qualified (internal or external) valuer:-

A person conducting the valuation who holds arecognised and relevant professional qualification andhaving recent post-qualification experience, andsufficient knowledge of the state of the market, in thelocation and category of the tangible fixed asset beingvalued. An internal valuer is a director, officer oremployee of the entity. An external valuer is not aninternal valuer and does not have a significant financialinterest in the entity.

Recoverable amount:-

The higher of net realisable value and value in use.*


* Refer to FRS 11 ‘Impairment of Fixed Assets and Goodwill’ for a definition ofvalue in use and details about its calculation.

Residual value:-

The net realisable value of an asset at the end of itsuseful economic life. Residual values are based onprices prevailing at the date of the acquisition (orrevaluation) of the asset and do not take account ofexpected future price changes.

Specialised properties:-


Tangible fixed assets:-

Assets that have physical substance and are held for usein the production or supply of goods or services, forrental to others, or for administrative purposes on acontinuing basis in the reporting entity’s activities.

Useful economic life:-

The useful economic life of a tangible fixed asset is theper iod over which the entity expects to der iveeconomic benefit from that asset.

Scope

The FRS applies to all financial statements thatare intended to give a true and fair view of areporting entity’s financial position and profitor loss (or income and expenditure) for aperiod.

The requirements of the FRS apply to alltangible fixed assets, with the exception ofinvestment properties as defined in SSAP 19‘Accounting for investment properties’.


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Reporting entities applying the FinancialReporting Standard for Smaller Entities (FRSSE)currently applicable are exempt from the FRS.

Initial measurement

Cost

A tangible fixed asset should initially bemeasured at its cost.

Costs, but only those costs, that are directlyattributable to bringing the asset into workingcondition for its intended use should beincluded in its measurement.

The cost of a tangible fixed asset (whether acquired orself-constructed) comprises its purchase price (afterdeducting any trade discounts and rebates) and anycosts directly attributable to bringing it into workingcondition for its intended use.

Directly attributable costs are:

(a) the labour costs of own employees (eg siteworkers, in-house architects and surveyors) arisingdirectly from the construction, or acquisition, ofthe specific tangible fixed asset; and

(b) the incremental costs to the entity that wouldhave been avoided only if the tangible fixed assethad not been constructed or acquired.

It follows that administration and other generaloverhead costs would be excluded from the cost of atangible fixed asset. Employee costs not related to thespecific asset (such as site selection activities) are notdirectly attributable costs.


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Examples of directly attributable costs include:

• acquisition costs (such as stamp duty, importduties and non-refundable purchase taxes)

• the cost of site preparation and clearance

• initial delivery and handling costs

• installation costs

• professional fees (such as legal, architects’ andengineers’ fees)

• the estimated cost of dismantling and removingthe asset and restoring the site, to the extent thatit is recognised as a provision under ‘Provisions, Contingent Liabilities and ContingentAssets’. The fact that the prospect of suchexpenditures emerges only some time after theoriginal capitalisation of the asset (eg because oflegislative changes) does not preclude theircapitalisation.

Abnormal costs (such as those relating to designerrors, industr ial disputes, idle capacity, wastedmaterials, labour or other resources and productiondelays) and costs such as operating losses that occurbecause a revenue activity has been suspended duringthe construction of a tangible fixed asset are notdirectly attributable to bringing the asset into workingcondition for its intended use.

Capitalisation of directly attributable costsshould cease when substantially all the activitiesthat are necessary to get the tangible fixed assetready for use are complete, even if the asset hasnot yet been brought into use.


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A tangible fixed asset is ready for use when its physicalconstruction is complete.

The costs associated with a start-up orcommissioning period should be included inthe cost of the tangible fixed asset only wherethe asset is available for use but incapable ofoperating at normal levels without such a start-up or commissioning period.

A distinction can be made between:

(a) the commissioning period for plant, in which it isimpossible for it to operate at normal levelsbecause of, for example, the need to run inmachinery, to test equipment and generally toensure the proper functioning of the plant; and

(b) an initial operating period in which, although theplant is available for use and capable of running atnormal levels, it is operated at below normal levelsbecause demand has not yet built up.

The costs of an essential commissioning period areincluded as part of the cost of bringing the asset up toits normal operating potential, and therefore as part ofits cost. However, there is no justification forregarding costs relating to other start-up periods,where the asset is available for use but not yetoperating at normal levels, for example because of alack of demand, as part of the cost of the asset. Anexample is the start-up period of a new hotel orbookshop, which could operate at normal levelsalmost immediately, but for which experience teachesthat demand will build up slowly and full utilisation orsales levels will be achieved only over a period ofseveral months.


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The initial carrying amount of tangible fixedassets received as gifts and donations bycharities should be the current value of theassets at the date they are received.

Donated assets are particularly common in the charitysector. Such organisations often receive tangible fixedassets that the entity cannot dispose of withoutexternal consent and other tangible fixed assets ofparticular historic, scientific or artistic importance.On occasion, such assets may present measurementdifficulties where conventional valuation approacheslack sufficient reliability. In addition, even wherevaluation is practical, if significant costs are involvedthey may be onerous compared with the additionalbenefit derived by users of the accounts in assessingmanagement’s stewardship of the assets. Where it canbe demonstrated that these factors are significantalternative approaches to the valuation of thosetangible fixed assets may be appropriate, provided thatadequate disclosure of the reason for the differenttreatment, and of the age, nature and scale of the assetsis given in the notes to the accounts. A similarapproach is acceptable on the first implementation ofthe where, under previously permitted accountingpolicies, a charity holds tangible fixed assets that werenot capitalised as required by the and for whichreliable estimates of cost or value are not available on acost-benefit basis. Generally, these issues will beaddressed in the relevant sector-specific guidance andStatements of Recommended Practice (SORPs).


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Finance costs

Where an entity adopts a policy of capitalisingfinance costs, finance costs that are directlyattributable to the construction of tangible fixedassets should be capitalised as part of the cost ofthose assets. The total amount of finance costscapitalised during a period should not exceedthe total amount of finance costs incurredduring that period.

An entity need not capitalise finance costs. However,if an entity adopts a policy of capitalisation of financecosts, then it should be applied consistently to alltangible fixed assets where finance costs fall to becapitalised in accordance with the above requirement.

Only finance costs that are directly attributable to theconstruction of a tangible fixed asset, or the financingof progress payments in respect of the construction ofa tangible fixed asset by others for the entity, should becapitalised. Directly attributable finance costs arethose that would have been avoided (for example byavoiding additional borrowings or by using the fundsexpended for the asset to repay existing borrowings) ifthere had been no expenditure on the asset. Financecosts are capitalised on a gross basis, ie before thededuction of any tax relief to which they give rise.

Where the entity has borrowed funds specifically forthe purpose of financing the construction of a tangiblefixed asset, the amount of finance costs capitalised islimited to the actual costs incurred on the borrowingsduring the period in respect of expenditures to dateon the tangible fixed asset. Finance costs in respect ofleased tangible fixed assets should be accounted for inaccordance with ‘Accounting for leases andhire purchase contracts’.


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Where the funds used to finance the construction of atangible fixed asset form part of the entity’s generalborrowings, the amount of finance costs capitalised isdetermined by applying a capitalisation rate to theexpenditure on that asset. For this purpose theexpenditure on the asset is the weighted averagecarrying amount of the asset during the period,including finance costs previously capitalised. Thecapitalisation rate used in an accounting period isbased on the weighted average of rates applicable tothe entity’s general borrowings that are outstandingduring the period. This excludes borrowings by theentity that are specifically for the purpose ofconstructing or acquiring other tangible fixed assets(eg obligations in respect of finance leases), or forother specific purposes, such as loans used to hedgeforeign investments.

In determining the borrowings to be included in theweighted average, the objective is a reasonable measureof the finance costs that are directly attributable to theconstruction of the asset. Accordingly, judgement willbe required to make a selection of borrowings thatbest accomplishes the objective. In somecircumstances, it is appropr iate to include allborrowings by the parent and its subsidiaries whencomputing a weighted average of the finance costs; inother circumstances, it is appropr iate for eachsubsidiary to use a weighted average of the financecosts applicable to its own borrowings.


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Where finance costs are capitalised,capitalisation should begin when:

(a) finance costs are being incurred; and

(b) expenditures for the asset are beingincurred; and

(c) activities that are necessary to get the assetready for use are in progress.

The activities necessary to get the asset ready for useencompass more than its physical construction. Theyinclude technical and administrative work beforeconstruction begins, such as obtaining permits.However, such activities exclude the holding of anasset when no production or development thatchanges the asset’s condition is taking place. Forexample, finance costs incurred while land is underdevelopment are capitalised during the period inwhich activities related to the development are beingundertaken. However, finance costs incurred whileland acquired for building purposes is held withoutany associated development activity do not qualify forcapitalisation.

Capitalisation of finance costs should besuspended during extended periods in whichactive development is interrupted.

Finance costs may be incurred during an extendedperiod in which the activities necessary to get the assetready for use are interrupted. Such costs are costs ofholding partially completed assets and do not qualifyfor capitalisation.


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Capitalisation of finance costs should ceasewhen substantially all the activities that arenecessary to get the tangible fixed asset readyfor use are complete. When construction of atangible fixed asset is completed in parts andeach part is capable of being used whileconstruction continues on other parts,capitalisation of finance costs relating to a partshould cease when substantially all the activitiesthat are necessary to get that part ready for useare completed.

A business park comprising several buildings, each ofwhich can be used individually, is an example of anasset of which parts are usable while constructioncontinues on other parts. An example of an asset thatneeds to be completed before any part can be used isan industrial plant involving several processes that arecarried out in sequence at different parts of the plantwithin the same site, such as a steel mill.

Disclosures—finance costs

Where a policy of capitalisation of finance costsis adopted, the financial statements shoulddisclose:

(a) the accounting policy adopted;

(b) the aggregate amount of finance costsincluded in the cost of tangible fixed assets;*


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*This disclosure is required by companies legislation as follows:in Great Britain, the Companies Act 1985, Schedule 4, paragraph 26(3).in Northern Ireland, the Companies (Northern Ireland) Order 1986, Schedule 4,paragraph 26(3).in the Republic of Ireland, the Companies (Amendment) Act 1986, Schedule,paragraph 14(3).

(c) the amount of finance costs capitalisedduring the period;

(d) the amount of finance costs recognised inthe profit and loss account during theperiod; and

(e) the capitalisation rate used to determine theamount of finance costs capitalised duringthe period.

Recoverable amount

If the amount recognised when a tangible fixedasset is acquired or constructed exceeds itsrecoverable amount, it should be written downto its recoverable amount.

A tangible fixed asset needs to be reviewed forimpairment on initial recognition only if there is someindication that impairment has occurred, as set out in ‘Impairment of Fixed Assets and Goodwill’. Atangible fixed asset that is impaired on initialrecognition should be written down in accordancewith .

Subsequent expenditure

Subsequent expenditure to ensure that thetangible fixed asset maintains its previouslyassessed standard of performance should berecognised in the profit and loss account as it isincurred.


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This type of expenditure is often referred to as ‘repairsand maintenance’ expenditure. An entity will assessthe standard of performance of an asset (or acomponent of the asset) to determine its usefuleconomic life and residual value. It will also assumethat certain ‘repairs and maintenance’ expenditure willbe car r ied out to maintain the standard ofperformance of the asset over its estimated usefuleconomic life. Examples are the cost of servicing orthe routine overhauling of plant and equipment andrepainting a building structure. Without suchexpenditure the depreciation expense would beincreased because the useful economic life or residualvalue of the asset would be reduced.

