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FRS 102 - Property Issues

6th Jun 2014
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While FRS 102 helps bring the UK into line with international financial reporting standards, and comes packaged in a far less weighty format (it’s only 350 pages long in comparison to the 3,000 pages of current UK GAAP), it does bring with it some issues and confusion – particularly around property.
 
One of the major issues is the treatment of investment property. Under current UK GAAP properties held for investment are treated as assets on The Balance Sheet (or to give it its FRS 102 name The Statement of Financial Position) and any change in value of these properties, after a revaluation, only effects the figure on The Balance Sheet. Under FRS 102 any revaluation (which must be based on fair value) is recorded in The Profit or Loss Account (or The Statement of Profit or Loss as it’s called in FRS 102). This of course creates an interesting question in regards to tax – if a property is revalued and it increases in value this will increase profits and thus increase the corporation tax liability, equally if a property is revalued and it decreases in value this will decrease profits and thus decrease the corporation tax liability. HMRC have provided guidance on this issue, in HMRC’s ‘FRS 102 Overview Paper Tax implications’, they state that while the correct accountancy treatment is to included revaluations in The Statement of Profit or Loss, any revaluation will not be included for the purposes of calculating tax liabilities.     
 
In regards to Property, Plant and Equipment (PPE) FRS 102 makes a number of minor changes:
 
  • The first of these changes is a requirement that major spare parts form part of PPE
  • The second of these changes is that when measuring the cost of an asset gained under abnormal credit terms, present value of all future payments should be used.
     
  • Renewals Accounting is no longer acceptable under FRS 102.
     
  • Any residual value should be based on current prices as opposed to historic prices.
 
For tax purposes these changes should have little effect, as depreciation and revaluations of capital assets are not directly taken into account when calculating tax liabilities (rather a capital allowance is provided for some assets). However when revenue expenditure is added to the cost of an asset, this will be recognised for tax purposes in line with the requirements of FRS 102.    
 
The above is only a brief summary of the issues FRS 102 brings. If you are unsure as to how FRS 102 effects you or your clients you should investigate further (the actual FRS 102 document and HMRC’s ‘FRS 102 Overview Paper Tax implication’ are good places to start – both are freely available on the web). CPAA members can also utilise the Association’s free tax and legal helpline if they are unsure of the implications of FRS 102.
 
 
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Contact the CPAA on 0161 834 5998 or via email at [email protected]
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