After considering how to account for valuation changes in investment properties in my previous blog posts, I now move on to one of the most controversial areas of investment properties: deferred taxation.
Another key difference between accounting for investment properties under FRS 102 and current UK GAAP is the recognition of deferred tax under FRS 102. FRS 19 prohibits the recognition of deferred tax on timing differences when fixed assets are revalued unless there is a commitment to sell that fixed asset. However FRS 102 requires a deferred tax provision to be recognised on investment property that is measured at fair value irrespective of whether the entity is likely to sell the asset and rollover any relief. Such deferred tax is measured using the tax rates and allowances that apply to the sale of the asset except where the asset has a limited useful life and all of the economic benefits are expected to be consumed.
The easiest way to understand deferred taxation is to have a look at some simple figures:
Client ABC Ltd with a year end of 31 December. They don't plan to early adopt so the first set of accounts under FRS 102 will be the year ended 2015. December 2014 comparatives will need to be restated and to do that we will need to know the opening position for that year (eg December 2013).
at end of 2015: £2.6 million
at end of 2014: £2.3 million
at end of 2013: £2.0 million
No difference noted between open market value and fair value.
Original cost of £1.0million thus at December 2013 there is £1.0m sitting in an investment revaluation reserve (and thus £1.3 million at 2014).
When calculating the deferred taxation for the investment property we use the tax rates and allowances applying to the sale of the asset and thus look at the difference between the fair value and its indexed cost. Indexed cost has been calculated at £1.3 million at end of 2013, at the end of 2014 assumed to be £1.326 million and at the end of 2015 assumed to be £1.5912 million.
|Valuation in accounts||2,000,000||2,300,000||2,600,000|
As an opening transition adjustment the £140,000 of deferred tax liability needs to be recognised with the corresponding entry to the non distributable reserve (alongside the movement of the investment revaluation reserve of £1.0 million to a non distributable reserve). The net effect to the non distributable reserve will therefore by £860,000.
To restate the comparative, an extra £54,800 of deferred tax needs to be recognised (debit to tax charge for the year and credit to deferred tax liability). The gain of £0.3 million also needs to be moved from the investment revaluation reserve to current year profit and loss.
In 2015, an extra £6,960 of deferred tax needs to be recognised and the revaluation gain of £0.3 million will need to be recognised in the profit and loss account.
Having now covered the majority of the complexities of investment properties throughout my first four blog posts, I would like to finish the series with a final blog on group scenarios - watch out soon!
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