Subsequent expenditure should be capitalised inthree circumstances:

(a) where the subsequent expenditure providesan enhancement of the economic benefits of the tangible fixed asset in excess of the previously assessed standard ofperformance.

(b) where a component of the tangible fixedasset that has been treated separately fordepreciation purposes and depreciated overits individual useful economic life, isreplaced or restored.

(c) where the subsequent expenditure relates toa major inspection or overhaul of a tangiblefixed asset that restores the economicbenefits of the asset that have beenconsumed by the entity and have alreadybeen reflected in depreciation.


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Subsequent expenditure on a tangible fixed asset isrecognised as an addition to the asset to the extent thatthe expenditure improves the condition of the assetbeyond its previously assessed standard of performance.Examples of subsequent expenditure that results in anenhancement of economic benefits include:

• modification of an item of plant to extend itsuseful economic life or increase its capacity

• upgrading machine parts to achieve a substantialimprovement in the quality of output.

Some tangible fixed assets require, in addition toroutine repairs and maintenance (which is treated inaccordance with paragraph ), substantial expenditureevery few years for major refits or refurbishment orthe replacement or restoration of major components.For example, a furnace may require relining every fiveyears. In accordance with paragraph , fordepreciation purposes an entity accounts separately formajor components (eg the furnace lining) that havesubstantially different useful economic lives from therest of the asset. In such a case, each component isdepreciated over its individual useful economic life, sothat the depreciation profile of the whole asset moreaccurately reflects the actual consumption of the asset’seconomic benefits. Subsequent expenditure incurredin replacing or renewing the component is accountedfor as an addition to the tangible fixed asset and thecar rying amount of the replaced component isremoved from the balance sheet in accordance withparagraphs and .


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The same approach may also be applied to majorinspections and overhauls of tangible fixed assets. Forexample, an aircraft may be required by law to beoverhauled once every three years. Unless theoverhaul is undertaken the aircraft cannot continue tobe flown. The entity reflects the need to undertakethe overhaul or inspection by depreciating an amountof the asset that is equivalent to the expectedinspection or overhaul costs over the period until thenext inspection or overhaul. In such a case, the costof the inspection or overhaul is capitalised whenincurred because it restores the economic benefits ofthe tangible fixed asset and the carrying amountrepresenting the cost of the benefits consumed isremoved from the balance sheet in accordance withparagraphs and .

The accounting treatment for subsequent expenditureshould reflect the circumstances that were taken intoaccount on the initial recognition of the asset and thedepreciation profile adopted (or subsequent revisionsthereof). Therefore, when the carrying amount of theasset already takes into account a consumption ofeconomic benefits, eg by depreciating components ofthe asset at a faster rate than the asset as a whole (or bya previous impairment of the asset or component), thesubsequent expenditure to restore those economicbenefits is capitalised. The decision whether toidentify separate components or future expenditureson overhauls or inspections for depreciation over ashorter useful economic life than the rest of thetangible fixed asset is likely to reflect:

• whether the useful economic lives of thecomponents are, or the period until the nextinspection or overhaul is, substantially differentfrom the useful economic life of the remainder ofthe asset;


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• the degree of ir regular ity in the level ofexpenditures required to restate the component orasset in different accounting periods; and

• their materiality in the context of the financialstatements.

Where it has been determined not to account for eachtangible fixed asset as several different assetcomponents or to depreciate part of the asset over adifferent timescale from the rest of the asset, the costof replacing, restoring, overhauling or inspecting theasset or components of the asset is not capitalised, butinstead is recognised in the profit and loss account asincurred in accordance with paragraph .

Valuation

Tangible fixed assets should be revalued onlywhere the entity adopts a policy of revaluation.Where such a policy is adopted then it shouldbe applied to individual classes of tangible fixedassets (in accordance with paragraph 61), butneed not be applied to all classes of tangiblefixed assets held by the entity.

Frequency

Where a tangible fixed asset is subject to apolicy of revaluation* its carrying amountshould be its current value as at the balancesheet date.


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* The term ‘revaluation’ does not encompass either the write-down of the carryingamount of a tangible fixed asset held at historical cost for an impairment in accordancewith FRS 11, or determination of the cost of an asset acquired as a result of a businesscombination stated at its fair value at the date of acquisition, in accordance with FRS 7‘Fair Values in Acquisition Accounting’, or, for charities, the initial measurement atcurrent value of a donated tangible fixed asset in accordance with paragraph 17.

The does not insist on annual revaluations,although the objective of a revaluation policy is toreflect current values as at the balance sheet date.Paragraphs - outline the procedures to be adoptedin order to satisfy the requirements of paragraph ,although more frequent valuations may be undertakenwhere appropriate. However, for cost/benefit reasons,the details specified in paragraphs - may not beappropriate for charities and other not-for-profit andpublic sector organisations adopting a revaluationpolicy, in which case alternative approaches may beacceptable. Generally, these approaches will beaddressed in the relevant sector-specific guidance andSORPs.

Where properties are revalued the requirements ofparagraph will be met by a full valuation at leastevery five years and an interim valuation in year .Interim valuations in years , and should becarried out where it is likely that there has been amaterial change in value.

Alternatively, for portfolios of non-specialisedproperties, a full valuation may be performed on arolling basis designed to cover all the properties over afive-year cycle, together with an interim valuation onthe remaining four-fifths of the portfolio where it islikely that there has been a material change in value.This approach is appropriate only where the propertyportfolio held by the entity either:

(a) consists of a number of broadly similar propertieswhose characteristics are such that their values arelikely to be affected by the same market factors; or

(b) can be divided on a continuing basis into fivegroups of a broadly similar spread.


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A full valuation of a property normally involves, interalia, the following:

(a) detailed inspection of the interior and exterior ofthe property (on an initial valuation this willinvolve detailed measurement of floor space etc,but this would need to be reperformed in futurefull valuations only if there was evidence of aphysical change to the buildings);

(b) inspection of the locality;

(c) enquir ies of the local planning and similarauthorities;

(d) enquiries of the entity or its solicitors; and

(e) research into market transactions in similarproperties, identification of market trends, and theapplication of these to determine the value of theproperty under consideration.

A full valuation of a property is conducted by either:

(a) a qualified external valuer; or

(b) a qualified internal valuer, provided that thevaluation has been subject to review by a qualifiedexternal valuer. The review involves the valuationof a sample of the entity’s properties by theexternal valuer and comparison with the internalvaluer’s figures leading to expression of opinionon the overall accuracy of the valuation, basedupon analysis of this sample. The external valuermust be satisfied that the sample represents agenuine cross-section of the entity’s portfolio.


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An interim valuation of a property is conducted by aqualified (external or internal) valuer and consists of:

(a) research into market transactions in similarproperties, identification of market trends, and theapplication of these to determine the value of theproperty under consideration (as in paragraph(e));

(b) confirmation that there have been no changes ofsignificance to the physical buildings, the legalrights, or local planning considerations; and

(c) an inspection of the property or the locality bythe valuer to the extent that this is regarded asprofessionally necessary, having regard to all thecircumstances of the case, including recentchanges to the property or the locality and thedate on which the valuer previously inspected theproperty.

For certain tangible fixed assets other than properties,for example company cars, there may be an activesecond-hand market for the asset, or appropriateindices may exist, such that the entity’s directors canestablish the asset’s value with reasonable reliability. Insuch cases it may be unnecessary to use the services ofa qualified valuer and the valuation should instead beupdated annually by the directors. Otherwise, thevaluation should be performed by a qualified valuer at


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least every five years, with an update in year , alsoperformed by a qualified valuer. In addition, thevaluation should be updated in the intervening yearswhere it is likely that there has been a material changein value. If a qualified internal valuer is used for thefive-yearly valuation, the valuation should be subjectto review by a qualified external valuer.

For an index to be appropriate for use by the directorsin valuing a tangible fixed asset other than property,the index table will:

(a) be appropriate to the class of asset to which it is tobe applied, as well as to the asset’s location andcondition, and take into account technologicalchange; and

(b) have a proven record of regular publication anduse and be expected to be available in theforeseeable future.

As explained in paragraphs , and , valuationsare to be updated where it is likely that there has beena material change in value. A material change in valueis a change in value that would reasonably influencethe decisions of a user of the accounts. In assessingwhether a material change in value is likely, thecombined impact of all relevant factors (eg physicaldeterioration in the property, general movements inmarket prices in the area etc) should be considered.

Valuation basis

The following valuation bases should be usedfor revalued properties that are not impaired:


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(a) non-specialised properties should be valuedon the basis of existing use value (EUV),*with the addition of notional directlyattr ibutable acquisition costs wherematerial. Where the open market value(OMV) is materially different from EUV,the OMV and the reasons for the differenceshould be disclosed in the notes to theaccounts.

(b) specialised properties should be valued onthe basis of depreciated replacement cost.

(c) properties surplus to an entity’srequirements should be valued on the basisof OMV, with expected directly attributableselling costs deducted where material.

Where there is an indication of impairment, animpairment review should be performed inaccordance with . The asset should be recordedat the lower of the revalued amount, determined inaccordance with the above paragraph, and recoverableamount (which is the higher of net realisable value†

and value in use).


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* In the case of registered social landlords the valuation of non-specialised properties isbased on Existing Use Value for Social Housing as defined in the RICS Appraisaland Valuation Manual.

† As the revalued amount of a tangible fixed asset is often close to its net realisablevalue, any further consideration of impairment is not generally necessary.

Notional directly attributable acquisition costs includesnormal dealing costs, such as professional fees, non-recoverable taxes and duties. It does not includeexpenditure incurred with the objective of enhancingthe site value, such as site improvements, costsinvolved in obtaining planning consent, the cost of sitepreparation and clearance, or other costs that wouldalready be reflected in EUV. For practical purposes,where notional acquisition costs (or expected sellingcosts for properties surplus to requirements) are notmaterial they may be ignored.

Certain types of non-specialised properties are boughtand sold, and therefore valued, as businesses. TheEUV of a property valued as an operational entity isdetermined by having regard to trading potential, butexcludes personal goodwill that has been created inthe business by the present owner or management andis not expected to remain with the business in theevent of the property being sold.

Some entities make structural changes to theirproperties or include special fittings within theirproperties in order to meet the particular needs of theirindividual businesses (for example specialised shopfronts on a retail unit). These structural changes andspecialised fittings are referred to as ‘adaptation works’and have a low or nil market value owing to theirspecialised nature. In such cases, the adaptation worksand shell of the property (ie the property in its statebefore adaptation) may be treated separately,* with onlythe shell of the property revalued using EUV. In sucha case, the adaptation works are held at depreciatedreplacement cost or depreciated historical cost.


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* In accordance with the RICS Appraisal and Valuation Manual, Practice Statement12.4.

Specialised properties, where a market value is notavailable, are valued using depreciated replacementcost. The objective of depreciated replacement cost isto make a realistic estimate of the current cost ofconstructing an asset that has the same servicepotential as the existing asset.

