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Accounting for tangible fixed assets - FRS15 demands best practice Back  
The implications of FRS15 on investment properties may lead to more cautious investment strategies writes Roseanne Kelly
FRS15 comes into force for accounting periods ending on or after 23 March 2000, replacing SSAP 12 on Depreciation. It applies to all tangible fixed assets except investment properties. However, properties do not qualify as investment properties until after completion, so FRS 15 does affect measurement of their cost. It eliminates ‘cherry-picking’ valuations by requiring valuation and updating by entire classes of asset. It clarifies in particular the circumstances in which depreciation may be regarded as immaterial, and the consequences for accounting. Arguably, what it does essentially is to codify and enforce existing best practice.

Inconsistency has been the main criticism of accounting for tangible fixed assets. The Companies Acts leave great freedom to choose when to revalue assets and to select for revaluation those assets which have risen in value and to ignore those which have fallen temporarily. Now FRS 15, issued by the ASB, requires consistency of valuations by insisting that all assets of the same ‘class’ must be revalued together and that those valuations are thereafter kept up to date annually.

At the same time, FRS 15 has tackled the other principal criticism, that depreciation required by the Companies Acts for many assets had appeared to decline into a virtually voluntary procedure. FRS 15 codifies the limited circumstances under which no depreciation is acceptable, and
imposes the discipline of an annual impairment test to check that the result remains acceptable

Cost & subsequent expenditure

a) Limited to directly attributable costs

A tangible fixed asset should initially be measured at its cost, but only those costs that are directly attributable to bringing the asset into working condition for its intended use may be included in that measurement. These include acquisition costs; site preparation; delivery and handling; installation; dismantling and site restoration (if recognisable as a provision under
FRS 12); labour costs of own employees arising directly from construction; and incremental costs that would have been avoided only if the asset had not been constructed/acquired.

b) Period of construction

Capitalisation ceases when substantially all activities necessary to get the asset ready for use are complete, even if the asset has not yet been brought into use.

c) Finance costs

Finance costs may be capitalised, as a consistent policy for all tangible fixed assets, where they are directly attributable to the construction of the asset, but may not exceed the total finance costs incurred in the period. For this purpose, if any asset is made up of parts that are capable of being used while construction continues on the rest, the completed parts should be treated as separate assets and further capitalisation of finance costs on them should cease.
This point may have particular significance for the measurement of the cost of investment properties, which will be determined under FRS 15 because they do not qualify as investment properties under SSAP 19 until they are completed. FRS 15 therefore challenges existing conventions for capitalising interest on the construction of investment properties until a high proportion of the property (say, 75%) has been let. Now, capitalisation must cease when the property is available for letting, not when let.

d) Subsequent expenditure

Capitalisation is appropriate where: the expenditure enhances the asset; separately depreciated components are restored; or it relates to major overhauls/inspections restoring the asset’s economic benefits, the consumption of which has been reflected in depreciation.


a) Valuation regime

If tangible fixed assets are to be revalued, a policy of revaluation must be adopted which relates to one or more specific class of fixed asset. Revalued assets must be carried at current value at each balance sheet date. A regime of full and interim valuations is laid down for properties, including prescribed involvement of external valuers to validate the work of internal valuers; and the use of annually updated market values and/or indices is prescribe for other fixed assets.

b) Class of assets

Little guidance is given on what the standard means by a class beyond the definition: A category of tangible fixed assets having a similar function or use in the business of the entity.

c) Reporting gains and losses on revaluation/disposal

Revaluation gains are recognised in the STRGL, except to the extent that they reverse (after adjusting for subsequent depreciation) revaluation losses previously recognised in the profit and loss account. When determining in which performance statement gains and losses should be recognised, this must be decided asset by asset and not by aggregating an entire class.


A change in method is permissible only if it gives a fairer presentation; any such change is not a change of accounting policy, and accordingly the existing carrying amount will be depreciated thereafter by the new method.

Two situations are laid down where an annual impairment test, per FRS 11, is required: (i) where no depreciation charge is made on the grounds that it would be immaterial (either because of the length of the estimated remaining useful economic life or because the estimated residual value is not materially different from the carrying amount); or (ii) where the estimated remaining useful economic life exceeds 50 years. Assets with more than 50 years life to run suffer both a depreciation charge (unless immaterial) and the annual impairment test.

FRS 15 has removed the long-standing SSAP 12 exception which allowed the effect of a change in economic life to be recognised in the P&L immediately if spreading it forward would materially distort future profits.

Additional Disclosure

FRS 15 re-enacts most of SSAP 12’s disclosure requirements and repeats several of the Companies Acts requirements. The following therefore are just some of those which FRS 15 imposes as additional requirements.

Finance costs

Where a policy of capitalising finance costs is adopted, disclose:

i) accounting policy adopted; and amount of finance costs capitalised in period (previously a Stock Exchange requirement only); ii) amount of finance costs recognised in the P&L in period.


For each class of revalued assets, disclose:i) name and qualifications of valuer or valuer’s organisation and description of its nature (previously, the requirement was limited to
name and qualification); ii) with basis/es of valuation, whether notional directly attributable acquisition costs have been included or expected selling costs deducted;

For revalued properties, disclose:

vii) where valued as ‘fully-equipped operational entities having regard to their trading potential’ (e.g., hotels), a statement to that effect and their carrying amount.


For each class of tangible fixed assets, a new requirement is to disclose: financial effect of change in period of estimates of either useful economic lives (was in SSAP 12) or residual values.

Transitional arrangements

On implementation of FRS 15 for the first time, the standard offers alternative options in respect of previously revalued assets for those entities that choose not to adopt a policy of revaluation; either:

i) retain existing book amounts, i.e., ‘freeze’ them, and disclose: fact that transitional provision being followed, and valuation not updated; and date of last revaluation; or (ii) restate to historical amounts as change in accounting policy.


The significance of FRS 15 is that it completes ASB’s major exercise to discipline the treatment of fixed assets. The combination of: FRS 10, Goodwill and intangible fixed assets;

FRS 11, Impairment of fixed assets and goodwill; FRS 12, Provisions; and
FRS 15 provides a powerful shake-up of practice, and should lead to noticeably greater consistency of treatment and comparability between similar entities. One likely result of the introduction of FRS 15 is an overhaul of fixed asset registers, including software, and of
the detail in which fixed assets are recorded. Some decisions must now be made, about: valuation policy; interest capitalisation policy; treatment of periodic maintenance, overhaul and refurbishment; and choice of asset lives in the light of requirements for an annual impairment review.

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