Following on from the feature on common issues encountered on first time adoption of FRS 102 in the July issue of ACCA's AB magazine there seems to be some concern and confusion over revaluation reserves and when and if they should apply.
Revaluation reserves are no longer the correct treatment for changes in fair value for Investment Properties. FRS 102 paragraph 16.7 states ‘Changes in fair value are recognised in profit or loss.’ It is important here to also recognise that the definition of an investment property has changed:
FRS 102 paragraph 16.2 - 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, rather than for:
(a) use in the production or supply of goods or services or for administrative purposes; or (b) sale in the ordinary course of business.
The Standard goes on to highlight that a property interest that is held by a lessee under an operating lease may be classified and accounted for as investment property and that division is required where there is mixed use. Paragraph 16.4 states that recognition will be ‘separated into investment property and property, plant and equipment’.
An FRC staff education note states ‘FRS 102 does not exclude from investment properties those properties that are let to and occupied by group companies, which would be recognised as investment properties in individual financial statements of the lessor. In the group accounts such properties would be part of property, plant and equipment. In certain circumstances FRS 102 permits a property held under an operating lease to be treated as an investment property....’
Property, plant and equipment is the other area where revaluation reserves had previously been common. For these assets a revaluation reserve still applies. On transition to FRS 102 the option exists for a revalued asset to be treated as deemed cost or to continue with a revaluation model. FRS 102 paragraph 17.15 states that, after initial recognition, an entity shall measure all items of property, plant and equipment using the cost model or the revaluation model. Where the revaluation model is selected, this shall be applied to all items of property, plant and equipment in the same class.