Historical cost vs fair value accounting

Q: Which items must be held at fair value?

Investment property. Paragraph 16.7 requires investment property to be measured at fair value at each reporting date with changes recognised in profit or loss. The one exception is property let to another group company, where paragraph 16.4A allows a choice of fair value or transfer to property, plant and equipment at cost. Derivatives and other Section 12 instruments. Paragraph 12.8 requires instruments within Section 12, such as interest rate swaps and forward currency contracts, to be measured at fair value through profit or loss, with limited exceptions including unquoted equity whose value cannot be measured reliably and designated hedging instruments. Shares in other companies. Paragraph 11.14(d)(iv) requires investments in shares that are equity of the issuer, held outside the group, to be measured at fair value through profit or loss if they are publicly traded or their fair value can otherwise be measured reliably. Only where neither applies are they held at cost less impairment.

Q: Which items may be held at fair value?

Property, plant and equipment. Paragraph 17.15 offers a cost model or a revaluation model. If revaluation is chosen it applies to every item in the same class, and paragraph 17.15B requires revaluations regular enough that the carrying amount does not differ materially from fair value at the year end. Intangible assets other than goodwill. Paragraph 18.18 allows a revaluation model, but paragraph 18.18B limits it to assets whose fair value can be determined by reference to an active market, which few intangibles have. Investments in subsidiaries, associates and joint ventures. In separate or individual accounts paragraph 9.26 allows cost less impairment, fair value through other comprehensive income, or fair value through profit or loss, applied consistently to each class. Loans and other basic debt instruments. Paragraph 11.14(b) allows designation at fair value through profit or loss on initial recognition, but only where it removes or significantly reduces an accounting mismatch or the instruments are managed on a fair value basis. Biological assets. Paragraph 34.3A offers a fair value model or a cost model for each class; paragraph 34.3B says an entity that chooses fair value cannot later switch to cost.

Q: Which items cannot be held at fair value?

Goodwill. Paragraph 19.23 requires cost less amortisation and impairment, and company law's alternative accounting rules in Schedule 1 paragraph 32(1) cover intangible assets "other than goodwill". Ordinary stock. Paragraph 13.4 measures inventories at the lower of cost and estimated selling price less costs to complete and sell. Paragraph 13.3 permits fair value less costs to sell only where the entity operates in an active market with published prices and the inventory is a store of readily realisable value, as with some traded commodities. The company's own equity and most liabilities. Schedule 1 paragraph 36(3)(d) excludes equity instruments issued by the company from fair value, and paragraph 36(2) excludes liabilities unless they are held for trading, are derivatives or fall within the further exception in sub paragraph (4). Anything in a micro entity's accounts. FRS 105 explains that the micro entity regime does not permit the alternative accounting rules or the fair value rules, so micro entities cannot revalue or remeasure assets or liabilities at fair value.

Historical cost records an asset at what was paid for it, adjusted for depreciation and impairment; fair value records it at what it could be sold for at the balance sheet date. Under FRS 102 most assets stay at historical cost, but investment property, derivatives and listed or reliably valued share investments must be held at fair value, while property, plant and equipment, some intangibles, group investments and biological assets may be. Goodwill, ordinary stock and the company’s own shares cannot be, and micro entities using FRS 105 cannot remeasure anything to fair value.

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What is the difference between the two bases?

FRS 102 describes both in Section 2. Paragraph 2.69 says the historical cost of an asset is the consideration paid to acquire or create it plus transaction costs. Paragraph 2.70 says that figure is then updated for depreciation or amortisation, payments received, impairment and any accrued interest. It never moves up because the market moves up.

Fair value is a current value. Paragraph 2.73 explains that it is not derived from the price of the original transaction and is not increased by transaction costs on purchase. How to estimate it, as an exit price between market participants, is set out in Section 2A, which we cover in FRS 102 Section 2A: fair value measurement. Paragraph 2.77 gives the trade off: where an asset’s value is sensitive to market factors, historical cost may differ significantly from current value and may not give relevant information if changes in value are important to users.

Company law frames the same choice differently. Schedule 1 to SI 2008/409 calls cost the historical cost accounting rules, permits revaluation under the alternative accounting rules in paragraph 32, and permits fair value under paragraphs 36 to 40. FRS 102 then decides, within that permission, when fair value is required, optional or barred.

Which items must be held at fair value?

Investment property. Paragraph 16.7 requires investment property to be measured at fair value at each reporting date with changes recognised in profit or loss. The one exception is property let to another group company, where paragraph 16.4A allows a choice of fair value or transfer to property, plant and equipment at cost.
Derivatives and other Section 12 instruments. Paragraph 12.8 requires instruments within Section 12, such as interest rate swaps and forward currency contracts, to be measured at fair value through profit or loss, with limited exceptions including unquoted equity whose value cannot be measured reliably and designated hedging instruments.
Shares in other companies. Paragraph 11.14(d)(iv) requires investments in shares that are equity of the issuer, held outside the group, to be measured at fair value through profit or loss if they are publicly traded or their fair value can otherwise be measured reliably. Only where neither applies are they held at cost less impairment.

