PracticeConsultingASB backtracks on depreciation

ASB backtracks on depreciation

New standard takes property owners' concerns on board.

The Accounting Standards Board has backed away from a confrontation with major property owners such as banks, hotel and retail chains by giving them optional choices for revaluing and depreciating assets in FRS 15, the new standard for tangible fixed assets, published today.

The exposure draft of the standard, FRED 15, took a tougher line on capitalising interest costs and requiring companies to depreciate assets in all circumstances; but the final standard relented by offering optional choices.

Companies such as hotel and pub chains that regularly maintain and upgrade their assets so they continue to hold high residual values, can omit depreciation charges as immaterial.

They are still required to conduct regular impairment reviews of their assets under FRS 11, however.

‘The exposure draft worked for us,’ said ASB assistant technical director Andrew Lennard. ‘People who were uneasy but did not state their case well came forward with hard data that enabled us to find a solution most people regard as reasonable.’

Neil Chisman, finance director at the Stakis Group, said FRS 15 amounted to ‘a good tidy-up’. Relaxing the mandatory requirements of the exposure draft would help hoteliers, and the use of impairment testing when depreciation was immaterial was a ‘sensible’ solution.

Nevertheless, FRS 15 is likely to cause anguish with its codification of formal revaluation procedures. Full valuations should be conducted every five years, with an interim valuation in year three. Companies opting not to use this treatment can still show assets at their historical cost.

Lennard argued that the ASB sought to establish a balance between establishing up-to-date and reasonable valuations, without imposing too many extra costs. The systematic policy was needed to stamp out ‘cherry-picking’ where, under the current law, companies can revalue assets when it is advantageous to do so.

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