2.9 Depreciation and revaluation of fixed assets

All fixed assets, tangible or intangible things purchased to be used by the society to generate revenue over time, must be capitalised in the society’s accounts. FRS102 allows for three different methods of accounting for fixed assets. It is important to understand them and apply the right one as it can make a material difference to the overall surpluses of the society and therefore its ability to allow for share withdrawal. The approach taken to depreciation and revaluation of fixed assets should be covered in the withdrawal policy of the society. 

Fixed assets must be classified as either “Investment Assets” or “Property, Plant and Equipment” which will determine the appropriate accounting treatment, either the Fair Value, Historic Cost or Revaluation method. 

Investment assets are all fixed assets that are used to earn rent or capital gains. 

Property, plant and equipment are all assets that are used either primarily for social benefit, in the production or supply of goods and services or for administrative purposes. 

Investment assets must be accounted for using the Fair Value method.

Fair Value method

This method is only allowed for Investment Property, or any other investments such as stocks and shares.

The initial measurement of the Investment Property should include all costs associated with the purchase of the asset. This must include:

• The cost of the asset;
• Any legal fees associated with its purchase;
• Any property taxes e.g. Stamp Duty Land Tax, Land and Buildings Transaction Tax or Land Transaction Tax;
• Any transactions costs;
• Any interest on bridging loans for the period required to get the asset ready for its intended use;
• Any other cost that can be directly attributable to its purchase.

Any subsequent or future measurements must be fair value. This must be a market-based valuation, made by a professional valuer. Any changes in the value from last year must appear as an income or expense in the profit and loss account. This could change the retained earnings and profitability of the society and theoretically its ability to finance the withdrawal of share capital. 

In order to decide whether a society can use any increases in value to finance share withdrawal, consideration should be given to whether the society can realise that increase in value without affecting the functioning of the society. If it cannot then realise the increase in value as cash, without affecting the functioning of the society, it cannot use that increase to finance the withdrawal of share capital. 

Historic Cost method

This method is only available to property, plant and equipment and intangible fixed assets. It is an accounting choice for accounting for property, plant and equipment between Historic Cost and the Revaluation methods. Whichever method is chosen, it must be applied to all assets in that asset class e.g. buildings, machinery, fixtures and fittings, equipment and vehicles. 

The initial measurement of property, plant and equipment is the same as with the investment assets and must include all costs associated with the purchase of the assets. 

Any subsequent or future measurements must be at the last book value, less any subsequent depreciation and impairment. An asset must be depreciated to down to their residual value over the course of their useful economic lives. Depreciation can be calculated using straight line or reducing balance methods – the choice based on when the expected economic benefits of the assets occur. If the economic benefits are spread out equally over the life of the assets, then use the straight line method. If they occur largely at the start of the life of the asset, then use the reducing balance method. 

Revaluation method

This method is only used for property, plant and equipment and some intangible fixed assets. 

The initial measurement of is the same as with investment assets and must include all costs associated with the purchase of the asset. 

Any subsequent or future measurements must involve the asset being revalued regularly enough that its value in the accounts does not materially differ from its fair value. The value must be stated in the accounts as its last revaluation, less depreciation since that date. 

Any increases in value (unless reversing a previous loss) must be recognised as a gain in an equity account – the revaluation reserve. If it is reversing a previous loss that was recognised in the profit and loss account, for up to that amount it must be recognised in the profit and loss, with the excess recognised as a gain and in the revaluation reserve. 

Any reduction in value (unless reversing a previous gain) must be recognised as an expense in the profit and loss. If the reduction is reversing a previous gain, then to that extent it must be shown as a reduction in the revaluation reserve, with any excess recognised as an expense in the profit and loss. 

Crucially, as the revaluation reserve is outside the profit and loss and a society cannot realise the value of property, plant and equipment without affecting the operation of the society, societies should not fund the withdrawal of share capital from the revaluation reserve.