To mark this momentous year for UK GAAP, I'm embarking on a mission to work my way through FRS 102, reading a portion on each working day of 2015 and writing a short blog entry on my thoughts and musings (be they few or many).
Day 74 (2 July)
Having looked at initial measurement of PPE in the last post, we'll proceed to subsequent measurement today. Before we do so, there's a couple of 'boring, but possibly important' paragraphs first: para 17.13 requires use of present value cost accounting if payment is deferred beyond normal credit terms (have fun trying to work out what is 'normal'!), and 17.14 requires fair value accounting for non-monetary consideration.
Right. On with subsequent recognition which is dramatically.... the same as FRS 15, at least for cost. The cost model is dealt with in a sentence (NB we'll get to depreciation rules a little later). The revaluation model is broadly equivalent to current GAAP but with a couple of key differences:
- Firstly, the rigid five-year revaluation cycle from FRS 15 (a full valuation at the end, an interim in year 3 and 'material' increments in between) is gone. In its place is a requirement for revaluations 'with sufficient regularity' so that the value isn't materially different from fair value (para 17.15B); and
- Secondly, in a further relaxation, para 17.15C sets out the valuation basis which is (normally) by a professionally-qualified valuer - but not specifically an independent valuer (as per FRS 15).
Let's analyse the impact of these changes, as there's good news and bad news for accountants. On the plus side, the relaxation means that for many trading entities, where the property NBV is by no means the biggest figure in the accounts and where the property is in a relatively low-growth area, revaluations will become less frequent, and this should lead to lower administrative costs for those entities. It also means that, if such an entity happens to employ a RICS-qualified valuer, direct incremental costs will effectively disappear if this person performs the valuations.
On the minus side, the fact that FRS 102 goes into far less detail concerning what a valuation entails could mean that, where an external valuer is used, costs could actually increase in some cases. FRS 15 sets out exactly what a valuer should do in paras 47-49, and it distinguishes between full and interim valuations, and makes clear that the former is only needed every five years. FRS 102 doesn't make any such distinction, and could lead some to conclude that a 'full' valuation (in order to obtain fair value as set out in paras 11.27 to 11.32) is needed every time. This will be of particular importance to, say, a professional services firm in the heart of London whose property may well materially appreciate in value every year. Now, it will be up to valuers to determine how detailed their processes need to be to comply with the FRS 102 requirement, and we'll have to see what practice emerges, but the lack of detail in FRS 102 compared to FRS 15 may lead to more varied practice.
There's also the poor auditor to consider. It's actually quite comforting as an auditor to know that, to comply with GAAP, your client is never more than a couple of years away from a formal valuation and is only ever four years from a full external valuation. Especially where year-on-year changes are not expected to be particularly material, this may mean that auditors perform little work on property values other than a skim-read of the valuers' reports. This may not be the case under FRS 102. There's no future hard requirement for any external evidence within GAAP, and there's the prospect of several years between valuations where a bullish director insists that there's been no material change. So accountants/auditors must beware 'selling the benefits' to clients of the relaxed approach to revaluations from an accounting perspective, only to insist on more frequent (and possibly externally conducted or reviewed) valuations to provide audit evidence.
P.S. If you missed the last instalment click here