Tangible fixed assets other than propertiesshould be valued using market value, wherepossible. Where market value is not obtainable,assets should be valued on the basis ofdepreciated replacement cost.*

For tangible fixed assets other than property that areused in the business, notional directly attributableacquisition costs should be added to market valuewhere material. For other tangible fixed assets that aresurplus to requirements, expected selling costs shouldbe deducted if material. Where market value is notobtainable, depreciated replacement cost, whichprovides a realistic estimate of the value attributable tothe remaining service potential of the total usefuleconomic life of the asset, should be used, with theassistance of a qualified valuer.


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* In accordance with guidance on the ‘Value of Plant and Machinery to the Business’set out in Practice Statement 4 in the RICS Appraisal and Valuation Manual. The definition of Value of Plant and Machinery to the Business is reproduced inAppendix I.

Class of assets

Where a tangible fixed asset is revalued alltangible fixed assets of the same class should berevalued. In those rare cases where it isimpossible to obtain a reliable valuation of anasset held outside the UK or the Republic ofIreland the asset may be excluded from theclass of assets for the purposes of thisparagraph. However, the carrying amount ofthe tangible fixed asset and the fact that it hasnot been revalued must be stated.

The separate classes of tangible fixed assets that areshown in the formats in companies legislation are:

(a) land and buildings;

(b) plant and machinery; and

(c) fixtures, fittings, tools and equipment.*

These are broad classes. For the purposes of valuation,entities may, within reason, adopt other, narrowerclasses that meet the definition of a class of tangiblefixed assets and are appropriate to their business. Forexample, land and buildings may be split intospecialised properties, non-specialised properties andshort leasehold properties. The disclosures required byparagraphs and should be given for each classof asset adopted by an entity for revaluation purposes.


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* In Great Britain, the Companies Act 1985, Schedule 4, Part I. In Northern Ireland, the Companies (Northern Ireland) Order 1986, Schedule 4,Part I. In the Republic of Ireland, the Companies (Amendment) Act 1986, section 4 andSchedule, Part I.

Reporting gains and losses on revaluation

Revaluation gains should be recognised in theprofit and loss account only to the extent (afteradjusting for subsequent depreciation) that theyreverse revaluation losses on the same asset thatwere previously recognised in the profit and lossaccount. All other revaluation gains should berecognised in the statement of total recognisedgains and losses.

Where a revaluation gain reverses a revaluation lossthat was previously recognised in the profit and lossaccount, the gain recognised in the profit and lossaccount is reduced by the amount of depreciation thatwould have been charged had the loss previously takento the profit and loss account not been recognised inthe first place. This is to achieve the same overalleffect that would have been reached had the originaldownward revaluation reflected in the profit and lossaccount not occurred.

All revaluation losses that are caused by a clearconsumption of economic benefits should berecognised in the profit and loss account.Other revaluation losses should be recognised:

(a) in the statement of total recognised gainsand losses until the carrying amountreaches its depreciated historical cost; and


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(b) thereafter, in the profit and loss accountunless it can be demonstrated that therecoverable amount of the asset is greaterthan its revalued amount, in which case theloss should be recognised in the statementof total recognised gains and losses to theextent that the recoverable amount of theasset is greater than its revalued amount.

For the purposes of paragraph 65(b), therecoverable amount of an asset should becalculated in accordance with the requirementsof FRS 11.

In determining in which performancestatement gains and losses on revaluation shouldbe recognised, material gains and losses onindividual assets in a class of asset should not beaggregated.

A downward revaluation may comprise, at least inpart, an impairment loss. When it is obvious thatthere has been a consumption of economic benefits(eg physical damage or a deterioration in the quality ofthe service provided by the asset), the asset is clearlyimpaired and the loss recognised in the profit and lossaccount, as an operating cost similar to depreciation.


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Other revaluation losses may be due in part to ageneral fall in pr ices (eg a general slump in theproperty market) and in part to a consumption ofeconomic benefits. Unless there is evidence to thecontrary, it is assumed that the fall in value from theasset’s previous carrying amount to depreciatedhistorical cost is due to a general fall in prices (whichis recognised in the statement of total recognised gainsand losses, as a valuation adjustment) and the fall invalue from depreciated historical cost to the revaluedamount is due to a consumption of economic benefits(and therefore recognised in the profit and lossaccount).

However, where it can be demonstrated thatrecoverable amount is greater than the revaluedamount, the difference between recoverable amountand the revalued amount is clearly not an impairmentand should therefore be recognised in the statement oftotal recognised gains and losses as a valuationadjustment, rather than the profit and loss account.

Paragraphs 63-70 do not apply to assets held byinsurance companies and insurance groups(including assets of the long-term business), aspart of their insurance operations, whererevaluation changes are included in the profitand loss account.


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Example—Reporting revaluation gains and losses

Assumptions

A non-specialised property costs £ million and hasa useful life of years and no residual value. It isdepreciated on a straight-line basis and revaluedannually. The entity has a policy of calculatingdepreciation based on the opening book amount.At the end of years and the asset has an EUV of£,, and £, respectively. At the endof year , the recoverable amount of the asset is£, and its depreciated histor ical cost is£,. There is no obvious consumption ofeconomic benefits in year , other than thataccounted for through the depreciation charge.

Accounting treatment under modified historical cost

Year 1 Year 2£000 £000

Opening book amount 1,000 1,080Depreciation (100) (120)*

Adjusted book amount 900 960Revaluation gain (loss)• recognised in the

STRGL 180 (220)• recognised in the profit

and loss account — (40)

Closing book amount 1,080 700

* As the remaining useful economic life of the asset is nine years, the depreciationcharge in year 2 is 1/9th of the opening book amount (£1,080,000/9 =£120,000).

continued


Example - continued

In year 1, after depreciation of £,, arevaluation gain of £, is recognised in thestatement of total recognised gains and losses, inaccordance with paragraph .

In year 2, after a depreciation charge of £,,the revaluation loss on the property is £,.According to paragraph , where there is not aclear consumption of economic benefits, revaluationlosses should be recognised in the statement of totalrecognised gains and losses until the carryingamount reaches its depreciated histor ical cost.Therefore, the fall in value from the adjusted bookamount (£,) to depreciated historical cost(£,) of £, is recognised in thestatement of total recognised gains and losses.

The rest of the revaluation loss, £, (ie the fallin value from depreciated historical cost (£,)to the revalued amount (£,)), should berecognised in the profit and loss account, unless itcan be demonstrated that recoverable amount isgreater than the revalued amount. In this case,recoverable amount of £, is greater than therevalued amount of £, by £,.Therefore £, of the revaluation loss isrecognised in the statement of total recognised gainsand losses, rather than the profit and loss account—giving rise to a total revaluation loss of £,(£,+£,) that is recognised in thestatement of total recognised gains and losses. Theremaining loss (representing the fall in value fromdepreciated histor ical cost of £, torecoverable amount of £,) of £, isrecognised in the profit and loss account.

Reporting gains and losses on disposal

The profit or loss on the disposal of a tangiblefixed asset should be accounted for in the profitand loss account of the period in which thedisposal occurs as the difference between thenet sale proceeds and the carrying amount,whether carried at historical cost (less anyprovisions made) or at a valuation. Profits orlosses on the disposal of fixed assets should beshown in accordance with FRS 3 ‘ReportingFinancial Performance’.

Where an asset (or a component of an asset) isreplaced, its carrying amount is removed from thebalance sheet (by eliminating its cost (or revaluedamount) and related accumulated depreciation) andthe resulting gain or loss on disposal is recorded inaccordance with paragraph . For example, a newtangible fixed asset may be acquired from insuranceproceeds when a previously held tangible fixed assethas been lost or destroyed. In such cases the lost ordestroyed asset is removed from the balance sheet andthe resulting gain or loss on disposal (being thedifference between the carrying amount and theinsurance proceeds) is recognised. The replacementasset is recorded at its cost.

Disclosures

In addition to the disclosures required byparagraphs 53(a), 61 and 72, where any class oftangible fixed assets of an entity has beenrevalued the following information should bedisclosed in each reporting period:


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(a) for each class of revalued assets:

(i) the name and qualifications of thevaluer(s) or the valuer’s organisationand a description of its nature;

(ii) the basis or bases of valuation(including whether notional directlyattributable acquisition costs have beenincluded or expected selling costsdeducted);

(iii) the date and amounts of the valuations;

(iv) where histor ical cost records areavailable, the carrying amount thatwould have been included in thefinancial statements had the tangiblefixed assets been carried at historicalcost less depreciation;

(v) whether the person(s) carrying out thevaluation is (are) internal or external tothe entity;

(vi) where the directors are not aware ofany mater ial change in value andtherefore the valuation(s) have not beenupdated, as described in paragraphs 45,46 and 50, a statement to that effect; and

(vii)where the valuation has not beenupdated, or is not a full valuation, thedate of the last full valuation.


(b) in addition, for revalued properties:

(i) where properties have been valued asfully-equipped operational entitieshaving regard to their trading potential,a statement to that effect and thecarrying amount of those properties;and

(ii) the total amount of notional directlyattributable acquisition costs (or thetotal amount of expected selling costsdeducted), included in the carryingamount, where material.

Other professional bodies may require disclosures inthe financial statements in addition to the abovedisclosures. For example, the RICS requiresconfirmation in a published document containing areference to a valuation report that the valuation hasbeen made in accordance with the RICS Appraisal andValuation Manual or a (named) alternative pursuant toPractice Statement .., or the extent of and reason(s)for departure therefrom.

In addition, companies legislation* requires disclosure,in the directors’ report, of the difference, with suchprecision as is practicable, between the carrying


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* In Great Britain, the Companies Act 1985, Schedule 7, paragraph 1(2).In Northern Ireland, the Companies (Northern Ireland) Order 1986, Schedule 7,paragraph 1(2).In the Republic of Ireland, the Companies Act 1963, section 158. (Note: this sectionincludes a general requirement for the directors’ report to deal with the state of affairs ofthe company; there is no specific requirement as in the UK references.)

amount and market value of interests in land,* where,in the opinion of the directors, it is of suchsignificance that it needs to be drawn to the attentionof the members of the entity.

Depreciation

Depreciable amount

The depreciable amount of a tangible fixedasset should be allocated on a systematic basisover its useful economic life. The depreciationmethod used should reflect as fairly as possiblethe pattern in which the asset’s economicbenefits are consumed by the entity. Thedepreciation charge for each period should berecognised as an expense in the profit and lossaccount unless it is permitted to be included inthe carrying amount of another asset.

The fundamental objective of depreciation is to reflectin operating profit the cost of use of the tangible fixedassets (ie amount of economic benefits consumed) inthe period. This requires a charge to operating profiteven if the asset has risen in value or been revalued.


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* In Great Britain, Schedule 1 to the Interpretation Act 1987 states that ‘“Land”includes buildings and other structures, land covered with water, and any estate,interest, easement, servitude or right in or over land’. In Northern Ireland, section 45 (i)(a) of the Interpretation Act (Northern Ireland) 1954states that ‘(a) “Land” shall include- (i) messuages, tenements and hereditaments ofany tenure; (ii) land covered by water; (iii) any estate in land or water; and (iv) housesor other buildings or structures whatsoever;’.

Where an asset has been revalued the current period’sdepreciation charge is based on the revalued amountand the remaining useful economic life. Ideally, theaverage value of the asset for the period should beused to calculate the depreciation charge. In practice,however, either the opening or closing balance may beused instead, provided that it is used consistently eachperiod.

