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FRSSE and depreciation of buildings

Is it permissible not to depreciate freehold buildings under the FRSSE, given that the standard is silent on the subject?


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The FRSSE is not a replacement for the FRS's - it runs in conjunction with the FRS's.

If the FRSSE is silent, then you have to refer to the full FRS's. FRS 15 (para 84) states that buildings have a limited life and therefore are depreciated.

Kind regards

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FRS 15 para 5 says . . .
"Reporting entities applying the Financial Reporting Standard for Smaller Entities (FRSSE) currently applicable are exempt from the FRS." That includes para 84.

The FRSSE is THE financial reporting standard for smaller entities, not a parallel standard that applies now and then. So whenever the FRSSE is silent, there is no requirement.

No need to depreciate, Chris, if you're correct about the FRSSE's silence.

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The building has to be depreciated.
The land portion needs not be amortised as it is freehold. The building has limited life and has to be depreciated.

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Not sure
about the comments "if the FRSSE is silent then no need to depreciate". The FRSSE refers simply to depreciation of fixed assets in general, it does not specify which fixed assets (other than investment properties) should or should not be depreciated. It does, however, stipulate that all tangible fixed assets (other than investment properties) will be depreciated on a systematic basis (para 6.38 of FRSSE 2007). In the poster's situation he is applying the FRSSE but FRSSE has been designed to work in conjunction with the full standards/UK GAAP in order to arrive at a true and fair view by virtue of reduced disclosure.

Buildings are tangible fixed assets and depreciation should, therefore, apply to buildings. I agree that para 5 of FRS 15 states that FRSSE companies are exempt from applying the FRS, but it does highlight an event whereby the FRSSE is silent on a "specific" issue, but where UK GAAP/FRS gives guidance on the "specific". The statement informing that FRSSE companies are exempt from FRS requirements is in (more or less) every FRS in the book as FRSSE companies don't report under full FRS, but they have to consult the FRS in either an ambiguous situation or where the FRSSE is explicitly silent on an issue affecting a FRSSE company which is otherwise covered in FRS.

As mentioned below, Land has an indefinite life and therefore is not depreciated. Buildings (and other tangible assets) do not have an indefinite lifespan.

Best wishes.

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My reading of the position ties in with what Steve is saying, but I do appreciate all informed comment here - thank you

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I think you can avoid depreciating the building
Hi, on a company that I prepare accounts for who own an office building and apply the FRSSE I looked into this area and reached the conclusion that you probably don't have to depreciate.

The justification I used was that as the expected residual values were sufficiently high and that the expected useful economic life of the asset was v.long, and as such the resulting depreciation charge would be immaterial.

I included a similar paragraph in the accounting policies.

I dare say someone will point out a flaw in this but I took the opinion that as long as the building was maintained properly it will likely be there in 100 or so years so what is the point of depreciating it.

Hope this helps.

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For what it's worth
I understood that you had to depreciate buildings, but that you could do so at 0%. Theargument being, I suppose, that you were positively applying a policy rather than simply overlooking it.

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I can see the arguments for and against why depreciation of buildings does not have to take place. In practical terms, however, you need to take a realistic view of the issues as to why depreciation needs to be implemented. For example, consider things like technological advances, building regulations in the future may require a major overhaul of a factory/building, triple glazing may be a prerequesite by health and safety in the future, the council could make a compulsory purchase order against the building or a major rebuild may be necessary. Certainly, in view of today's climate change, the building could suffer serious storm/wind damage and could be rendered that unsafe it has to be pulled down. Would a building built in 1900 still be in the same condition now as it was then? I doubt it very much, no matter how high the maintenance of it was.

All these eventualities suggest that a building does not have an infinite life and therefore should be depreciated to reflect, not only major defects in the future, but also for practical purposes cited above.

You could adopt the revaluation method, which means you then do away with depreciation and just have annual revaluations.

Kind regards

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An entity must be able to justify that a policy of non-depreciation is acceptable on the grounds of immateriality, both in aggregate and in terms of individual assets. Depreciation may be immaterial due to:

- a long useful economic life; or

- high residual value (or both).

A high estimate of residual value may be justified on the following grounds:

a. the entity having a policy of regular maintenance and repair (charged to the profit and loss account), so that the asset maintains its performance standards;

b. the asset is not expected to suffer from economic or technological obsolescence resulting from for example, changes in patterns of demand; and

c. where estimated residual values are material:

- the entity has a policy of disposing of similar assets before the end of their useful economic lives; and

- the disposal proceeds of similar assets have been similar to their carrying amounts.

An impairment review, in accordance with FRS 11, must be performed annually on tangible fixed assets (other than non-depreciable land), at the end of each accounting period, where:

- no depreciation is charged as it is deemed immaterial because of the length of the remaining useful economic life or where the estimated residual value is not markedly different from the carrying amount; or

- the tangible fixed assets estimated useful economic life exceeds 50 years.

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Can anyone tell me the source of the above?

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