Depreciation methods under FRS 102 and FRS 105

What the standards require

• The depreciable amount of an asset is allocated on a systematic basis over its useful life (FRS 102 paragraph 17.18; FRS 105 paragraph 12.17).
• The method chosen reflects the pattern in which the business expects to use up the asset's benefits. The possible methods include straight-line, diminishing balance and a usage method such as units of production (FRS 102 paragraph 17.22).
• Depreciation begins when the asset is available for use and stops when it is derecognised. It does not stop because the asset is idle, unless it is fully depreciated (FRS 102 paragraph 17.20).
• Major components with different patterns of use are depreciated separately. Land generally has an unlimited useful life and is not usually depreciated (FRS 102 paragraph 17.16), and land and buildings are accounted for separately (FRS 102 paragraph 17.8).
• Residual value, useful life and method are reviewed when there is an indication they have changed, and a change is a change in accounting estimate, applied from then on with no restatement of earlier years (FRS 102 paragraphs 17.19 and 17.23).
• A micro-entity under FRS 105 measures property, plant and equipment at cost less accumulated depreciation and impairment, with no revaluation (FRS 105 paragraph 12.14).

The methods compared

Straight-line, worked

For example, a machine costs £20,000, is expected to last five years and to sell for £2,000 at the end. The depreciable amount is £18,000, so the charge is £3,600 a year. The journal each year end debits depreciation in the profit and loss account and credits accumulated depreciation on the balance sheet (ACCA: adjustments to financial statements). After two years the carrying amount is £12,800.

Reducing balance at 25%, worked

Reading the reducing balance figures

The same machine at 25% reducing balance carries a higher charge in the early years and a lower one later, and still holds £4,746 after five years. ACCA describes the diminishing balance charge as a percentage of the carrying amount, which gives a higher expense in the early years (ACCA: property, plant and equipment). The percentage is a choice of the business and should be set so the carrying amount approaches the expected residual value at the end of the asset's life.

Other points at the year end

• Part-year charges: a business either charges depreciation from the month the asset is available for use, or applies a stated policy such as a full year in the year of purchase and none in the year of sale, applied consistently.
• Disposals: cost and accumulated depreciation are removed, and the difference between the carrying amount and the sale proceeds is a profit or loss on disposal.
• Intangible assets are amortised over a finite useful life. If, in exceptional cases, the life cannot be estimated reliably it must not exceed 10 years (FRS 102 paragraph 18.20).
• A depreciation charge on manufacturing assets may form part of the cost of stock (FRS 102 paragraph 17.17).

Depreciation and tax

HMRC's Capital Allowances Manual says capital allowances take the place of depreciation charged in the accounts, which is not normally deductible for tax (HMRC CA10020). The depreciation charge is added back in the tax computation and capital allowances are claimed on qualifying spending. See capital allowances rates for 2026.

Sole traders and partnerships on the cash basis deduct most capital spending as an expense, with exceptions including cars and land; capital allowances remain available for cars (HMRC BIM72035).