The economic benefits embodied in a tangible fixedasset are consumed by the entity principally throughthe use of the asset. However, other factors often alsoresult in the diminution of the economic benefits thatmight have been expected to be available from theasset. Consequently, all the following factors need tobe considered in determining the useful economic life,residual value and depreciation method of an asset:

• the expected usage of the asset by the entity,assessed by reference to the asset’s expectedcapacity or physical output

• the expected physical deterioration of the assetthrough use or effluxion of time; this will dependupon the repair and maintenance programme ofthe entity both when the asset is in use and whenit is idle

• economic or technological obsolescence, forexample arising from changes or improvements inproduction, or a change in the market demand forthe product or service output of that asset

• legal or similar limits on the use of the asset, suchas the expiry dates of related leases.


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A variety of methods can be used to allocate thedepreciable amount of a tangible fixed asset on asystematic basis over its useful economic life. Themethod chosen should result in a depreciation chargethroughout the asset’s useful economic life and not justtowards the end of its useful economic life or whenthe asset is falling in value. Two of the more commonmethods are:

(a) Straight-line—Here it is assumed that equalamounts of the asset’s economic benefits areconsumed in each year of the asset’s estimateduseful economic life. Therefore the asset iswritten off in equal instalments over its estimateduseful economic life.

(b) Reducing balance—This method more closelyreflects the pattern of consumption of theeconomic benefits of assets that clearly providegreater benefits when new than as they becomeolder—perhaps as a result of general wear causingthem to become more prone to breakdown, orless capable of producing a high-quality product,or because they will necessar ily be lesstechnologically advanced than the latest model.

Where the pattern of consumption of an asset’seconomic benefits is uncertain, a straight-line methodof depreciation is usually adopted.

A change from one method of providingdepreciation to another is permissible only onthe grounds that the new method will give afairer presentation of the results and of thefinancial position. Such a change does not,however, constitute a change of accountingpolicy; the carrying amount of the tangiblefixed asset is depreciated using the revisedmethod over the remaining useful economiclife, beginning in the period in which thechange is made.


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Where the tangible fixed asset comprises two ormore major components with substantiallydifferent useful economic lives, eachcomponent should be accounted for separatelyfor depreciation purposes and depreciated overits individual useful economic life.

Land and buildings are separable components and aredealt with separately for accounting purposes, evenwhen they are acquired together. With certainexceptions, such as sites used for extractive purposesor landfill, land has an unlimited life and therefore isnot depreciated. Buildings have a limited life andtherefore are depreciated. An increase in the existinguse value of the land on which a building stands doesnot affect the determination of the useful economiclife or residual value of the building. Anotherexample of separable components that may havesubstantially different useful economic lives is thestructure of a building and items within the structuresuch as general fittings.

It would not be appropriate, however, to treat thetrading potential associated with a property that isvalued as an operational entity, such as a public houseor hotel, as a separate component, where the valueand life of any such trading potential is inherentlyinseparable from that of the property.

Subsequent expenditure on a tangible fixedasset that maintains or enhances the previouslyassessed standard of performance of the assetdoes not negate the need to chargedepreciation.


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In calculating the useful economic life of an asset it isassumed that subsequent expenditure will beundertaken to maintain the previously assessedstandard of performance of the asset (for example thecost of servicing or routine overhauling of plant andequipment). Without such expenditure thedepreciation expense would be increased because theuseful economic life or residual value of the assetwould be reduced. This type of expenditure isrecognised as an expense when incurred in accordancewith paragraph .

In addition, subsequent expenditure may beundertaken that results in an enhancement of theeconomic benefits of the asset in excess of thepreviously assessed standard of performance, or therestoration or replacement of a component of the assetthat has been separately depreciated, or the restorationof the economic benefits of a tangible fixed assetwhere the cost of an overhaul or inspection of thetangible fixed asset has been reflected in previousdepreciation. This type of expenditure may result inan extension of the useful economic life of the asset,but cannot extend the useful economic life of the assetindefinitely and does not negate the need to chargedepreciation. In accordance with paragraph thesubsequent expenditure is capitalised as it is incurredand depreciated over the asset’s or the component’suseful economic life, or the period to the next majoroverhaul or inspection, as appropriate.

Tangible fixed assets, other than non-depreciable land, should be reviewed forimpairment, in accordance with FRS 11, at theend of each reporting period when either:


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(a) no depreciation charge is made on thegrounds that it would be immaterial (eitherbecause of the length of the estimatedremaining useful economic life or becausethe estimated residual value of the tangiblefixed asset is not materially different fromthe carrying amount of the asset); or

(b) the estimated remaining useful economiclife of the tangible fixed asset exceeds 50years.

For tangible fixed assets other than non-depreciableland, the only grounds for not charging depreciationare that the depreciation charge and accumulateddepreciation are immaterial. The depreciation chargeand accumulated depreciation are immaterial if theywould not reasonably influence the decisions of a userof the accounts.

An entity must be able to justify that the unchargeddepreciation is not material in aggregate as well as foreach tangible fixed asset. Depreciation may beimmaterial because of very long useful economic livesor high residual values (or both). A high residualvalue will reflect the remaining economic value of theasset at the end of its useful economic life to theentity. These conditions may occur when:

(a) the entity has a policy and practice of regularmaintenance and repair (charges for which arerecognised in the profit and loss account) suchthat the asset is kept to its previously assessedstandard of performance; and

(b) the asset is unlikely to suffer from economic ortechnological obsolescence (eg due to potentialchanges in demand in the market followingchanges in fashion); and


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(c) where estimated residual values are material:

(i) the entity has a policy and practice ofdisposing of similar assets well before the endof their economic lives; and

(ii) the disposal proceeds of similar assets (afterexcluding the effect of price changes sincethe date of acquisition or last revaluation)have not been mater ially less than theircarrying amounts.

Where it is not reasonably practicable to performimpairment reviews on an individual asset basis, theyshould be performed for groups of assets, as part ofincome-generating units, in accordance with .After the first per iod the reviews need only beupdated. If expectations of future cash flows anddiscount rates have not changed significantly, theupdating procedure will be relatively quick toperform. If there have been no adverse changes in thekey assumptions and variables, or if the estimatedrecoverable amount was previously substantially inexcess of the carrying amount, it may even be possibleto ascertain immediately that the asset or income-generating unit is not impaired.

Review of useful economic life and residual value

The useful economic life of a tangible fixedasset should be reviewed at the end of eachreporting period and revised if expectations aresignificantly different from previous estimates.If a useful economic life is revised, the carryingamount of the tangible fixed asset at the date ofrevision should be depreciated over the revisedremaining useful economic life.


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If a tangible fixed asset is carried in the balance sheetat a revaluation (particularly if valued usingdepreciated replacement cost), a reassessment of usefuleconomic life may necessitate a revaluation of theasset, in accordance with paragraphs , , and .The revalued amount should be depreciated over therevised useful economic life.

Where the residual value is material it should bereviewed at the end of each reporting period totake account of reasonably expectedtechnological changes based on pr icesprevailing at the date of acquisition (orrevaluation). A change in its estimated residualvalue should be accounted for prospectivelyover the asset’s remaining useful economic life,except to the extent that the asset has beenimpaired at the balance sheet date.

The reassessed residual value is, where practicable,restated in terms of the price level that existed whenthe asset was purchased (or revalued). Where such arestatement is not practicable, the residual value isrestated in terms of current values only where theresidual value at current prices is below the originalestimate of residual value. Events or changes incircumstances that cause the residual value to fall mayalso be indicative of an impairment of the asset (iewhen the asset’s recoverable amount falls below itscarrying amount), in which case an impairment reviewshould be performed in accordance with .


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Renewals accounting

Definable major assets or components within an infrastructure system or network withdeterminable finite lives should be treatedseparately and depreciated over their usefuleconomic lives. For the remaining tangiblefixed assets within the system or network (‘theinfrastructure asset’), renewals accounting (asoutlined in paragraph 98) may be used as amethod of estimating depreciation in thefollowing circumstances:

(a) the infrastructure asset is a system ornetwork that as a whole is intended to bemaintained at a specified level of servicepotential by the continuing replacement andrefurbishment of its components; and

(b) the level of annual expenditure required tomaintain the operating capacity (or servicecapability) of the infrastructure asset iscalculated from an asset management planthat is certified by a person who isappropriately qualified and independent;and

(c) the system or network is in a mature orsteady state.

Where renewals accounting is adopted, the levelof annual expenditure required to maintain theoperating capacity of the infrastructure asset istreated as the depreciation charged for theperiod and is deducted from the carryingamount of the asset (as part of accumulateddepreciation). Actual expenditure is capitalised(as part of the cost of the asset) as incurred.


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In the above circumstances, it is appropriate to treatthe infrastructure asset as a single network of systems(ie one asset, except for definable major componentswith determinable finite lives), rather than as anumber of individual assets. Evidence that a system ornetwork is in a mature and steady state is providedwhen the annual cost of maintaining that system isrelatively constant. In addition, attention should begiven to removing the carrying amount of that part ofthe infrastructure asset that is replaced or restored bythe subsequent expenditure. If the above treatment ofaccounting for infrastructure assets is not adopted,then expenditure to maintain the operating capacity of the infrastructure assets would be recognised in accordance with paragraphs and , anddepreciation calculated in the conventional manner, inaccordance with paragraphs -.

Disclosures

The following information should be disclosedseparately in the financial statements for eachclass of tangible fixed assets:

(a) the depreciation methods used;

(b) the useful economic lives or thedepreciation rates used;

(c) total depreciation charged for the period;

(d) where material, the financial effect of achange during the period in either theestimate of useful economic lives (made inaccordance with paragraph 93) or theestimate of residual values (made inaccordance with paragraph 95);


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(e) the cost or revalued amount at thebeginning of the financial period and at thebalance sheet date;

(f) the cumulative amount of provisions fordepreciation or impairment at thebeginning of the financial period and at thebalance sheet date;

(g) a reconciliation of the movements,separately disclosing additions, disposals,revaluations, transfers, depreciation,impairment losses, and reversals of pastimpairment losses written back in thefinancial period; and

(h) the net carrying amount at the beginning ofthe financial period and at the balance sheetdate.

When a tangible fixed asset is revalued, the carryingamount of the asset is restated at its revalued amount.Usually any accumulated depreciation at the date ofrevaluation is eliminated and the cost or revaluedamount of the asset is restated at its revalued amount.Alternatively, where the valuation is calculated on adepreciated replacement cost basis, both the cost orrevalued amount and the accumulated depreciation atthe date of revaluation may be restated, so that thecarrying amount of the asset after revaluation equals itsrevalued amount.

Where there has been a change in thedepreciation method used, the effect, ifmaterial, should be disclosed in the period ofchange. The reason for the change should alsobe disclosed.


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Date from which effective and transitionalarrangements

The accounting practices set out in the FRSshould be regarded as standard in respect offinancial statements relating to accountingperiods ending on or after 23 March 2000.Earlier adoption is encouraged.

Where, on implementation of the FRS for thefirst time, an entity does not adopt a policy ofrevaluation, but the carrying amount of itstangible fixed assets reflects previousrevaluations, it may:

(a) retain the book amounts (subject to therequirement to test the assets forimpairment in accordance with FRS 11where there is an indication that animpairment may have occurred). In thesecircumstances the entity should disclose thefact that the transitional provisions of theFRS are being followed and that thevaluation has not been updated and give thedate of the last revaluation; or

(b) restate the carrying amount of the tangiblefixed assets to historical cost (less restatedaccumulated depreciation), as a change inaccounting policy.

The transitional arrangement set out in paragraph(a) is available only on the first application of the.


