Nearly three years on from the introduction of FRS 102, accounting for investment properties is STILL a major bone of contention for accountants and auditors alike. Here are the most common questions that crop up on Insight Training courses and workshops that deal with this issue:
1. One the changes I hate about FRS 102 is the fact that we now have to start revaluing investment properties. Isn’t it a chore?!
Maybe it is – but under old SAAP 19 and FRSSE there was always a requirement to do it. Maybe what FRS 102 has done is shone a light on the fact that sometimes under old UK GAAP companies got it wrong! And don’t forget that FRS 102 applies even if a company is audit exempt!!
2. I’ve heard that the definition is quite key to determining whether you need to apply the fair value model. Is that right?
Potentially. Investment property is held to generate rental income or for capital appreciation or both. If you can argue that you’re holding an asset for a different reason, it’s more likely to qualify as a tangible asset (or property, plant and equipment – PPE).
That will be the case for a hotel, where significant additional services are being provided, and potentially even for serviced offices where, for the owner, it’s far more than a passive investment.
3. Any other ‘workarounds’ to avoid us fair valuing it?
There is an ‘undue cost and effort exemption’ but that’s frowned on by the regulators and is being abolished in the triennial review of FRS 102.
Where an asset is being rented out – typically at below market rent – in order to deliver social benefit, then it would be accounted for as PPE and so depreciated cost would be used. This dispensation is quite narrow though and is only generally used in the social housing sector.
4. I’ve heard it’s all doom and gloom in this area as a result of the FRS 102 ‘ triennial review’. Is that true?
Not at all! Where FRS 102 would have previously required you to account for properties let intra group as investment properties and fair value them, that’s not going to be case going forward. The old SSAP 19 exemption for intra group lets is being reintroduced on an optional basis.
Also where an entity has ‘mixed used property’ the rented element will only need to be accounted for using section 16 of FRS 102 (i.e. fair valued) in the event of it being ‘separable’ (i.e. capable of being sold off separately).
5. My client has a 31 December 2017 year end. Can I apply the triennial review amendments re-investment properties rented intra-group?
If you get your skates on, yes. It was available for early adoption for 31 March 2017 year ends and after.
6. If I apply the triennial review amendments re-investment properties rented intra-group can I use ‘fair value as deemed cost’?
Yes you can. Go back to day one of the comparative period for implementation of the triennial review amendments (1 January 2016 if the company has a 31 December 2017 year end), freeze the valuation there and then account for the asset as PPE in the 31 December 2017 year end accounts – and restate comparatives.
7. Any downside?
The balance sheet might be weaker if you’re using depreciated cost because (1) there will be no valuation uplifts going forward and (2) depreciation will be charged.
However if you can demonstrate that residual value is high compared to cost (actual or deemed), depreciation might become immaterial, in which case there’ll be no need for it.
8. When applying FRS 102, does a company need to disclose who valued an investment property?
It might help, but the only specific requirement is to disclose ‘methods and significant assumptions applied in determining fair value’ (paragraph 16.10 of FRS 102). The requirements are the same for small companies applying FRS 102 Section 1A.
9. So just state in the accounting policy notes that investment properties are in the books at open market value and that’s it?
Ideally a bit more than that. What basis has been used for determining fair value – third party valuation, consideration of property yields, comparison of the market value of similar properties etc.?
10. How about FRS 105?
You’re not allowed to fair value anything under FRS 105, so investment properties are accounted for as PPE at depreciated cost. That could make life much easier – and make FRS 105 quite appealing if the company qualifies for it.