Client buys a property for £1.5M (because that was what the buyer wanted) but valued by bank's surveyor at £1.4M... under FRS 102, cost, then open-market-value... client p**sed because I'm about to knock £100k off his balance sheet value... gets worse because over the years they've improved the property (which has been capitalised) consequently these are going as well as otherwise it would be double-counting... another £100k off the balance sheet...
Its not the enhancements that they're particularly bothered about, its the fact that they paid £1.5M but the OMV is less... and given the state of the property market this will always be the case in the foreseeable future.
... & no its not an audit.
Question... what are the implications of the client saying, sod it, leave it and disclose that we're not complying with FRS 102 1A?
I would appreciate your opinion, before I take this to the institute & have to fire-off a £5k pa client...
Replies (14)
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This is an investment property presumably?
Forget what the bank's valuer says about the current value. What does your client think?
You mean it’s a property used in the company’s trade?
If so, doesn’t FRS102 permit cost less depreciation?
If it is PP&E then surely the carrying value is depreciated cost unless the asset is impaired. (17.15A)
Just because the bank values the asset at less than cost does not necessarily mean the asset is impaired. What is the asset's value in use?
Paul, having re-read Sn17 for the umpteenth time, I can see where you're coming from... but, & its a big but, doesn't the fact that I have a so-called "professional" valuation, imply that the asset is impaired? otherwise, given that the surveyor knew what they were going to pay for it, why did the muppet provide a lower figure?
Have you actually got a professional, paid-for valuation? Or just a mortgage valuation?
I thought it was generally accepted that mortgage surveys tend to result in a 'prudent' valuation (i.e. "I'm not getting paid enough for this to warrant taking a chance of getting sued over it")
I agree with John.
You have NOT received a proper open market valuation for purposes of selling the property (and even if you had, you may still have an argument for value in use).
Therefore, you have no evidence that the asset is impaired. I might even go as far to say that if the bank is prepared to lend to £1.4m on a £1.5m asset, then that is evidence that the property isn't impaired.
I would not be writing this asset down.
Valuations on commercial property/ residential portfolio valuations by professional surveyors, for bank purposes, these days always require careful thought.
After 2008, when large numbers of valuations proved optimistic (mainly because funding for purchasers had dried up so there were no purchasers- they created their own perfect storm) and valuers were getting sued left, right and centre re valuations issued pre 2008, the figures they started producing became , at times, a nonsense. One parade of shell units with one bank got valued at sub £200,000 in 2011, within 5 years all had been sold for £450,000- we sold them into our SIPPs to repay that bank in full and then sold them out without forced sale.
We had red book valuations instructed by another bank on our entire portfolio secured to them in 2012, they then used these to argue covenants were broken. We got alternative valuations, argued their figures were nonsense and then downsized the business borrowings (with a gun at our head) and the penny eventually started to drop with the bank when we were consistently achieving 30% over their valuations and 15% over the ones we had instructed, or even higher in some cases. Only one property sold near its valuation- an out of town unit , everything in strong urban areas pushed well ahead.
Of course all this activity soured our banking relationship and in 2016, having tidied our LTV position and strengthened our cashflow, we moved from this bank.
Whilst I do use the current valuation figures in our accounts (as it keeps the current bank happy that the accounts tie with the valuations - we had them all done again in 2016) we know they are still a nonsense, I have a site earning £270,000 rents a year with a professional valuation at £2.25m, reality is the site is at minimum worth £5 million.
I will caveat the above by saying the properties need to be in strong cities, outlying properties can still be tricky to find a buyer, but if in a decent size city I would frankly ignore any valuation performed by surveyors at the behest of a bank, a combination of fear and worrying they get dropped from the panel of surveyors tends, imho, to lead to some very conservative figures.
If relevant, can’t you just rely on “the property has been valued by the director at market value, who has significant experience within the property market” for the £1.5m?