Investment properties – practical issues adopting new UK GAAP
The main differences between FRSSE 2015, FRS 105 and FRS 102 and the new UK GAAP regime for transfers between investment properties and other classes of assets.
Definitions In substance, the definition of investment property under the old and new standards is broadly the same. In essence it is a property which is not held for use or consumption in the ordinary course of business; instead it is held for capital appreciation and rental potential, or both.
FRSSE 2015 Key facts:
movements in fair value of investment properties are recognised in revaluation reserve in equity
deferred tax is only recognised on revaluation gains and losses if the entity has entered into a binding agreement to sell the asset and has revalued the asset to the selling price.
FRS 105 for micro entities Key facts:
the standard does not permit the application of fair value accounting
the standard does not permit provisioning for deferred tax.
Under FRS 105 the recognition of investment properties stays at historical cost and does not change, irrespectively of any actual changes in the market value of the property. This treatment will be more attractive to small companies with a small property portfolio, who will avoid costly revaluations and the burden of accounting for deferred tax.
FRS 102 and FRS 102 1A Key facts:
movements on revaluation recognised in PL, but treated as unrealised for distribution and tax purposes
deferred tax arises.
The rules applied to revaluation of investment property under FRS 102 are straightforward and simply require any changes on revaluation to be recognised in profit and loss, rather than revaluation reserve. In this case, movements in fair value of investment properties are not taxable. Instead, a deferred tax cost in profit and loss, and provision for deferred tax in the balance sheet, are recognised. It is only the disposal of the investment property that will give rise to a realised chargeable gain.
How to transition Investment properties need to be brought into the accounts by adjusting comparative figures in the first set of accounts prepared under the new UK GAAP. This means restating the comparative balance sheet and profit and loss, and may mean a retrospective valuation.
The transition date to the new UK GAAP is the beginning of the comparative period. Creating a transition date balance sheet is important to bring in all the changes required by the standard into the comparatives, but that balance sheet is not included in the accounts themselves.
For example, if the first year of accounts under the new GAAP is 31/12/2016, the transition date is 01/01/2015.
In creating a set of account for 31/12/2016 the following values need to be established:
what was the FV of investment property as at 01/01/2015 – for example 500k
what was the surplus on revaluation as recognised in revaluation reserve in the last set of accounts per the old standard – for example 80k.
In the comparatives of the 31/12/2016 year end accounts the revaluation reserve of 80k will be moved from balance sheet to profit and loss. The carrying amount of the asset as at 31/12/2015 will be 580k.
Any subsequent movements in FV arising in 2016 will be brought into profit and loss in 2016 and every subsequent year.
Transfers from and to investment properties FRS 102 brought in a change in the classification of investment properties from the group perspective. While under SSAP 19 investment properties that were let to and occupied by another group entity for its own purpose were included as part of fixed assets, under the new GAAP they may now be classified as investment property under section 16 of FRS 102. Hence a re-classification of in the group accounts may be necessary.
However, transfers between investment properties and other types of assets are much more likely to arise due to commercial decisions of management, or a new availability of fair value which previously could not be reliably established. FRS 102 does not offer much guidance on these aspects, and therefore various accounting approaches are possible. The IFRS regime could be used as a guide here.
The following transfers to and from investment property are considered below:
From inventories to investment property The carrying value of inventory at the date of transfer can be used as initial carrying value of the investment property. Any movement between the initial carrying amount and the fair value is subsequently taken to profit and loss.
Owner-occupied property to investment property Several options could be used: s a) Treat carrying value of PPE as initial carrying amount of the investment property. Difference between that and the fair value is recognised in PL in the year of reclassification. b) Similarly to provision of IAS 40 ‘Investment property’, owner-occupied property is first brought in line with the fair value as part of PPE, before it is re-classed as investment property. This results in recognising a revaluation surplus or deficit in other comprehensive income.
Examples: 1) FV is less than carrying value of the property:
Any decrease up to the previous revaluation surplus is offset against revaluation reserve in other comprehensive income (equity).
Any decrease over and above credit balances in previously recognised revaluation surplus is recognised in PL.
2) FV is more than carrying value of the property:
Any increase up to any cumulative impairment losses recognised in relation to the property in PL, is recognised in PL as reversal of impairment.
Any additional increase is recognised as revaluation surplus in other comprehensive income.
After the transfer, all movements are accounted for in PL as per the standard treatment.
From investment property to owner-occupied property The last fair value of the investment property becomes the deemed cost for initial recognition as PPE. Property is not restated to historical cost; however, a disclosure of the historical cost will be required.
Any revaluation surplus is moved from PL to other comprehensive income, if the transfer is made after the adoption of the new regime. Depreciation in PL is charged on the deemed cost, and in the event of a future revaluation (if there is a change in accounting policy from cost to revaluation method) the excess of depreciation over the original amount is charged against any revaluation surpluses accumulated.
From investment property to inventories There is a conflict between the standard and company law as applied to Companies Act accounts, with respect to the value at which the transfer should be made and recognised in inventories.
While the default position is that fair value of the property would become the deemed cost on transfer, and currently company law permits an alternative recognition of stocks at current cost, or fair value, other factors need to be considered:
from 01/01/2016 stock recognition at current cost is removed (SI 2015/980)
recognition at fair value would require re-measurement at each reporting year end. This is not usually permitted under FRS 102 2.2.
Preparers and entities affected could consider restating the carrying amount in inventories to the historical cost, less any impairment on transfer. A disclosure of true and fair view override from the law may be necessary.