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HMRC internal manual

Business Income Manual

Tax and accountancy: FRS15: renewals accounting

FRS15 permits renewals accounting on infrastructure assets in specified circumstances; that is, where the infrastructure is treated as a single system, is maintained by continuing replacement of parts according to a projected asset management plan (AMP) calculated by a qualified and independent person. The system or network has to be in a mature or steady state.

Under renewals accounting, the estimated level of expenditure required to maintain the operating capacity (over the AMP period) is treated as depreciation and is charged to the profit and loss account. Actual maintenance expenditure is capitalised. There is no direct link between the actual expenditure in any one year and the amount charged to the profit and loss account. Renewals accounting provides a mechanism to smooth the profile of maintenance expenditure. Where this accountancy treatment applies, the deduction of annual depreciation, being the estimated level of expenditure required to maintain the asset, from the profits is acceptable for tax purposes on an on-going basis as it achieves the object of relieving expenditure only once.

For entities applying one of EU endorsed IFRS, FRS 102 or FRS 101 renewals accounting is not permitted. Instead items of property, plant and equipment are measured at cost or fair value and then depreciated over their expected useful life. An entity that has previously applied renewals accounting will therefore need to determine the cost or fair value of assets and a useful economic life to their assets and depreciate accordingly.