Tangible fixed assets - FRS 15

FRS 15 - in force for year ends after 22 March 2000

This Standard addresses a number of difficult issues in accounting for tangible fixed assets but leaves companies to make choices on key matters.

Summary

Tangible fixed assets may be carried in the balance sheet at cost or valuation (less any subsequent depreciation).However valuations may not be adopted on any piecemeal basis, but only as a matter of accounting policy (ie that the relevant assets are carried at market value) in which case: - all the assets of a particular class must be carried at valuation- valuations must be kept up to date- for properties, an external valuation by a qualified valuer is required at least every five years (even for private companies).
Rules for the capitalisation of costs incurred in the construction of tangible fixed assets are set out for the first time.These are deliberately restrictive, permitting capitalisation only of costs directly attributable to bringing the asset into working condition. Hence- maintenance, administrative costs and overheads may not be allocated to an asset, nor can costs incurred during an interruption of active development- the costs or losses of any start up or low capacity period of normal operation may not be capitalised.On the other hand, future decommissioning costs are now deemed costs of construction (corresponding to the liability being provided under FRS 12).
Attributable finance costs can be capitalised, now gross of tax, but as with valuations, this is a matter of accounting policy.
The ASB states (in our view correctly) that conceptually attributable finance costs should be capitalised. However, taken to its full extent, this concept would require the capitalisation of notional interest by a company utilising its spare cash to finance the construction of an asset. As there is no present consensus on the capitalisation of notional interest the ASB prefers to leave this issue, and hence the capitalisation choice, open.
Depreciation should allocate the cost (or revalued amount) of an asset less its residual value over the useful economic life of that asset.So, no change of principle, but?- useful lives and residual values must be reviewed every year- elements of a fixed asset should be depreciated separately where they have different useful economic lives (eg land and buildings, shops and shop fittings, furnaces and furnace linings)- where there is no depreciation charge or where the useful economic life is estimated to exceed 50 years, the asset should be subject an impairment review in accordance with the full rigour of FRS 11.

Commentary

In theory the Standard should bring to an and an era when the balance sheet figure for properties could comprise the meaningless sum of a 1964 cost, a 1974 purchase at a 1984 valuation, and a 1994 purchase at a 1998 valuation, and where the disclosed profit on a property disposal depended upon whether or when an a valuation had been included in the accounts. However, under the transition rules, a company may (with adequate disclosure) leave unsystematic past valuations in its balance sheet, so that the anomalies are likely to die out only slowly. (Companies may alternatively reverse out all their past revaluations on implementing the new Standard.)

The main impact of the Standard could therefore be its effective tightening of the cost capitalisation rules, although this effect will not be explicit except for those companies having to make substantial prior year adjustments in respect of past costs.

The ASB can be congratulated for calling time on arguments over whether or not buildings must be depreciated; instead, the preparers of accounts must decide for themselves. But those who would not depreciate must recognise that there is almost bound to be a year in which their impairment review necessitates a substantial charge to the profit and loss account.

This website is intended for general guidance only. No responsibility for loss occasioned to any person acting as a result of any material in this publication can be accepted.

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