FRS 102 Section 17 requires property, plant and equipment to be recognised at cost when future benefits are probable and the cost can be measured reliably. Cost includes everything needed to get the asset working, but not start up, training or general overheads. After that a business either keeps the cost model or revalues a whole class of assets, and any major component with a different life, such as a roof or a lift, is depreciated separately.

What is property, plant and equipment?

The FRS 102 glossary defines property, plant and equipment as tangible assets held for use in the production or supply of goods or services, for rental to others, or for administrative purposes, and expected to be used during more than one period. That covers buildings, plant, vehicles, computers, fixtures and fittings.

Paragraph 17.3 excludes agricultural biological assets, heritage assets and mineral rights, which are dealt with in Section 34. Property held to earn rent or for capital growth is investment property under Section 16 instead. Software that a machine cannot run without is part of the hardware and treated as property, plant and equipment (paragraph 18.3B).

When should an item be recognised as an asset?

Paragraph 17.4 sets two tests: it must be probable that future economic benefits will flow to the business, and the cost must be measurable reliably. Paragraph 17.5 says spare parts, stand by equipment and servicing equipment are property, plant and equipment if they meet the definition; otherwise they are inventory.

Two rules deal with spending after acquisition:

  • Replacement parts (17.6). The cost of replacing part of an asset, such as a building’s roof, is added to the asset if it brings incremental future benefits, and the carrying amount of the old part is derecognised, whether or not it was depreciated separately. If the old part’s carrying amount cannot be identified, the current cost of the replacement can be used as a proxy, adjusted for depreciation.
  • Major inspections (17.7). Where regular major inspections are a condition of operating an asset, such as a bus, each inspection’s cost is capitalised and any remaining cost of the previous inspection is derecognised.

Day to day servicing costs go to profit or loss as incurred (paragraph 17.15).

Paragraph 17.8 adds that a site and the buildings on it are separable assets and must be accounted for separately even when bought together. This is important because the site generally has an unlimited useful life and is not usually depreciated (paragraph 17.16), while the building is.

What goes into cost?

Paragraph 17.10 lists the elements of cost:

  1. purchase price, including legal and brokerage fees, import duties and non refundable purchase taxes, less trade discounts and rebates;
  2. costs directly attributable to bringing the asset to the location and condition needed for it to operate as management intends, such as site preparation, delivery and handling, installation, assembly and testing;
  3. the initial estimate of dismantling, removal and site restoration costs, where an obligation exists and is recognised under Section 21;
  4. borrowing costs, if the business capitalises them under paragraph 25.2.

Paragraph 17.11 lists costs that must be expensed: opening a new facility, introducing a new product or service including advertising, conducting business in a new location or with a new class of customer including staff training, and administration and general overheads. Under paragraph 17.12, income and costs of incidental operations during construction that are not needed to get the asset ready go to profit or loss.

Under paragraph 17.13 cost is the cash price equivalent, so if payment is deferred beyond normal credit terms the asset is recorded at the present value of the payments. Under paragraph 17.14 an asset received in exchange for another is measured at fair value, unless the exchange lacks commercial substance or neither fair value is reliably measurable, in which case the carrying amount of the asset given up is used.

What is component accounting?

Paragraph 17.16 says that if the major components of an asset have significantly different patterns of consumption of economic benefits, the initial cost must be allocated to those components and each depreciated separately over its useful life. Other assets are depreciated as a single asset.

Illustration only. A company buys a freehold factory for £1,200,000. It allocates £400,000 to the site, £650,000 to the building structure, £100,000 to the roof and £50,000 to heating and ventilation plant.

Component Cost £ Useful life Annual straight line charge £
Site 400,000 Unlimited Nil
Structure 650,000 50 years 13,000
Roof 100,000 20 years 5,000
Heating and ventilation 50,000 10 years 5,000
Total 1,200,000 23,000

When the heating plant is replaced in year 10, the new cost is capitalised and the old component, by then fully depreciated, is derecognised under paragraph 17.6. Depreciating the whole building over 50 years would understate the charge and leave the old plant inside the carrying amount.

Depreciation begins when the asset is available for use and does not stop just because the asset is idle, unless it is fully depreciated (paragraph 17.20). Paragraph 17.21 lists the factors for setting useful life: expected usage, physical wear and tear, technical or commercial obsolescence and legal limits such as lease expiry. The choice of method is covered in depreciation methods.

Cost model or revaluation model?

Paragraph 17.15 lets a business choose the cost model or the revaluation model, but revaluation must be applied to all items in the same class, meaning assets of a similar nature, function or use. A company cannot revalue only the one building that has gone up in value.

  • Cost model (17.15A): cost less accumulated depreciation and impairment losses.
  • Revaluation model (17.15B): fair value at the revaluation date less later depreciation and impairment, with revaluations regular enough that the carrying amount does not differ materially from fair value at the reporting date.

Paragraph 17.15C says the fair value of buildings is usually determined from market evidence by professionally qualified valuers, and of plant and equipment by appraisal of market value. For specialised assets rarely sold except with the business, paragraph 17.15D allows an income or depreciated replacement cost approach.

Where do revaluation gains and losses go?

Under paragraph 17.15E an increase goes to other comprehensive income and is accumulated in equity, except to the extent it reverses a previous decrease on the same asset recognised in profit or loss. Under paragraph 17.15F a decrease goes to other comprehensive income up to the revaluation surplus held for that asset, and any excess goes to profit or loss. Company law requires the surplus to be held in a separate revaluation reserve (Schedule 1 paragraph 35 of the 2008 accounts regulations).

Paragraph 29.15 requires deferred tax on a revalued asset that is not depreciated, such as a site, to be measured using the tax rates and allowances that apply to its sale. Paragraph 17.32A requires disclosure of the revaluation date, whether an independent valuer was involved, the methods and assumptions, and the carrying amount under the cost model for each revalued class.

What happens on impairment and disposal?

Paragraph 17.24 applies Section 27 to impairment, and paragraph 17.26 notes that a plan to dispose of an asset earlier than expected is an impairment indicator. Compensation from third parties, such as insurance proceeds for a damaged asset, is recognised in profit or loss only when virtually certain (paragraph 17.25).

An item is derecognised on disposal or when no future benefits are expected (paragraph 17.27). The gain or loss is net disposal proceeds less carrying amount, goes to profit or loss and is not revenue (paragraphs 17.28 and 17.30).

What does this mean for tax and for micro entities?

The accounting cost and depreciation do not drive tax relief. HMRC’s Business Income Manual (BIM35201) confirms depreciation is not an allowable deduction in computing trading profits; relief comes through capital allowances instead, so component splits are an accounting exercise rather than a tax claim. Micro entities applying FRS 105 must use cost less depreciation and impairment under paragraph 12.14, with no revaluation option, though component accounting still applies under paragraph 12.15.

Common mistakes include capitalising training and launch costs, depreciating the site with the building, revaluing selected assets rather than a whole class, leaving replaced parts on the register, and not disclosing assets pledged as security or capital commitments, which paragraph 17.32 requires.

Solar Protect provides tax investigation insurance for businesses and fee protection schemes for accountancy practices. Read how our cover works or get a quote.

Related Accountapedia entries

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.