ACCOUNTING FOR FRS102
Some of the most practical issues surrounding FRS 102 are those concerning investment properties and the significantly different accounting treatments under FRS 102 and SSAP 19.
The definition of investment property under FRS 102 is set out in paragraph 16.2 to 16.4 of FRS 102:
“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 purposes, or
(b) sale in the ordinary course of business.”
Implications for Group Accounts
Paragraph 8(b) of SSAP 19 ( Accounting for Investment Properties ) prohibits property let to and occupied by another group company, including a subsidiary, being treated as investment property in either the individual accounts or the group financial statements.
Unfortunately, FRS 102 is silent on the treatment of investment properties let to and occupied by group companies. Fortunately, Staff Education Note 4 Investment Properties clarifies the position. Page 3 of the Note confirms that FRS 102 does not exclude those properties that are let to and occupied by group companies from the definition in paragraph 16.2 to 16.4.
In a group situation investment properties would be recognised as such in the individual financial statements of a lessor. Investment properties should form part of property, plant and equipment in the group financial statements .
Implications for Profit & Loss
Paragraph 16.7 of FRS 102 requires fluctuations in fair value to be taken to profit or loss account and reported within operating profit rather than to a revaluation reserve as is the case under SSAP 19. This represents a significant change in presentation for those companies which need to apply the requirements in FRS 102 to their investment properties in 2015. There is a requirement to apply FRS 102 retrospectively to the date of transition and hence there will be changes to previously reported profit/loss and equity.
Implications for Deferred Tax
Paragraph 29.16 of FRS 102 has a direct link to investment properties and requires deferred tax to be accounted for in respect of investment property that is measured at fair value in accordance with paragraph 16 requirements. Any increase or decrease in the fair value of the investment property must be matched with a corresponding provision for deferred tax.
In contrast, current UK GAAP only requires deferred tax to be provided for where there is a binding agreement to sell the property at the balance sheet date.
Undistributable Reserves ?
The fair value gain is not distributable as a dividend to shareholders and this includes any transfers to profit and loss reserves of brought forward revaluation surpluses for investment property at the date of transition.
This may suggest the use of an ‘undistributable reserves’ account within the equity section of the balance sheet in order to distinguish distributable reserves from undistributable reserves. While there is no company legislation requirement to that effect, it would represent a way of keeping a track of those reserves which are not distributable for dividend purposes.
While these practical issues are currently the preserve of those preparing accounts, in the longer term it is the reader of those accounts who will be navigating, and relying on, that preparation.
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