Rental Property Cost £200,000.00
Depreciation @ 2% SL in 5 Years £20,000.00
Accounts BV at YE 5 £180,000.00
HMRC BV at YE 5 £200,000
Market Value now at YE 6 £225,000.00
What should be depreciation policy for a medium-sized company and what should be entries at YE 6 for proper disclosure in accounts?
Any experienced can guide, please.
Replies (17)
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What accounting standard? FRS 102 holds that investment property must be held at fair value. Rental property is usually but not always investment property.
What does HMRC BV mean?
Does it qualify as an investment property per FRS 102? Presumably not as you would have been fair valuing annually.
You can choose to revalue properties that are not investment properties. This is not mandatory.
There will be a deferred tax liability or possibly asset based on the difference between book value and tax written down value.
See also sections 16 and 17 of FRS102.
Typically a property held for the purposes of collecting rents or for capital appreciation will be an investment property, subject to a few exceptions.
I would suggest reading sections 16 and 17 of FRS 102.
I would suggest how the property is financed is pretty much irrelevant. How it is used, as noted by Duggimon, is key.
Actually not so in reality- where it has an external bank lender I would be more inclined to revalue in the accounts.
In my experience it can be difficult explaining to bank managers that the valuation from x surveyor you have given him says £YY but the same property in the accounts you have given him is only shown as £XX because the company reports under FRS105.
It is not as bad as say explaining that preference shares are for accounts purposes in creditors but they are not a real creditor and dividends on them are in interest paid and need extracted out of interest paid when doing interest cover calculations, but it is only slightly easier-in my experience unless they qualified as accountants bankers really do not understand accounts.
I understand what you are saying.
However my point was that how the property was financed i.e. bank loan/director loan/ own retained earnings does in no way determine whether the property is an investment property or is property, plant & equipment.
So if its a rental property, it will probably be classified as an 'investment property' with it being measured at fair value.
The OP made reference to a medium sized company so I assume FRS 105 and its differing treatment of investment properties is not relevant in this instance.
The funding doesn't determine whether a property is an investment property.
If the company has bought it to rent out to third parties, it may well qualify as an investment property. Without more information I couldn't be certain.
You would need to check the definitions in FRS102 (if that's the standard you are reporting under). Or ask your accountant.
@the op, have you considered whether under your professional ethics you have sufficient competence to act in this matter?
You wont be the first accountant to have be tripped up by property taxation which is quite specialist if you are used to (say) builders or retail.
Its one thing to get a bit lost from time to time (we all do that), but you don't even seem to know which town your are in on this one.
All of the professional accountancy bodies require members to consider whether they have the technical skills required before undertaking work.
Tax on property can be a challenging area, even for practitioners who are very experienced.
ishould.. is questioning whether you have the technical skills required to deal with this matter. Given your apparent lack of understanding regarding accounting investment property, I agree.
For a company holding investment properties, the treatment unde FRS 102 and FRS 105 are wildly different and not necessarily easy to switch between, you need to pick one and stick.
I would argue that accounting for investment properties under FRS 105 does not give a true and fair view and shouldn't be used, but I'm sure others would argue with that.
At least it solves your issue of deciding on a depreciation policy.