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Version: 8.1

Fixed assets : an introduction

A fixed asset is an asset that generates a lasting economic benefit for the company. Fixed assets are listed under fixed assets on the company's balance sheet. Each one represents a value that can be separated from the business. As a result, it can be reliably valued at any point in its life cycle.

It is sometimes difficult to distinguish between expenses and fixed assets. As a rule, expenses related to the company's activity but with a useful life limited to the accounting period are considered expenses. Purchased goods will be directly used/consumed.

Conversely, assets (tangible, intangible or financial) whose useful life or use extends over several financial years must be capitalised.

Although the tax authorities have set the amount of £500 to differentiate between expenses and fixed assets, there may still be fixed assets of a lower value (provided that the asset constitutes an investment).

The concept of depreciation

A fixed asset is subject to depreciation. This means that the cost of its acquisition, or its valuation, is spread over several financial years for accounting purposes.

Depreciation therefore defines the loss in value of a fixed asset of the company due to wear and tear or obsolescence.

Depreciation is used to reduce the book value of the asset.

The rules applicable to depreciation are set out in the General Accounting Plan.

Depreciation depends on the normal useful life of the asset, as set out in the General Accounting Plan (between 5 and 10 years depending on the asset, in general). It can be calculated using linear depreciation (equal depreciation each year) or declining balance depreciation (higher depreciation at the beginning of the asset's useful life).

The applicable depreciation methods are:

  • Linear depreciation;

  • Degressive balance or derogatory depreciation;

  • Variable or unit of production depreciation;

  • Exceptional depreciation.

The pro rata temporis principle

Pro rata temporis is the proportion of time applicable for calculating depreciation.

What you will notice is that for a fixed asset, the first and last depreciation dates will be calculated on a pro rata basis if and only if the asset is acquired during the calendar year.

If this is the case, you must apply a pro rata temporis, but there is a nuance to note: if the asset is depreciable on a linear basis, you will apply the first day of use of the asset.

If the asset is depreciable on a degressive balance basis, you will use the first day of the month in which the asset was acquired.

The pro rata temporis is calculated using the rule of 3. The amount of the asset is multiplied by the number of days of use over 360 days.

For example: you purchased a van for £15,000 on 15 June, you put it into service on 20 June and you decide to depreciate it over 5 years on a linear basis:

Linear method = First day of use of the asset = 20 June.

Calculation of the pro rata from July to the end of December (6x30) + from 20 June to 30 June (11) = 191 days / 360 days.

The first annual payment will therefore be £15,000 / 5 x 191/360 = £1,591.66.