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Except as provided for in paragraph 108,revisions to the useful economic lives andresidual values of tangible fixed assetsrecognised on adoption of the FRS are not theresult of a change in accounting policy andshould be treated in accordance withparagraphs 93-96 and not as pr ior per iodadjustments.

Revisions to the useful economic lives or residualvalues of tangible fixed assets may result in thedepreciation of tangible fixed assets that werepreviously not depreciated by the entity on thegrounds of immateriality. In such cases, the carryingamounts of the tangible fixed assets should bedepreciated prospectively over the remaining usefuleconomic lives of the assets.

Where, on adoption of the FRS, entities separatetangible fixed assets into different componentswith significantly different useful economic livesfor depreciation purposes, in accordance withparagraphs 36-41 and 83-85, the changes shouldbe dealt with as prior period adjustments, as achange in accounting policy.*

Amendment to SSAP 19 and withdrawal of SSAP 12

Paragraph 9 of SSAP 19 ‘Accounting forinvestment properties’ is deleted.

The FRS supersedes SSAP 12 ‘Accounting fordepreciation’.


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* In accordance with FRS 3 and UITF Abstract 14 ‘Disclosure of changes inaccounting policy’.

A D O P T I O N O F F R S 1 5 B Y T H E B O A R D

Financial Reporting Standard 15 - ‘Tangible FixedAssets’ was approved for issue by the ten members ofthe Accounting Standards Board.

Sir David Tweedie (Chairman)

Allan Cook (Technical Director)

David Allvey

Ian Brindle

Dr John Buchanan

John Coombe

Raymond Hinton

Huw Jones

Professor Geoffrey Whittington

Ken Wild


A P P E N D I X I

R I C S D E F I N I T I O N S

The following definitions have been extracted fromthe Appraisal and Valuation Manual published by RICSBooks and are reproduced with the permission of theRoyal Institution of Chartered Surveyors, which ownsthe copyright.

Specialised properties:-

“those which, due to their specialised nature, arerarely, if ever, sold on the open market for singleoccupation for a continuation of their existing use,except as part of a sale of the business in occupation.Their specialised nature may ar ise from theconstruction, arrangement, size or location of theproperty, or a combination of these factors, or may bedue to the nature of the plant and machinery anditems of equipment which the buildings are designedto house, or the function, or the purpose for whichthe buildings are provided. Examples of specialisedproperties, which are usually valued on theDepreciated Replacement Cost (DRC) basis, are:

(a) oil refineries and chemical works where, usually,the buildings are no more than housings orcladding for highly specialised plant;

(b) power stations and dock installations where thebuildings and site engineering works are relateddirectly to the business of the owner, it beinghighly unlikely that they would have a value toanyone other than a company acquir ing theundertaking;

APPENDIX I - RICS DEFINITIONS

(c) properties of such construction, arrangement, sizeor specification that there would be no market(for a sale to a single owner occupier for thecontinuation of existing use) for those buildings;

(d) standard properties in particular geographical areasand remote from main business centres, locatedthere for operational or business reasons, whichare of such an abnormal size for that district, thatthere would be no market for such buildingsthere;

(e) schools, colleges, universities and researchestablishments where there is no competingmarket demand from other organisations usingthese types of property in the locality;

(f ) hospitals, other specialised health care premisesand leisure centres where there is no competingmarket demand from other organisations wishingto use these types of property in the locality; and

(g) museums, libraries, and other similar premisesprovided by the public sector.”

Non-specialised properties:-

“all properties except those coming within thedefinition of specialised properties. Hence they arethose for which there is a general demand, with orwithout adaptation, and which are commonly bought,sold or leased on the open market for their existing orsimilar uses, either with vacant possession for singleoccupation, or (whether tenanted or vacant) asinvestments or for development. Residentialproperties, shops, offices, standard industrial andwarehouse buildings, public houses, petrol fillingstations, and many others, are usually non-specialisedproperties.”


Open market value:-

“An opinion of the best price at which the sale of aninterest in property would have been completedunconditionally for cash consideration on the date ofvaluation, assuming:

(a) a willing seller;

(b) that, prior to the date of valuation, there had beena reasonable period (having regard to the nature ofthe property and the state of the market) for theproper marketing of the interest, for theagreement of the price and terms and for thecompletion of the sale;

(c) that the state of the market, level of values andother circumstances were, on any earlier assumeddate of exchange of contracts, the same as on thedate of valuation;

(d) that no account is taken of any additional bid by aprospective purchaser with a special interest; and

(e) that both parties to the transaction had actedknowledgeably, prudently and withoutcompulsion.”


Existing use value:-

“An opinion of the best price at which the sale of aninterest in property would have been completedunconditionally for cash consideration on the date ofvaluation, assuming:

(a) a willing seller;

(b) that, prior to the date of valuation, there had beena reasonable period (having regard to the nature ofthe property and the state of the market) for theproper marketing of the interest, for theagreement of the price and terms and for thecompletion of the sale;

(c) that the state of the market, level of values andother circumstances were, on any earlier assumeddate of exchange of contracts, the same as on thedate of valuation;

(d) that no account is taken of any additional bid by aprospective purchaser with a special interest;

(e) that both parties to the transaction had actedknowledgeably, prudently and withoutcompulsion;

(f ) that the property can be used for the foreseeablefuture only for the existing use; and

(g) that vacant possession is provided on completionof the sale of all parts of the property occupied bythe business.”


Depreciated replacement cost (of property):-

“The aggregate amount of the value of the land for theexisting use or a notional replacement site in the samelocality, and the gross replacement cost of the buildingsand other site works, from which appropr iatedeductions may then be made to allow for the age,condition, economic or functional obsolescence,environmental and other relevant factors; all of thesemight result in the existing property being worth lessto the undertaking in occupation than would a newreplacement.”

Value of plant and machinery to the business:-

“An opinion of the price at which an interest in theplant and machinery utilised in a business would havebeen transferred at the date of valuation assuming:

(a) that the plant and machinery will continue in itspresent uses in the business;

(b) adequate potential profitability of the business, orcontinuing viability of the undertaking, bothhaving due regard to the value of the total assetsemployed and the nature of the operation; and

(c) that the transfer is part of an arm’s length sale of thebusiness wherein both parties acted knowledgeably,prudently and without compulsion.”


A P P E N D I X I I

N O T E O N L E G A L R E Q U I R E M E N T S

Great Britain

In Great Britain, the statutory requirements relating toaccounting for tangible fixed assets are set out in theCompanies Act . The main requirements that aredirectly relevant to tangible fixed assets and therequirements of are set out in Schedules andA and are summarised below.

Schedule does not apply to banking and insurancecompanies or groups. Requirements equivalent tothose of Schedule are contained in Schedule (forbanking companies and groups) and in Schedule A(for insurance companies and groups).

Initial cost

Paragraph of Schedule requires the amount to beincluded in respect of any fixed asset to be its purchaseprice or production cost. The purchase price is to bedetermined by adding to the actual price any expensesincidental to its acquisition (paragraph () ofSchedule ). Paragraph () requires the cost ofproduction of an asset to comprise the purchase priceof raw mater ials and consumables used and theamount of costs incurred by the company that aredirectly attributable to the production of that asset. Inaddition, paragraph () allows the inclusion of:

(a) indirectly attr ibutable costs incurred by thecompany relating to the period of production;and


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(b) interest on capital borrowed to finance theproduction of the asset. (However, the amount ofthe interest capitalised is required to be disclosedin the notes to the accounts.)

Where there is no record of the purchase price orproduction cost of any asset of a company, paragraph of Schedule requires the asset value to bedetermined using the earliest available record of thevalue of the asset on or after its acquisition orproduction by the company. Such earliest availablerecords may also be used where there are no relevantprices, expenses or costs against which the purchaseprice may be determined or where the record of suchpurchase pr ice cannot be obtained withoutunreasonable expense or delay.

Valuation

The alternative accounting rules set out in paragraph() of Schedule permit tangible fixed assets to beincluded at a market value determined as at the date oftheir last valuation or at their current cost.

Where the alternative accounting rules set out inparagraph () of Schedule are adopted by acompany the following additional information isrequired to be included in the company’s accounts:

(a) the assets revalued and the basis of valuation(paragraph () of Schedule ).

(b) either the comparable amounts determinedaccording to the historical cost accounting rulesor the differences between those amounts and therevalued amounts (paragraph () of Schedule ).

APPENDIX II - NOTE ON LEGAL REQUIREMENTS

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(c) the year and amount of the valuation (paragraph(a) of Schedule ).

(d) in the case of assets that have been valued duringthe financial year, the names of the persons whovalued them or particulars of their qualificationsfor doing so and the bases of valuation used bythem (paragraph (b) of Schedule ).

Reporting revaluation gains and losses

A revaluation gain is required by the to berecognised in the statement of total recognised gainsand losses, unless it reverses a previous revaluation lossthat has been recognised in the profit and loss account.This requirement is consistent with paragraph () ofSchedule , which requires the “amount of any profit”(ie gain) “or loss” calculated under the alternativeaccounting rules to be “credited to a separate reserve(the revaluation reserve)”. The requirement for arevaluation gain to be recognised in the profit and lossaccount to the extent that it reverses a revaluation losspreviously recognised in the profit and loss account isconsistent with paragraph () of Schedule , whichexplicitly authorises transfers to take place between therevaluation reserve and the profit and loss accountprovided that the relevant amount was previouslycharged to that account.

The requires all revaluation losses that are clearlydue to the consumption of economic benefits to berecognised in the profit and loss account. Thisrequirement is consistent with paragraph () ofSchedule , which requires provisions for depreciationor permanent diminution in value to be recognised inthe profit and loss account.


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For other revaluation losses where it can bedemonstrated that the recoverable amount of the assetis greater than its revalued amount, the requiresthe difference between recoverable amount andrevalued amount to be recognised in the statement oftotal recognised gains and losses. In this situationthere has been no diminution in value underparagraph () of Schedule and therefore the losscan remain in the revaluation reserve in accordancewith paragraph () of Schedule .

For other revaluation losses where it cannot bedemonstrated that the recoverable amount of the assetis greater than its revalued amount, an impairment lossarises. Where a fixed asset is impaired, it will alwaysbe the case that both the value in use and the netrealisable value will be below the carrying amount. Inthe case of a revalued fixed asset, it would bereasonable to reflect the uncertainty as to thepermanence of any impairment by treating it as areversal of any revaluation previously recognised.Such an impairment would be dealt with through thestatement of total recognised gains and losses (ie as arevaluation reserve movement). However, if theimpairment results in a carrying amount belowdepreciated historical cost, then, as in a pure historicalcost context, it would be reasonable to treat that partof the impairment as being of a permanent nature andcharge it to the profit and loss account.

Depreciation

Where a fixed asset has a limited useful economic life,paragraph of Schedule requires its purchase priceor production cost less its estimated residual value tobe written off systematically over the period of theasset’s useful economic life.


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Paragraph () of Schedule requires thedepreciation of revalued assets to be calculated on thebasis of their latest valuations. Paragraph () allowsa company to include under the relevant profit andloss account heading provisions for depreciation forthe revalued assets based only on their historical cost,provided that the difference between that and theprovision for depreciation calculated on the revaluedamount is shown separately either in the profit andloss account or in the notes. It is unclear, however,whether the whole depreciation charge is required tobe recognised in the profit and loss account (seediscussion in Appendix IV ‘The development of the’).

