Tangible assets (formally tangible fixed assets) are physical items that a business owns and uses in its operations over more than one accounting period. They are a subcategory of fixed assets and are distinguished from intangible assets by having a physical form that can be seen and touched.
Under FRS 102 (Section 17) and the Companies Act 2006, tangible fixed assets must be recognised, measured, and disclosed according to specific requirements designed to give a true and fair view of the company’s financial position.
Categories of Tangible Assets
The Companies Act 2006 (Schedule 1) requires tangible fixed assets to be analysed into the following categories on the balance sheet:
| Category | Examples |
|---|---|
| Land and buildings | Freehold and leasehold property, offices, warehouses, factories |
| Plant and machinery | Production equipment, specialist tools, manufacturing lines |
| Fixtures and fittings | Office furniture, shelving, lighting, signage |
| Motor vehicles | Cars, vans, lorries, forklifts |
| Assets under construction | Items being built or installed but not yet in use |
Land Versus Buildings
Land is typically not depreciated because it has an indefinite useful life (unless it is a wasting asset such as a quarry). Buildings are depreciated over their estimated useful life. When land and buildings are purchased together, the cost must be allocated between the two components.
Recognition Criteria
A tangible asset is recognised on the balance sheet when:
- It is probable that future economic benefits will flow to the entity
- The cost of the asset can be measured reliably
Items that do not meet these criteria – for example, research costs or exploratory expenditure with uncertain outcomes – are expensed as incurred.
Initial Measurement
Tangible assets are initially measured at cost, which includes all expenditure directly attributable to bringing the asset to the location and condition necessary for it to operate as intended:
| Cost Component | Example |
|---|---|
| Purchase price (net of trade discounts) | Invoice price of a machine |
| Import duties and non-refundable purchase taxes | Customs duty on imported equipment |
| Delivery and handling charges | Freight and unloading costs |
| Installation and assembly costs | Specialist contractor fees |
| Site preparation | Groundwork, foundations |
| Professional fees directly related to acquisition | Surveyor’s fees on a property purchase |
| Testing costs | Running a machine to verify it works |
| Estimated dismantling and site restoration costs | Where there is a legal or constructive obligation |
VAT is excluded from cost where the business can reclaim it as input tax.
Costs Not Capitalised
| Item | Treatment |
|---|---|
| General administration and overhead costs | Expensed as incurred |
| Training costs for staff operating the asset | Expensed as incurred |
| Initial operating losses before the asset reaches planned capacity | Expensed as incurred |
| Relocation costs | Expensed as incurred |
Depreciation
Depreciation is the systematic allocation of the depreciable amount of a tangible asset over its estimated useful life. The depreciable amount is the cost (or revalued amount) less the estimated residual value.
Common Depreciation Methods
| Method | Formula | Suitable For |
|---|---|---|
| Straight-line | (Cost - Residual value) / Useful life | Assets providing uniform benefit over time |
| Reducing balance | Fixed percentage applied to net book value | Assets losing value faster in early years |
| Units of production | (Cost - Residual value) / Estimated total units x Actual units | Assets where wear relates to usage |
Typical Useful Lives in UK Practice
| Asset | Useful Life | Common Method |
|---|---|---|
| Freehold buildings | 25-50 years | Straight-line |
| Leasehold improvements | Term of the lease | Straight-line |
| Plant and machinery | 5-15 years | Straight-line or reducing balance |
| Motor vehicles | 3-8 years | Reducing balance |
| Computer equipment | 3-5 years | Straight-line |
| Fixtures and fittings | 5-10 years | Straight-line |
The depreciation method and useful life must be reviewed at least at each financial year end. If expectations change, the estimates are revised prospectively.
Subsequent Expenditure
Expenditure on an existing tangible asset after initial recognition is capitalised only if it enhances the asset’s future economic benefits beyond those originally assessed. Expenditure that merely maintains the asset in its current condition is treated as revenue expenditure and charged to the income statement.
| Expenditure | Treatment | Reasoning |
|---|---|---|
| Replacing an engine that extends the vehicle’s life | Capitalise | Enhances future economic benefits |
| Routine servicing of a vehicle | Expense | Maintains existing condition |
| Adding a new wing to a building | Capitalise | Creates additional capacity |
| Repainting the existing building | Expense | Maintains existing condition |
Revaluation
Under FRS 102, companies may choose to measure tangible fixed assets at revalued amount instead of historical cost, provided:
- Revaluations are carried out with sufficient regularity to ensure the carrying amount is not materially different from fair value
- All assets within the same class are revalued (cherry-picking is not permitted)
- Revaluation gains are credited to a revaluation reserve within equity
- Revaluation losses are charged to the income statement (unless reversing a previous gain on the same asset)
Revaluation is most commonly applied to land and buildings, where market values may significantly exceed historical cost over time.
Disposal
When a tangible asset is sold, scrapped, or otherwise disposed of, the asset and its accumulated depreciation are removed from the balance sheet. The difference between the net proceeds and the net book value is recognised as a profit or loss on disposal.
| Detail | £ |
|---|---|
| Original cost | 30,000 |
| Accumulated depreciation | (22,000) |
| Net book value at disposal | 8,000 |
| Sale proceeds | 10,500 |
| Profit on disposal | 2,500 |
The profit on disposal is reported in the income statement, typically within operating profit or as a separate line item below it.
Impairment
If there are indicators that a tangible asset’s carrying amount may not be recoverable, an impairment review is required under FRS 102 (Section 27). If the recoverable amount (the higher of fair value less costs to sell and value in use) is below the carrying amount, an impairment loss must be recognised.
Tangible Assets on the Balance Sheet
Tangible fixed assets are presented within non-current assets on the balance sheet:
| Tangible Fixed Assets | Cost (£) | Accumulated Depreciation (£) | NBV (£) |
|---|---|---|---|
| Land and buildings | 400,000 | (50,000) | 350,000 |
| Plant and machinery | 150,000 | (65,000) | 85,000 |
| Motor vehicles | 72,000 | (38,000) | 34,000 |
| Fixtures and fittings | 28,000 | (14,000) | 14,000 |
| Total | 650,000 | (167,000) | 483,000 |
The notes to the accounts must include a full reconciliation showing opening balances, additions, disposals, depreciation charged, revaluations, and impairments for each category.
Capital Allowances
For corporation tax, accounting depreciation is not deductible. Instead, tax relief on tangible assets is given through capital allowances. The main reliefs include the Annual Investment Allowance (100% deduction up to £1,000,000), full expensing for qualifying plant and machinery, and writing-down allowances at 18% (main pool) or 6% (special rate pool).
The difference between accounting depreciation and capital allowances creates a timing difference that gives rise to deferred tax.