Impact of properties under construction on the FS?

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I'm trying to understand forecasting of a real estate company that develops and also rents out property (does not build to sell). Some of its properties under construction are valued at fair value (completing in the next year) and others are valued at cost (completing much later). A couple of questions to confirm my thoughts:

  • I assume the properties under construction valued at cost are valued at the total costs spent on the project so far? And this is reflected in "investment properties" on the balance sheet? (There is no separate line on the BS for properties under construction).

  • For forecasts for this year, do I need to add the amount of capex that will be spent on the projects valued at cost this year to the investment properties line on the balance sheet, to reflect that the value at cost/carrying value has increased?

  • likewise on the income statement, is this capex/increase in carrying value also added to the "gain on valuation of properties" line? Or because it's still being measured at cost reflecting capex spent, rather than being revalued to fair value, it shouldn't be reflected as a gain?

  • I assume I don't need to do any of this for the properties under construction recognised at fair value if I assume the fair value does not change at year end? So the capex spent on the projects valued at fair value does not impact the investment properties under construction in the balance sheet?

As an additional question, is it not risky to value developments completing in the next year at the completed fair value? Completion may be soon, but ultimately it's not completed yet and anything could happen to the project. What happens if the project is delayed to much later? Is it then revalued at cost with a writedown? Or am I misunderstanding "fair value" as completed fair value?

Thank you in advance to all you knowledgeable people!

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By paul.benny
10th Mar 2024 11:35

Starting with your final paragraph, yes, you are misunderstanding fair value. Which is probably why most of the rest of your post is nonsense.

On the first bullet point
- FRS102 doesn’t explicitly deal with assets under construction. As part-built property appears to be material, I would disclose separately within investment properties.
- For part-completed properties, I would look at the revenue recognition requirements in s23. In essence, if cost to date plus cost to complete are greater than estimated fair value at completion, you should be taking a write-down now rather than waiting to complete.

Your 2nd and 3rd bullet points seem to be based on the misunderstanding. Forecasts are for management accounts, so you can forecast what you like – and deal with the consequences if your forecast is way out. There is no P&L movement and no revaluation from completing a property. The entries are simply dr investment properties, cr creditors for the purchased materials.

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