For any company that holds investment property, planning for the switch to the new UK GAAP standard FRS 102 is essential. FRS 102 is set to replace all of the current FRSs and SSAPs, and will result in a number of significant accounting changes.
It’s important to understand the impact of these changes and update processes accordingly. After all, most UK companies holding investment property will need to apply FRS102 soon, so it’s important to act quickly.
Section 16 of FRS 102 defines and sets out the accounting treatment for investment property and related disclosure requirements. But first…
What is investment property?
Investment properties and owner-occupied properties are subject to different accounting standards. Investment property is defined by the Financial Reporting Council (FRC) as:
- Property (land or a building – or part of a building – or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both.
However, it doesn’t apply to any property sale in the ordinary course of business, or property used in the production or supply of goods or services or for administrative purposes.
A property interest held by a lessee under an operating lease can be classified and accounted for as investment property using this section. However, this is only applicable if, and only if, the property would otherwise meet the definition of an investment property and the lessee can measure the fair value of the property interest without undue cost or effort on an on-going basis. This classification alternative is available on a property-by-property basis.
Property held primarily for the provision of social benefits, like social housing held by a public benefit entity, will not be classified as investment property. Instead, it is accounted for as property, plant and equipment in accordance with Section 17 of FRS 102
Mixed-use property will be separated between investment property and property, plant and equipment. However, if the fair value of the investment property component cannot be measured reliably without undue cost or effort, the entire property will be accounted for as property, plant and equipment in accordance with Section 17 of FRS 102
These guidelines are detailed and should be consulted by anyone unsure of whether or not a property purchase is classified as an investment property or not. Also, it is highly recommended that all commercial investors seek professional help from accountants with a firm understanding of FRS 102 and its wide scope when buying investment property and on the transition to FRS 102.
How do I account for an investment property?
If an investment property’s fair value can be measured reliably and without undue cost or effort, this should be performed at each reporting date. Any changes in fair value are recognised in the profit and loss account.
If a company has agreements based on the reported profit figures – such as bonus pools, earn outs or loan covenants – this could play havoc with the annual results and cause problems.
But what if I have a group of companies?
In a group situation, investment properties would be recognised as such in the individual financial statements of a lessor. When it comes to preparing the group financial statements, investment properties would form part of property, plant and equipment.
Will I have to pay more tax?
No, an investment property is a chargeable asset and tax will only become payable when the property is sold. However, FRS 102 does require the company to provide for deferred tax on the fair value changes.
Can I distribute the reserves?
The fair value gain is not distributable as a dividend to shareholders. This also includes any transfers to profit and loss reserves of any revaluation surpluses brought forward for investment property at the date of transition.
While there is nothing in companies’ legislation which requires the reserves to be split between distributable and non-distributable reserves, it is a smart way to keep track of reserves which are not distributable for dividend purposes.
Go with the Flow
Flow’s team of expert cloud accountants boast over 60 years’ experience advising small and medium-sized businesses, and can offer professional, proactive and tailored guidance to suit your accounting needs, too.
We have helped some of the UK’s largest property investment groups manage their finances. And we can do the same for you. For more information, call 0330-123-5577 today or take a look at our commercial property accounting services.
Flow’s Latest White Paper Coming Soon!
Our new e-book, Accounting Advice for Innovative UK Commercial Property Investors, is coming soon, and will be packed with useful tips and resources. Watch this space!