A change to the basis of accounting under FRS15 will result in
prior period adjustments when they have been using provisions for
repairs and maintenance. This is because the accounts have to be
re-stated as if the FRS15 basis has always applied. Any repairs
provision (which will often have been allowable for tax purposes)
will be added back (and is chargeable for tax purposes if it has
been allowed in the past). The business may also make a prior
period adjustment to depreciation. This is not allowable for tax
purposes if it is depreciating capital expenditure, for example the
original capital cost of the asset.
Where the business is moving to renewals accounting (see
BIM31065) the cumulative expenditure to
date is debited to the fixed asset account and a depreciation
account is set up to match the cumulative provision charge to the
profit and loss account. The difference between these two
cumulative figures reflects the amount by which the company has
spent more than it has charged against profits and vice versa. If
the business had under-spent on maintaining its infrastructure, the
provision made under the old accounting policy is replaced by the
excess of cumulative depreciation over the cumulative maintenance
expenditure being capitalised. Conversely it is possible that a
business is ahead of its maintenance plan and has spent more than
has been charged to the profit and loss account. In this case the
current asset for deferred expenditure under the old policy is
replaced by the excess of cumulative maintenance expenditure now
capitalised over cumulative depreciation.
Under the renewals basis of accounting the annual
depreciation of assets, being the estimated level of expenditure
required to maintain the asset, is deductible from profits. This
alignment is acceptable for tax purposes on an on-going basis as it
achieves the object of relieving expenditure only once.
Revenue officers should consult Revenue Accountants where it
is not clear how the prior period adjustments have been calculated.
The general change of basis guidance is at
BIM34000 onwards. The guidance at
BIM34080 may also be relevant as that
looks at the impact of a move to following FRS12.