Disclosure requirements

In addition to the disclosures mentioned in paragraph above in connection with the revaluation of tangiblefixed assets, the following disclosures are required:

(a) Paragraph of Schedule requires the disclosureof the accounting policies adopted by a company(including the policies regarding the depreciationand diminution in value of assets).

(b) Paragraph () requires the disclosure of theamount of interest capitalised, where such a policyis adopted.

(c) Paragraph details the disclosures required of themovement on tangible fixed asset balances for theitems under each of the headings for tangiblefixed assets set out in the balance sheet formats inSchedule , as follows:


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1. Land and buildings

2. Plant and machinery

3. Fixtures, fittings, tools and equipment

4. Payments on account and assets in the courseof construction.

(d) Paragraph () of Schedule requires disclosure,in the directors’ report, of the difference, withsuch precision as is practicable, between thecarrying amount and market value of interests inland, where, in the opinion of the directors, it isof such significance that it needs to be drawn tothe attention of the members of the entity.

Northern Ireland

The statutory requirements in Northern Ireland areset out in the Companies (Northern Ireland) Order. They are identical to and parallel the referencesin the legislation for Great Britain cited above.

Republic of Ireland

The statutory requirements in the Republic of Irelandthat correspond to those cited above for Great Britainare shown in the following table.


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Great Britain Republic of Ireland

Schedule to the The Schedule to Companies Act : the Companies

(Amendment) Act :paragraph paragraph paragraph paragraph paragraph () paragraph ()paragraph (), () paragraph (), () and () and ()

paragraph paragraph paragraph () paragraph ()paragraph () and () paragraph () and ()paragraph () and () paragraph () and () paragraph () and () paragraph () and ()paragraph paragraph paragraph paragraph paragraph (a) and (b) paragraph (a) and (b)

Schedule A to the European CommunitiesCompanies Act (Companies: Group

Accounts) Regulations

Schedule to the The Companies ActCompanies Act , , section *

paragraph ()

Schedule to the European CommunitiesCompanies Act (Credit Institutions:


Schedule A to the European CommunitiesCompanies Act (Insurance Undertakings:



* Note: this section includes a general requirement for the directors’ report to deal withthe state of affairs of the company; there is no specific requirement as in the UKreferences.

A P P E N D I X I I I

C O M P L I A N C E W I T H I N T E R N A T I O N A LA C C O U N T I N G S T A N D A R D S

The main requirements for the recognition,measurement and depreciation of tangible fixed assetsare included in International Accounting Standard(IAS) (revised ) ‘Property, Plant andEquipment’. In addition, some other relevantrequirements are included in IAS (revised )‘Borrowing Costs’.

The requirements in the lead to compliance withIAS and the relevant requirements of IAS in allmain respects, except as discussed below.

Fair/current value

Both the and IAS require that, where a policyof revaluation is adopted, the revalued tangible fixedassets should be carried at current values. IAS usesthe term ‘fair value’ and states that the fair value ofland and buildings, plant and equipment is usuallytheir market value, but where there is no evidence ofmarket value depreciated replacement cost should beused instead.

As explained in Appendix IV ‘The development ofthe ’, the valuation requirements in the arebased on the value to the business model and thereforedefine current value as the lower of replacement costand recoverable amount. The Board believes that thisgives a more precise and clearer indication of theamount at which the asset should be revalued andtherefore prefers this terminology to the use of theterm ‘fair value’.

APPENDIX III - COMPLIANCE WITH INTERNATIONAL ACCOUNTING STANDARDS

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Accordingly, the requires non-specialisedproperties to be valued at existing use value, with theaddition of notional directly attributable acquisitioncosts, if mater ial, to reflect replacement cost.Similarly, specialised properties should be valued usingdepreciated replacement cost. However, propertiessurplus to requirements should be valued at netrealisable value—ie open market value less expectedselling costs, if material. Similar valuation bases arerequired for tangible fixed assets other than property.IAS is silent in respect of whether valuations shouldbe on an existing use basis and whether material directacquisition or selling costs should be added/deducted.

Revaluation gains and losses

The requirements of IAS differ from those in the in two main respects:

• To be consistent with ‘Impairment of FixedAssets and Goodwill’, the requires revaluationlosses that are clearly caused by the consumptionof economic benefits to be recognised in theprofit and loss account (paragraph ). The Boardbelieves that such losses are operating costs similarto depreciation and should be treated as such byrecognition in the profit and loss account. IAS does not have a similar requirement.

• IAS permits only those losses that reverserevaluation gains that were previously recognisedin the statement of total recognised gains andlosses to be recognised in that statement. The requires other losses to be recognised in thestatement of total recognised gains and losses tothe extent that the asset’s recoverable amount isgreater than its revalued amount. The Boardbelieves that such losses, which have beendemonstrated not to be impairments, are in thenature of losses caused by a general fall in prices.


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Depreciation

Both the and IAS state that subsequentexpenditure does not negate the need fordepreciation. However, the takes this one stepfurther by also requiring impairment reviews at theend of each reporting period where depreciation isnot charged on the basis of immateriality or where theremaining useful economic life is estimated to begreater than years.

Disclosures

IAS requires the following additional disclosures:

(a) in general:

• property, plant and equipment pledged assecurity for liabilities,* and the existence andamounts of restrictions on title

• the amount of expenditures on account ofproperty, plant and equipment in the courseof construction

• the amount of commitments for theacquisition of property, plant andequipment.*

APPENDIX III - COMPLIANCE WITH INTERNATIONAL ACCOUNTING STANDARDS

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* These disclosures are required by companies legislation, as follows: in Great Britain, the Companies Act 1985, Schedule 4, paragraphs 48(4), 50(1),50(3) and 50(5). in Northern Ireland, the Companies (Northern Ireland) Order 1986, Schedule 4,paragraphs 48(4), 50(1), 50(3) and 50(5). in the Republic of Ireland, the Companies (Amendment) Act 1986, Schedule,paragraphs 34(1), 36(1), 36(3) and 36(6).

(b) in respect of each class of property, plant andequipment:

• the measurement bases used for determiningthe gross carrying amount

(c) in respect of each revalued class of property, plantand equipment:

• the nature of any indices used to determinereplacement cost

• the revaluation surplus,* indicating themovement for the period and any restrictionson the distr ibution of the balance toshareholders.


* These disclosures are required by companies legislation, as follows: in Great Britain, the Companies Act 1985, Schedule 4, paragraphs 34(2), 42(1)and 46(1). in Northern Ireland, the Companies (Northern Ireland) Order 1986, Schedule 4,paragraphs 34(2), 42(1) and 46(1). in the Republic of Ireland, the Companies (Amendment) Act 1986, Schedule,paragraphs 22(3), 29(1) and 32(1).

A P P E N D I X I V

T H E D E V E L O P M E N T O F T H E F R S

The need for a standard

Many of the principles for determining the cost oftangible fixed assets when they are initially recognisedand measured are well known and accepted.However, as no previous accounting standard dealtwith these issues, differences in practice have arisen.

Many entities adopted a policy of valuing specifictangible fixed assets as permitted by the alternativeaccounting rules in companies legislation.* Previouspractices allowed valuations of assets to be made at anentity’s discretion and there was no requirement forvaluations to be updated in subsequent accountingperiods. Replacing the historical cost of an asset witha valuation provides more relevant information to theuser of the accounts. Nevertheless, the relevance ofthis information diminishes over time as it no longerreflects the current value of the tangible fixed asset.Finally, an entity could revalue some but not all of itstangible fixed assets, with little constraint imposed bythe need to treat similar assets consistently. As a result,it was often difficult to understand the amountsattributable to the entity’s assets and accordingly tomake comparisons from year to year and betweensimilar entities.

APPENDIX IV - THE DEVELOPMENT OF THE FRS

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* For example 65 per cent of companies included in the Company Reporting databasecarried revalued tangible fixed assets in their accounts. However, Company Reportingnoted that half of these companies did not have any valuations that were more recentthan five years old. (Company Reporting No 80 February 1997)

In respect of depreciation, ‘Accounting fordepreciation’, which this supersedes, was generallyregarded as broadly satisfactory. However, it becameapparent that some of the requirements of required clarification. In particular, clarification wassought on the accounting treatment adopted by anumber of entities that did not depreciate certainassets, most commonly properties, on the grounds thatthey were either increasing in value or beingmaintained or refurbished regularly.

The addresses these concerns by specifyingaccounting rules for the initial recognition, valuationand depreciation of tangible fixed assets, other thaninvestment properties. In developing the , theBoard has considered the comments on its initialproposals which were set out in the Discussion Paper‘Measurement of Tangible Fixed Assets’ and on itssubsequent proposals in ‘Measurement ofTangible Fixed Assets’.

Initial cost

Decommissioning costs

In accordance with ‘Provisions, ContingentLiabilities and Contingent Assets’ a provision may berecognised for a present obligation in respect ofdecommissioning costs: such costs may include thoserelating to the dismantling and removal of a facilityand the restoration of a site. Providing for these costsreflects the obligation of the entity that arises as aconsequence of the construction or acquisition of theasset, and which cannot be avoided by the entity’sfuture actions.


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This states that these costs, to the extent that theyqualify for recognition as a provision under ,should be capitalised as a directly attributable cost ofthe relevant asset (even though they may not be paiduntil the end of the asset’s life). Treating these costs aspart of the cost of the relevant asset acknowledges thatthe entity has undertaken the obligation to meet thesecosts in order to derive the benefits of the servicepotential provided by the asset. This has theconsequence that these costs are charged to the profitand loss account as depreciation over the asset’s life.

Donated tangible fixed assets

Charities often receive gifts and donations of assets.Donated tangible fixed assets do not have a cost to thecharity, and therefore their initial measurement shouldbe their current value at the date of donation. As thisis a particular issue for charities, apart from the abovekey principle, the leaves more detailed guidance tothe relevant sector-specific guidance and Statements ofRecommended Practice (SORPs).

Inalienable, historic and similar assets

The Board believes that, in principle, inalienable,*historic and similar tangible fixed assets should berecognised in the balance sheet, to reflect that:

(a) the assets give rise to future economic benefits(although not necessarily in terms of cash inflows),

(b) the entity has stewardship of the assets, and

(c) the entity has invested funds in the assets (throughacquisition, maintenance, restoration etc).


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* Inalienable assets are tangible fixed assets that an entity cannot dispose of withoutexternal consent.

However, the Board accepts that for some assets thatwere not capitalised in the past and for some donatedinalienable, historic and similar assets, the cost ofobtaining a valuation (if indeed a reliable valuation isavailable) may outweigh the benefit to users of theaccounts. In such cases, appropriate disclosures shouldbe made in the notes to the accounts instead. Furtherguidance is available in the relevant sector-specificguidance and SORPs.

Capitalisation of finance costs

The permits the optional capitalisation of financecosts, such as interest. The Board acknowledges thatit would be preferable either to prohibit or to mandatethe capitalisation of finance costs. Conceptually,directly attributable finance costs should be capitalised,for the following reasons:

(a) finance costs are just as much a cost ofconstructing the tangible fixed asset as otherdirectly attributable costs.

(b) capitalising finance costs results in a tangible fixedasset cost that more closely matches the marketprice of completed assets. Treating the financecosts as an expense distorts the choice betweenpurchasing and constructing a tangible fixed asset.

(c) the accounts are more likely to reflect the truesuccess or failure of the project.

