Fixed assets (also called non-current assets) are resources a business holds for long-term use in its operations rather than for resale. They provide economic benefit over multiple accounting periods and form a significant part of most companies’ balance sheets.
Under FRS 102 and the Companies Act 2006, fixed assets must be recognised, measured, and disclosed according to specific rules that ensure the financial statements give a true and fair view.
Classification of Fixed Assets
Fixed assets are divided into three main categories:
Tangible Fixed Assets
Tangible fixed assets are physical resources with a useful life of more than one accounting period:
| Asset Type | Examples |
|---|---|
| Land and buildings | Offices, warehouses, factories |
| Plant and machinery | Production equipment, specialist tools |
| Fixtures and fittings | Office furniture, shelving, lighting |
| Motor vehicles | Cars, vans, lorries |
| Computer equipment | Servers, desktops, laptops |
| Leasehold improvements | Fit-out costs on leased premises |
Intangible Fixed Assets
Intangible fixed assets are non-physical assets with a useful life of more than one year:
| Asset Type | Examples |
|---|---|
| Goodwill | Arising from business acquisitions |
| Patents | Rights to inventions or processes |
| Trademarks | Registered brand names and logos |
| Software | Purchased or internally developed software |
| Licences | Rights to operate or use intellectual property |
Investments
Long-term investments held as fixed assets include:
- Shares in subsidiary or associated companies
- Long-term loans to group companies
- Investment properties
Recognition and Initial Measurement
A fixed asset is recognised when:
- It is probable that future economic benefits will flow to the entity
- The cost can be measured reliably
The initial cost of a tangible fixed asset includes:
| Component | Example |
|---|---|
| Purchase price | The amount paid to the supplier |
| Import duties and non-refundable taxes | Customs duties on imported equipment |
| Directly attributable costs | Delivery, installation, professional fees for commissioning |
| Site preparation costs | Groundwork or structural modifications |
| Estimated dismantling costs | Where there is an obligation to restore a site (recognised as a provision) |
VAT is not included in the cost if the business is VAT-registered and can reclaim the input tax.
Example: Acquiring a Machine
A company purchases a machine for £25,000 plus £5,000 VAT. Delivery costs £800 and installation costs £1,200. The company is VAT-registered.
| Component | Amount (£) |
|---|---|
| Purchase price (net of VAT) | 25,000 |
| Delivery | 800 |
| Installation | 1,200 |
| Total capitalised cost | 27,000 |
The journal entry:
| Account | Debit (£) | Credit (£) |
|---|---|---|
| Plant and machinery | 27,000 | |
| VAT input tax | 5,000 | |
| Bank / Accounts payable | 32,000 |
Depreciation
Depreciation is the systematic allocation of the cost of a tangible fixed asset over its estimated useful life. It matches the cost of the asset to the periods that benefit from its use, in accordance with the accruals concept.
Depreciation Methods
| Method | Calculation | Best Suited For |
|---|---|---|
| Straight-line | (Cost - Residual Value) / Useful Life | Assets that provide equal benefit each year |
| Reducing balance | Fixed % applied to net book value each year | Assets that lose value faster in early years |
| Units of production | Based on output or usage | Assets where wear relates to usage, not time |
Straight-Line Example
Machine costing £27,000 with an estimated useful life of 9 years and residual value of £1,800:
Annual depreciation = (£27,000 - £1,800) / 9 = £2,800
| Account | Debit (£) | Credit (£) |
|---|---|---|
| Depreciation expense | 2,800 | |
| Accumulated depreciation - plant and machinery | 2,800 |
Reducing Balance Example
Vehicle costing £20,000 with a depreciation rate of 25% reducing balance:
| Year | Opening NBV (£) | Depreciation (£) | Closing NBV (£) |
|---|---|---|---|
| 1 | 20,000 | 5,000 | 15,000 |
| 2 | 15,000 | 3,750 | 11,250 |
| 3 | 11,250 | 2,813 | 8,437 |
| 4 | 8,437 | 2,109 | 6,328 |
Useful Life Estimates
FRS 102 does not prescribe specific useful lives. Companies must estimate useful lives based on:
- Expected physical wear and tear
- Technological or commercial obsolescence
- Legal or contractual limits on use
- The entity’s experience with similar assets
Common useful life ranges in UK practice:
| Asset | Typical Useful Life |
|---|---|
| Buildings | 25-50 years |
| Plant and machinery | 5-15 years |
| Motor vehicles | 3-8 years |
| Computer equipment | 3-5 years |
| Fixtures and fittings | 5-10 years |
| Leasehold improvements | Term of the lease |
Fixed Assets on the Balance Sheet
Fixed assets are presented at the top of the balance sheet under non-current assets:
