Accounting for investment properties has been one of the headline changes under FRS 102 and today I will set out and update you on the key issues which may crop up for you and / or your clients.
Note: remember that FRS 102 is mandatory for non-small companies with periods beginning on or after 1 January 2015 and comparatives (including the opening balance sheet) will need to be restated.
As we get ever closer to the point when accountants and auditors will be subsumed in FRS 102, a number of common topics relating to investment properties are cropping up which I will tease out over a series of short blog posts with some issues certainly being more controversial than others.
Let's start with a definition.
Section 16 of FRS 102 defines investment property as property (which can include land or only part of a building) held by the owner or by the lessee under a finance lease to earn rentals or for capital appreciation or both, rather than for:
- use in the production or supply of goods or services or for administrative purposes; or
- sale in the ordinary course of business.
There is also scope for an investment property to be held under an operating lease. This will arise if, and only if, the property would otherwise meet the definition of an investment property.
Is this definition any different from SSAP 19?
Yes as SSAP 19.18 explicitly states that the following are not investment properties:
(a) A property which is owned and occupied by a company for its own purposes is not an investment property.
(b) A property let to and occupied by another group company is not an investment property for the purposes of its own accounts or the group accounts.
This second part (b) is important as properties which used to be let to a fellow group company will now potentially fall into the category of investment property under FRS 102. This chain of thought is to be continued in a separate blog post, so watch this space in the coming weeks and months......
What happens if part of the property is let but part of the property is used by the entity itself?
Under SSAP 19.18 that would have been accounted for as a tangible fixed asset as the entity occupied part of the property (irrespective of how much the entity used itself versus letting out). However under section 16 of FRS 102 you will now have a mixed use property and the fair value of the proportion of the area let should be quantified and accounted for as an investment property. Unless this component cannot be measured reliably (in the context of undue cost or effort) the whole property is accounted for as a tangible fixed asset. So we will now potentially see one property with an element of it being depreciated and held at cost (being property, plant and equipment) and another element being held at fair value and not depreciated (being investment property). The size of the investment property may be smaller than the size of the PPE element yet it may hold more value on its balance sheet. As an accountant this makes sense it light of what the property is being used for, but will this seem strange to a non-accountant?
How do we initially record an investment property under section 16 of FRS 102?
Pretty much as you would expect - how much it cost to acquire (eg. purchase price, directly attributable expenditure such as legal fees, relevant stamp duty etc.) or if under a finance lease then the asset is recognised at the lower of the fair value of the property and the present value of the minimum lease payments. If property has been constructed rather than purchased then SSAP 19.7 (a) only allowed the property to be classified as an investment property once construction work was completed whilst there is no such prohibition under section 16 of FRS 102. As such the property could be included in investment property earlier under FRS 102 as long as it meets the definition above.
What about subsequent measurement?
SSAP 19 required investments properties to be carried at open market value with no depreciation whilst FRS 102 refers to fair value (with no depreciation); although this change in wording is not expected to lead to many differences at all in practice. For an unquoted asset the price of a recent transaction for an identical asset or a valuation technique provides evidence of fair value. Both open market value and fair value should be accounted for on an on-going basis (ie. at the end of each period). A key difference in FRS 102 is that a depreciated cost model can be used instead of the fair value approach, more on this in the coming weeks....
I am sure many of you will be aware of section 35 of FRS 102 which outlines certain transitional options available for first time adopters. In particular there are two areas which impact investment properties:
These transitions options are only likely to be valid when the depreciated cost model is used and this is where it starts to get a bit more interesting. When can we use the depreciated cost model is the key question and with that bombshell I will leave it there to pick up on in my next blog post in a few weeks' time.