However, the Board was influenced by the argumentthat if capitalisation is to become mandatory, in theorynotional interest should also be capitalised. This is acontentious issue and until an internationallyacceptable approach is agreed, the Board favoursmaintaining the optional capitalisation of finance costs,which is consistent with the approach in IAS ‘Borrowing Costs’.


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Subsequent expenditure

The codifies generally accepted accounting practicethat subsequent expenditure on a tangible fixed assetundertaken to ensure that the asset maintains itspreviously assessed standard of performance (ie ‘repairsand maintenance’ expenditure) is recognised in theprofit and loss account as it is incurred, whereassubsequent expenditure that enhances the previouslyassessed standard of performance of the tangible fixedasset is capitalised.

However, the also recognises that it may beappropr iate to capitalise certain subsequentexpenditure that would have been written off to theprofit and loss account in the past as repairs ormaintenance expenditure, but to do so only where thedepreciation of the asset already reflects the reductionof the service potential of the asset that has beenrestored by the expenditure. Where appropriate,tangible fixed assets may be divided into two or moremajor asset components, each component beingtreated separately for depreciation purposes anddepreciated over its own individual useful economiclife. Therefore, when a component is restored orreplaced, that expenditure should be capitalised.

The decision to record a tangible fixed asset as severaldifferent components with different useful economiclives will depend upon the individual circumstances.In practice the Board expects a commonsenseapproach, so that only significant, major componentswith substantially different useful economic lives areidentified and treated separately for depreciationpurposes.


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Before became applicable, some entitiesrecognised as a provision significant costs of futurerepairs, maintenance, inspections or overhauls of theirtangible fixed assets. Under , such future costsare not present obligations of the entity resulting frompast events, and therefore no provision should be madefor them, even if they are required by legislation if theasset is to continue to be used. In these circumstances,an entity should charge such expenditure to the profitand loss account as it is incurred.

Alternatively, the entity may depreciate the relevantpart of the asset that is declining in service potential toreflect the need for future repairs, maintenance,inspections or overhauls (ie to take account of theactual consumption of the asset’s economic benefits)and to capitalise the subsequent expenditure because itresults in the restoration of the asset or replacement ofsome of its components. This latter approach resultsin a charge being recognised in the profit and lossaccount that is similar to what would have beenrecognised under previous (pre- ) practices.However, the charge takes the form not of a provisionfor future expenditure but of depreciation, inrecognition of the fact that economic benefits of theasset have been consumed at a different rate from thatapplicable to the remainder of the asset.


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Valuation

Optional valuation

The codifies present practice whereby thevaluation of tangible fixed assets is optional. By notimposing a requirement either to revalue or not torevalue, the Board is, exceptionally, leaving toindividual preparers of financial statements the task ofweighing the costs and benefits of the alternativeaccounting treatments. However, where a revaluationpolicy is adopted, the imposes conditions toprevent ‘cherry-picking’ which assets are revalued andwhen, by requiring up-to-date valuations of all assetsin the same class.

Frequency of valuation

In determining the guidance in the regarding thefrequency of revaluations in paragraphs -, theBoard had regard to the views of both the RoyalInstitution of Chartered Surveyors (RICS) andrespondents to the earlier proposals in the DiscussionPaper and . It has balanced the benefits tousers of the financial statements of up-to-date andreliable current values with the cost to preparers ofobtaining regular, reliable valuations. This guidancewas prepared pr imar ily for commercial entities.Therefore, charities, public sector and other not-for-profit organisations, which have different cost/benefitconsiderations, may find that different approaches aremore appropriate. Alternative guidance may be foundin the relevant sector-specific guidance and SORPs.


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Basis of valuation

As mentioned in the Board’s draft Statement ofPrinciples for Financial Reporting, the current valueof an asset is determined by reference to the value tothe business model. The value of an asset to thebusiness (ie its current value) is the value that isrelevant to economic decision-making, ie the loss thatthe entity would suffer if it were deprived of the asset.This can be portrayed diagrammatically as follows:

If the entity is to continue in its existing business at itscurrent volume (or greater), the value to the businessof a tangible fixed asset that is used in the business willnormally be its replacement cost. As long as the assetis not impaired (in which case recoverable amountwould be less than replacement cost), the entity, ifdeprived of the asset, would replace it with anothersimilar asset for the same use.


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Value to the business = lower of

Replacement cost and Recoverable amount= higher of

Value in use and Netrealisable

value

For non-specialised properties, existing use value(EUV), with the addition of notional directlyattributable acquisition costs (where material), is thebasis that more closely approaches the concept ofreplacement cost (ie the least cost of purchasing theremaining service potential of the asset at the date ofvaluation). Notional directly attributable acquisitioncosts are included where material, as they form part ofthe cost to the entity of replacing the asset. EUVreflects the replacement of the service potential that isused by the owner rather than alternative possible uses.

Normally EUV will be no greater than open marketvalue (OMV) as the latter reflects the additionalpossible uses that are ignored in arriving at EUV (forexample, a factory located on the edge of anexpanding town may have greater value as a potentialresidential property development than as an industrialsite). In most cases, where a non-specialised propertyis fully developed for its most beneficial use, it isexpected that the EUV will equal OMV with vacantpossession. However, in some circumstances EUVmay be higher than OMV. This may be the effect, forexample, of restrictive alienation clauses in headleases,planning consents that are personal to the presentoccupier, or known contamination that does not affectthe existing use of the non-specialised property. All ofthese would lower OMV, but would be disregarded indetermining EUV as they do not affect the cost ofreplacement. Therefore, the requires furtherinformation about OMV in the notes to the financialstatements where OMV is materially different fromEUV.


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A concern was raised that in certain limitedcircumstances EUV may not provide an adequatemeasure of the replacement cost of a non-specialisedproperty. This was due, in part, to the following twofactors:

• When valuing a property with adaptation works(ie structural changes and specialised fittings madeto the shell of a property to meet the particularneeds of the individual business), both OMV andEUV are often lower than the original cost of theproperty. This is because the specialised nature ofthe adaptation works means that they are eithernot required by other entities or could not beused by them and therefore they are ascribed alow or nil market value.

• In rare cases, an entity may hold an exceptionallylarge property that because of its size would beunlikely to be purchased in its present state by asingle purchaser but might well be of interest to anumber of purchasers if it was divided intocomponents. In this situation it is unlikely thatevidence of market transactions of similarexceptionally large properties exists.

The Board has discussed these issues with the RICS.The first issue may be addressed by treating theadaptation works and shell of the property as separateassets, in accordance with the RICS Appraisal andValuation Manual, Practice Statement .. Becausethere is no market for the adaptation works they areheld at cost or depreciated replacement cost, and theshell of the body (pre-adaptation works) is valuedusing EUV.


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For exceptionally large properties, the RICS hasindicated that it is prepared to consider amending thecommentary to the definition of EUV, to include thepotential for breaking up such properties into smallerunits.

For certain properties no EUV or OMV can bedetermined, owing to their specialised nature andbecause they are rarely sold on the open market,except as part of a sale of the business in occupation.Such specialised properties are therefore valued on thebasis of depreciated replacement cost.

If an entity were deprived of a tangible fixed asset thatwas surplus to requirements, then it would not replacethat asset with another similar asset with the sameservice potential. In this situation, consistently withthe value to the business model, the relevant valuationbasis is not replacement cost or value in use, but rathernet realisable value. Therefore, the requiresproperties surplus to requirements to be valued usingOMV less any material expected directly attributableselling costs. Selling costs are deducted to reflect thenet realisable value of the asset to the entity.

Similar valuation bases are to be used for tangible fixedassets other than properties.

Reporting gains and losses on revaluation

The Board believes that, in principle, downwardrevaluations fall into two general groups—those thatare clearly caused by a consumption of economicbenefits (eg physical damage or a deterioration in thequality of the service provided by the asset) and thosecaused by a general fall in prices (eg a general slump inthe property market). The first type is similar todepreciation and is treated as such, whereas the secondtype is more like a valuation adjustment that would fallto be recognised in the statement of total recognisedgains and losses.


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When it is obvious that there has been a consumptionof economic benefits, the asset is clearly impaired andthe loss recognised in the profit and loss account,which is consistent with the treatment in ‘Impairment of Fixed Assets and Goodwill’.

However, in most cases it is difficult to allocate adownward revaluation to one or other group withcertainty. In order to provide objectivity in thetreatment of revaluation losses, the requires thatwhere there is doubt whether the fall in value iscaused by a reduction in the quantum of the servicepotential, the loss should be recognised in thestatement of total recognised gains and losses until thecarrying amount of the asset reaches its depreciatedhistorical cost. Any further fall in value should berecognised in the profit and loss account, except to theextent that it can be demonstrated that the tangiblefixed asset is not impaired—ie that the recoverableamount exceeds the revalued amount; such a fall isrecognised in the statement of total recognised gainsand losses instead.

Where the type of fall in value is unclear, splitting therevaluation loss between the statement of totalrecognised gains and losses and the profit and lossaccount is necessarily arbitrary, because it dependsupon whether the fall in value is above or belowdepreciated historical cost. However, this treatmenthas the advantage of being consistent with , IAS (revised ) ‘Property, Plant and Equipment’and IAS ‘Impairment of Assets’ (although someother aspects of the treatment of revaluation gains andlosses in the are not consistent with IAS , asnoted in Appendix III ‘Compliance with InternationalAccounting Standards’).


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The Board recognises that the treatment of revaluationlosses in the represents a pragmatic solution and,together with the other members of the G+,* isdeveloping the above approach further in connectionwith its project on reporting financial performance.To this end, the Board, as part of the G+, intends toissue later in a Discussion Paper that willconsider the development of a new framework forreporting gains and losses with different characteristics.The Paper will explore the above concepts further andconsider ways of refining the approach to revaluationlosses. This process may, in due course, lead torevisions to the in this area, in conjunction withfuture developments in the reporting of financialperformance and revisions to ‘ReportingFinancial Performance’.

Revaluation gains are most likely to reflect a generalrise in prices and therefore are recognised in thestatement of total recognised gains and losses asvaluation adjustments. Nevertheless, revaluation gainsthat reverse previous revaluation losses on the sametangible fixed asset are recognised in the sameperformance statement (after adjusting for subsequentdepreciation) as the revaluation loss it reverses.


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* The G4+1 is a group of representatives from the standard-setting bodies ofAustralia, Canada, New Zealand, the UK and the USA, and from the InternationalAccounting Standards Committee.

Reporting gains and losses on disposal

requires gains and losses on disposal to berecognised in the profit and loss account in the periodin which the disposal took place, calculated as thedifference between carrying amount and the net saleproceeds. This treatment of gains and losses ondisposals is inconsistent with the treatment of gainsand losses on revaluation. For example, a revaluationgain would be recognised in the statement of totalrecognised gains and losses, whereas a subsequent gainon disposal would be recognised in the profit and lossaccount, even though both gains were due to the samefactors (ie rising market prices).

therefore proposed amending the requirementin , so that immediately before recording thedisposal of a tangible fixed asset, the carrying amountof the asset would be adjusted to the disposal proceedsand any gain or loss resulting from such an adjustmentwould be recognised in accordance with therequirements for reporting revaluation gains and losses.Under these proposals those losses on disposal thatwould be recognised in the profit and loss account areregarded as a form of consumption similar todepreciation. This proposal was to apply to alltangible fixed assets, whether or not a policy ofrevaluation had been adopted.