| Tangible fixed assets | Cost (£) | Accumulated Depreciation (£) | NBV (£) |
|---|---|---|---|
| Land and buildings | 300,000 | (45,000) | 255,000 |
| Plant and machinery | 120,000 | (48,000) | 72,000 |
| Motor vehicles | 60,000 | (30,000) | 30,000 |
| Computer equipment | 25,000 | (18,000) | 7,000 |
| Total | 505,000 | (141,000) | 364,000 |
The notes to the accounts must include a reconciliation showing:
- Cost or valuation at the start and end of the period
- Additions and disposals during the period
- Depreciation charged during the period
- Accumulated depreciation at the start and end
- Any impairment losses or revaluations
Revaluation
Under FRS 102, companies may choose to carry tangible fixed assets at revalued amount rather than historical cost. If the revaluation model is adopted:
- Assets must be revalued with sufficient regularity to ensure the carrying amount is not materially different from fair value
- Revaluation gains are credited to the revaluation reserve within equity
- Revaluation losses are charged to the income statement unless they reverse a previous revaluation gain
- All assets within the same class must be revalued
Disposal of Fixed Assets
When a fixed asset is sold or scrapped, the difference between the sale proceeds and the net book value (cost less accumulated depreciation) is recognised as a profit or loss on disposal.
Example: A vehicle with original cost of £20,000 and accumulated depreciation of £14,000 is sold for £8,000.
- Net book value: £20,000 - £14,000 = £6,000
- Sale proceeds: £8,000
- Profit on disposal: £2,000
| Account | Debit (£) | Credit (£) |
|---|---|---|
| Bank | 8,000 | |
| Accumulated depreciation | 14,000 | |
| Motor vehicles (cost) | 20,000 | |
| Profit on disposal | 2,000 |
Capital Allowances and Corporation Tax
For corporation tax purposes, HMRC does not allow the accounting depreciation charge as a tax deduction. Instead, businesses claim capital allowances, which are the tax equivalent of depreciation but follow HMRC’s own rules. The total amount spent on acquiring or enhancing fixed assets is classified as capital expenditure.
Annual Investment Allowance (AIA)
The AIA provides a 100% first-year deduction for qualifying expenditure on plant and machinery, up to the annual limit (currently £1,000,000). This means most UK businesses can deduct the full cost of qualifying assets in the year of purchase.
Writing Down Allowances (WDA)
Expenditure exceeding the AIA is allocated to pools and written down at:
| Pool | Rate |
|---|---|
| Main pool | 18% reducing balance |
| Special rate pool | 6% reducing balance |
| Single asset pool | 18% or 6% depending on the asset |
Full Expensing
From 1 April 2023, companies can claim full expensing (100% first-year allowance) on qualifying main-rate plant and machinery, with no monetary cap. This is a permanent measure and represents one of the most generous capital allowance regimes in the developed world.
Fixed Assets Versus Current Assets
The distinction between fixed assets and current assets depends on the intended use:
| Characteristic | Fixed Assets | Current Assets |
|---|---|---|
| Purpose | Used in the business | Held for sale or consumed within 12 months |
| Duration | More than one accounting period | Within one accounting period |
| Treatment | Capitalised and depreciated | Expensed or carried at lower of cost and NRV |
| Examples | Buildings, vehicles, machinery | Cash, stock, receivables |
The same item can be a fixed asset in one business and a current asset in another. A vehicle is a fixed asset for a delivery company but a current asset (stock) for a car dealer.
Impairment of Fixed Assets
Under FRS 102 (Section 27), if there are indicators that a fixed asset may be impaired, the company must estimate the asset’s recoverable amount (the higher of fair value less costs to sell and value in use). If the recoverable amount is below the carrying amount, an impairment loss must be recognised.
Indicators of impairment include:
- Significant decline in market value
- Adverse changes in the asset’s physical condition
- Evidence of obsolescence
- Significant changes in the business or market environment
- The asset being idle or part of a restructuring
Impairment losses are charged to the income statement, unless the asset was previously revalued upwards, in which case the loss first reduces the revaluation reserve.
Fixed Asset Register
A fixed asset register is a detailed record of all fixed assets owned by the business. It typically includes:
- Asset description and location
- Date of acquisition
- Cost or valuation
- Depreciation method and rate
- Accumulated depreciation
- Net book value
- Disposal details
Regular physical verification of assets against the register is an important internal control, ensuring assets recorded in the ledger actually exist and are in use.