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Correct treatment of investment property FRS102?

Using section 16 and 17 rules for a 2nd investment property

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I have taken on a new client who 100% owns multiple LTD companies, one of which owns a commercial property which is rented back to the other two.

It looks as though their previous accountant has been applying the rule where by a group investment property can be moved to PPE and valued at cost less depn, so far so good.

The client has since bought a 2nd mixed use property through the same  LTD company (commercial and residential) that they intend to rent out in future. My logic dictates that the treatment for that 2nd property be fair value through profit and loss, as it's nothing to do with the rest of the group businesses, but can the two different treatments be applied within the same company?

All advice greatly apprciated.

Replies (7)

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Hallerud at Easter
By DJKL
09th Dec 2020 16:34

Question one, are they group entities to one another? Your initial statement suggests they are a collection of companies all owned by the same individual, does that constitute Group Entities under 16.1A below? (I actually have no idea if it does or does not but certainly such an arrangement would not in normal parlance be a group.)

"This section does not apply to investment property rented to another group entity andtransferred to property, plant and equipment (see paragraph 16.4A)"

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By paul.benny
09th Dec 2020 16:41

+1 to the response by DJKL. Common ownership doesn't make the companies a group.

That aside, it's completely appropriate to report the two properties differently because they are held for different reasons - one to occupy, the other to let out.

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Replying to paul.benny:
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By HannahS
09th Dec 2020 17:41

Many thanks for your reply. I have double checked the shareholding’s and they are all just 100% owned by the one individual so not “group” companies as you’ve stated.
Do you know of any other legitimate reason why they may have been accounted for at cost and not fair value?
I’ve queried with the old accountant but haven’t received a response yet.

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Replying to HannahS:
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By paul.benny
09th Dec 2020 17:50

Investment properties must be revalued at each balance sheet date. Perhaps treating as PP&E was a slight bending of the Standard to avoid fees for revaluation?

I do have some sympathy with that approach. It makes no difference to cash nor to tax payable. With a single shareholder, the only party that might care is a lender.

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Replying to paul.benny:
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By HannahS
09th Dec 2020 18:07

Thanks, I guess that just leaves me with the dilemma of do I carry on doing it technically “wrong” or advise the client to get a valuation and change the treatment going forwards. Nothing in accounting is ever simple!!!!

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Replying to HannahS:
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By johnt27
09th Dec 2020 19:53

The group exemption that the previous accountant has applied only came into FRS 102 with the triennial review which was effective from 1 Jan 2019, so presumably they were applying FV beforehand (I know they probably weren't).

Anyway the accounting treatment is wrong so should be corrected. Nothing in FRS 102 says you have to get a professional valuation done and the standard expects disclosure regarding who has done the valuation so 3rd parties can tell if the directors are hamming it up or not.

The valuation basis would only really be an issue if the company was seeking finance or subject to audit as I'd expect some challenge around valuation method etc

So, in the end it's pretty simple if you apply the rules properly...

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Replying to johnt27:
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By HannahS
09th Dec 2020 20:06

Thank you John, I appreciate your assistance.

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