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Which items may be held at fair value?

Property, plant and equipment. Paragraph 17.15 offers a cost model or a revaluation model. If revaluation is chosen it applies to every item in the same class, and paragraph 17.15B requires revaluations regular enough that the carrying amount does not differ materially from fair value at the year end.
Intangible assets other than goodwill. Paragraph 18.18 allows a revaluation model, but paragraph 18.18B limits it to assets whose fair value can be determined by reference to an active market, which few intangibles have.
Investments in subsidiaries, associates and joint ventures. In separate or individual accounts paragraph 9.26 allows cost less impairment, fair value through other comprehensive income, or fair value through profit or loss, applied consistently to each class.
Loans and other basic debt instruments. Paragraph 11.14(b) allows designation at fair value through profit or loss on initial recognition, but only where it removes or significantly reduces an accounting mismatch or the instruments are managed on a fair value basis.
Biological assets. Paragraph 34.3A offers a fair value model or a cost model for each class; paragraph 34.3B says an entity that chooses fair value cannot later switch to cost.

Which items cannot be held at fair value?

Goodwill. Paragraph 19.23 requires cost less amortisation and impairment, and company law’s alternative accounting rules in Schedule 1 paragraph 32(1) cover intangible assets “other than goodwill”.
Ordinary stock. Paragraph 13.4 measures inventories at the lower of cost and estimated selling price less costs to complete and sell. Paragraph 13.3 permits fair value less costs to sell only where the entity operates in an active market with published prices and the inventory is a store of readily realisable value, as with some traded commodities.
The company’s own equity and most liabilities. Schedule 1 paragraph 36(3)(d) excludes equity instruments issued by the company from fair value, and paragraph 36(2) excludes liabilities unless they are held for trading, are derivatives or fall within the further exception in sub paragraph (4).
Anything in a micro entity’s accounts. FRS 105 explains that the micro entity regime does not permit the alternative accounting rules or the fair value rules, so micro entities cannot revalue or remeasure assets or liabilities at fair value.

Where do fair value movements go?

It depends on the route. Investment property and financial instruments measured at fair value under paragraphs 36 to 39 of Schedule 1 have their changes taken to profit or loss, as paragraph 40(2) of Schedule 1 requires, and as paragraphs 16.7 and 12.8 of FRS 102 provide. Revaluations of property, plant and equipment work differently: paragraph 17.15E puts a revaluation increase through other comprehensive income into equity, unless it reverses an earlier decrease charged to profit or loss, and paragraph 17.15F charges a decrease to other comprehensive income only to the extent of earlier gains on the same asset.

In law the revaluation surplus goes to a separate revaluation reserve under Schedule 1 paragraph 35. Paragraph 35(3) allows a transfer from that reserve to the profit and loss account only where the amount was previously charged to it or represents realised profit, or on capitalisation into shares.

Deferred tax follows the asset. Paragraphs 29.15 and 29.16 require deferred tax on revalued non depreciable assets and on investment property at fair value to be measured using the tax rates and allowances that apply to sale of the asset. See deferred tax under FRS 102.

How do the bases compare for the same building?

Illustration only. A company bought a building for £500,000, of which £200,000 relates to the plot itself, which is not depreciated. Three years later it is worth £650,000.

How the building is used and measured	Balance sheet	Where the change goes
Own offices, cost model	£500,000 less three years’ depreciation on the £300,000 building element	Depreciation charged to profit or loss
Own offices, revaluation model	£650,000, then depreciated from the revalued amount	Uplift to other comprehensive income and revaluation reserve
Let to an unrelated tenant, investment property	£650,000, not depreciated	Uplift of £150,000 to profit or loss, with deferred tax

The same building shows three different profit figures depending on its use and the policy chosen, which is why the accounting policy note has to say which basis applies to each class of asset. Our pages on property, plant and equipment and stock or investment property cover the classification questions.

Which basis is better for a small company?

Where FRS 102 gives a choice, the cost model is cheaper to run: no regular valuations, no revaluation reserve and less deferred tax. Fair value gives readers, and lenders in particular, a balance sheet closer to current worth, which can help with borrowing covenants. It also brings volatility and valuation costs, and the requirement in paragraph 17.15B for revaluations of sufficient regularity is ongoing, not a one off exercise. Where fair value is mandatory, as for investment property, the question is only how to obtain a reliable valuation each year.

What mistakes come up?

Depreciating investment property, or holding it at cost, when paragraph 16.7 requires fair value.
Revaluing one property in a class and leaving the others at cost, contrary to paragraph 17.15.
Taking a revaluation gain on own use property to profit or loss instead of other comprehensive income.
Leaving listed shares at cost.
Carrying a revaluation into a micro entity’s FRS 105 accounts, which the regime does not allow.
Forgetting deferred tax on fair value gains.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.