The responses to made it clear that thisproposal was not acceptable at present. Respondentsargued that:

• the development of the role of the statement oftotal recognised gains and losses in waspremature, particularly as the direction andoutcome of the Board’s intended project toreview was unclear.


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• the proposal raised anomalies for tangible fixedassets held at historical cost. Gains and losses ondisposal reflect the accuracy of depreciationpolicies and estimated residual values, andtherefore it was argued that they should berecognised in the same performance statement asdepreciation.

• the proposal is inconsistent with the treatment ofgains and losses on disposals of businesses,subsidiaries and investments.

The Board acknowledges that more work needs to becarried out in this area and intends to revisit thisaspect in the course of its review of .Accordingly the retains the requirements of for the treatment of gains and losses on disposal.

Depreciation

The objective of depreciation

Depreciation is a measure of the cost (historical cost orrevalued amount) of the economic benefits of thetangible fixed asset that have been consumed by theentity during the period.

It is sometimes argued that a valuation approach todepreciation should be adopted especially where anentity revalues its tangible fixed assets. The Boarddisagrees with this approach because it does notdistinguish between depreciation (ie the amountconsumed) and other sources of value changes andtherefore results in a reduced or nil depreciationexpense in a period of rising prices, even though thereis a cost to the entity of using the asset to generate itsrevenues.


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The Board does not accept that the increase in thevalue of a tangible fixed asset justifies non-depreciation. Wherever the asset has a finite expectedlife, part of the asset representing one year’s economicbenefits of the asset is consumed in the year. Therevenues generated by the entity through using thetangible fixed asset in the business justify a charge tothe profit and loss account for using that asset. Anincrease in value, or an increase in residual value,whether ar ising from external factors or fromrefurbishment, should impact only on the parts of theasset representing future economic benefits.

Split depreciation

Some have argued that the depreciation charge on arevalued tangible fixed asset should be split, and onlythat part relating to the historical cost of the assetcharged to the profit and loss account. The part ofthe depreciation charge that corresponds to therevaluation movement would be charged instead tothe statement of total recognised gains and losses.Such split depreciation would remove a disincentive torevalue fixed assets and the depreciation charged to theprofit and loss account would represent an allocationof the actual cash outlay.

The issue of split depreciation raises legalconsiderations. In Great Britain, paragraph () ofSchedule to the Companies Act * states that:


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* In Northern Ireland, the Companies (Northern Ireland) Order 1986, Schedule 4,paragraph 32(3). In the Republic of Ireland, the Companies (Amendment) Act 1986, Schedule,paragraph 20(3).

“Where sub-paragraph () applies in the case of anyfixed asset the amount of the provision for depreciationin respect of that asset ... may be the historical costamount instead of the adjusted amount, provided that theamount of any difference between the two is shown separatelyin the profit and loss account or in a note to the accounts.”(emphasis added)

It is unclear whether the above-mentioned paragraphpermits split depreciation. The Board thereforeobtained a legal opinion on this issue. That opinionnoted that the practical effect of the paragraph asdrafted makes it arguable that the entirety of a givencharge need not pass through the profit and lossaccount. However, the opinion went on to note theimplications of the Marleasing* decision. This caseindicates that national courts of EU Member States areunder a Community law obligation to interpretnational law so that it conforms, so far as possible,with the underlying directive (in this case, the FourthDirective). Articles . and . (c)(cc) of the FourthDirective prohibit split depreciation.


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* Marleasing S.A. vs La Commercial Internacional de Alimentation S.A. (C-106/89) [1992 CMLR 305].

The Board also considered an alternative method ofachieving split depreciation. With this method thefull depreciation charge would be included in theprofit and loss account along with a credit from therevaluation reserve equal to the depreciation on therevaluation surplus. In Great Britain, section () ofthe Companies Act * permits depreciation on arevaluation surplus to be treated as a realised profit andparagraph () of Schedule * permits an amount tobe transferred from the revaluation reserve to theprofit and loss account if it represents a realised profit.However, total depreciation and the credit from therevaluation reserve would be required to be separatelydisclosed in the profit and loss account (ie the creditfrom the revaluation reserve would not be permittedto be offset against the charge for depreciation).

The Board disagrees with the introduction of thisalternative for three reasons:

(a) It would involve recycling amounts previouslyrecognised in the statement of total recognisedgains and losses—ie via a transfer from therevaluation reserve to the profit and loss account.The transfer from the revaluation reserve wouldresult in a charge to the statement of totalrecognised gains and losses. Such a charge has nomeaning.

(b) It is inconsistent with the Board’s view ofdepreciation as a measure of the cost of theeconomic benefits consumed during the period.


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* In Northern Ireland, the Companies (Northern Ireland) Order 1986, article 283(2)and Schedule 4, paragraph 34(3). In the Republic of Ireland, the Companies (Amendment) Act 1983, section 45(6)and the Companies (Amendment) Act 1986, Schedule, paragraph 22(4).

(c) An approach that recognises depreciation on thehistorical amount of an asset in the profit and lossaccount and depreciation on the revalued amountin the statement of total recognised gains andlosses implies that the purpose of the profit andloss account is invariably to report historical costprofits and losses. The Board rejected such anobjective during its development of . Inaddition, requires a note of historical costprofits and losses where there is a mater ialdifference between the results as disclosed in theprofit and loss account and the result on anunmodified historical cost basis.

The Board believes that depreciation measured atcurrent prices represents the best measure of theoperating cost of using the asset in question. This isbecause the purpose of charging depreciation to theprofit and loss account is to show the cost of theeconomic benefits consumed during the period, anddepreciation based on current value reflects the costthat the entity could have avoided if it had not usedthe asset. In addition, it also provides a consistencybetween the profit and loss account and the balancesheet and is consistent with companies legislation.Hence, the requires the depreciation charge in theprofit and loss account to be based on the revaluedamount of the asset, whenever the asset has beenrevalued.

Non-depreciation of tangible fixed assets

There has been a growing trend towards the non-depreciation of certain tangible fixed assets,particularly property. The main circumstances inwhich it is argued that no depreciation need becharged are where maintenance or refurbishment iscarried out regularly, significantly extending the usefuleconomic life of the asset or maintaining the residualvalue of the asset.


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The Board believes that the estimate of a tangiblefixed asset’s useful economic life cannot be extendedlimitlessly through maintenance, refurbishment,overhaul or replacement of components of the asset.This is because the physical life of a tangible fixedasset, other than non-depreciable land, cannot beindefinite. At some point in time it will not beeconomic to continue to maintain and restore theasset and it will have scrap value only. Accordingly,the states that subsequent expenditure on atangible fixed asset that maintains or enhances thepreviously assessed standard of performance of theasset does not negate the need to charge depreciation.

The Board acknowledges that, with regularmaintenance and restoration and where economic ortechnological obsolescence is unlikely, some tangiblefixed assets (eg heritage buildings, fine art) may havevery long useful economic lives before they need amajor refit or restoration or are scrapped. In suchcases the per iodic depreciation charge may beimmaterial.

The useful economic life of a tangible fixed asset isdefined as the period in which the asset is expected tobe used by the entity in its business. Therefore theuseful economic life to the entity may be substantiallyshorter than the asset’s total economic life, particularlywhere the asset management policy of the entityinvolves the disposal of assets after a specified time orafter consumption of a limited portion of theeconomic benefits embodied in the asset. In addition,the asset may have an alternative use that has a longereconomic life. In these circumstances, with regularmaintenance and repairs, the residual value of the assetat the end of the useful economic life to the entity,which will reflect the remaining economic value ofthe asset, may not be insignificant or mater iallydifferent from the carrying amount of the asset.


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The Board believes that, apart from non-depreciableland, the only grounds for not charging depreciationon a tangible fixed asset are that the depreciationcharge and related accumulated depreciation balanceare not material, owing to a long estimated remaininguseful economic life or high residual value. By notcharging depreciation, however, there is greater riskthat recoverable amount will fall below the carryingamount in the future. Where depreciation is notcharged, therefore, the requires impairment reviewsto be undertaken at the end of each reporting period.

Similarly, the longer the useful economic lives assignedto tangible fixed assets, the greater is the risk that therecoverable amounts will fall below the carryingamounts in future. Where a depreciation periodexceeds years, the Board believes that the risk issufficiently high to require depreciation to besupplemented by reviews for impairment at the end ofeach reporting period.

Review of useful economic life and residual value

Changes in the useful economic life or residual valueof a tangible fixed asset generally arise from newinformation or developments and therefore do notrelate to past periods. For that reason the requireschanges in the useful economic life and residual valueof an asset to be accounted for prospectively over itsremaining useful economic life. Estimates of residualvalue should be based on prices prevailing at the dateof acquisition or latest revaluation. Unless the asset isbeing revalued, therefore, the estimate of residualvalue should not be altered simply because ofchanging prices.


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Changes made following exposure of FRED 17

The majority of respondents to were broadlysupportive of its proposals, with the exception of theproposals in respect of the treatment of gains and losseson disposal and the consequential amendment to , which proved controversial. The Board hasaccepted the argument that the changes to recognitionof gains and losses on disposal should not beintroduced in isolation from a review of other aspectsof . It has, therefore, not incorporated theseproposals in the requirements of the , maintainingthe treatment in , as outlined above.

In the light of other comments made by thoseresponding to , a number of changes havebeen made to its proposals. The most significantchanges are:

• the exemption of investment properties from therequirements of the . The treatment ofinvestment properties is being considered furtherby the Board, in tandem with the internationalproject on investment properties. The Boardbelieves that, until this work is complete, it isappropriate to maintain the status quo as set outin ‘Accounting for investment properties’.

• the inclusion of an explanatory paragraphexplaining that, when valuing a non-specialisedproperty, the adaptation works may be treatedseparately from the shell of the building.

• the amendment of the requirements for reportinggains and losses on revaluation that reverseprevious losses or gains, to take into accountsubsequent depreciation. This ensures that therequirements are consistent with the equivalentrequirements in .


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• the deletion of the proposed requirement in to disclose in the notes to the financialstatements any significant differences between thecur rent value and the car rying amount ofproperties that are not revalued. The Boardagreed with respondents that the requirement incompanies legislation to make a similar disclosurein the directors’ report was sufficient.

• the addition of a new requirement for impairmentreviews to be performed in each reporting periodwhen either no depreciation charge on a tangiblefixed asset is made on the grounds that it wouldbe immaterial or the estimated remaining usefuleconomic life of the asset exceeds years. Thisreplaces the proposal in that it should beassumed that the residual value of a tangible fixedasset was materially different from its carryingamount, unless the entity intends to dispose of theasset within about a year from its date ofacquisition. The Board accepted respondents’comments that the assumption in did notreflect economic reality in certain circumstances.The new requirement is explained in paragraphs- above.

• the addition of a new requirement in respect ofthe use of renewals accounting as a method ofestimating the depreciation of infrastructure assets.

• the addition of a requirement to disclose areconciliation of the movements on the carryingamount for each class of tangible fixed assets.This is consistent with the equivalent requirementin companies legislation, but is repeated in the for those entities that do not fall within the scopeof companies legislation, and to ensure that thereconciliation is given for each class of assetsadopted for revaluation purposes.


• the removal of the paragraph in ‘Accounting for investment properties’ thatexempts charities with investment properties fromfollowing the requirements of , to beconsistent with the SORP ‘Accounting byCharities’ issued by the Charity Commissionersfor England and Wales.


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