When should land be classed as an investment?

At what point should land be reclassified as an investment rather than PPE?

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I have a client who has recently received outline planning permission for a proportion of their land (to build houses) and have subsequently had the land revalued.  This is unrelated to their usual business activities.  Up until this point the land and buildings have been classed as a fixed asset with gains being taken to a revaluation reserve.  

Should the land be reclassified as an investment at this point?  And does it make any difference if they intend to do the development themselves (hold as WIP within PPE)?

Any help appreciated!

 

Replies (11)

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paddle steamer
By DJKL
18th Jul 2018 11:31

Not sure it is investment property, for one thing apart from its resale how are they to derive future economic benefit, I presume they will not be renting it to a third party?

(as an aside assume limited company as you mention a revaluation reserve)

To me it possibly has a whiff of having become stock for resale, as it will likely follow for accounts and tax purposes the intent re its future use the key is discern that intent.

As an aside, with all property projects I would, before doing anything, work through likely path or possibly paths and ensure there were no tax/funding/compliance banana skins on the proposed route/routes before I started, hitting one mid stride with property projects can be very expensive.

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paddle steamer
By DJKL
18th Jul 2018 11:32

Deleted duplicate post.

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By Ranse
18th Jul 2018 11:55

"Intent" is key in deciding how to account for the land.....i would have questioned the original intention why it was accounted for as fixed asset and not IP under FRS102 in the first place. " was the land acquired for capital appreciation " , do they expect to sell it in the normal course of business? , then you can turn your attention to the house construction ?

Let see who will agree with me...

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By Anony1974
18th Jul 2018 11:57

Hi. No they won't be renting to a third party. It's likely they will build the properties and then sell them.

Really I was working on the assumption from FRS102 that it met the definition of an investment as they're holding the land for capital appreciation and it is not being used for their usual supply of services?

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By Anony1974
18th Jul 2018 11:59

It was previously held as a FA as the planning permission scenario has been a fairly recent development.

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Replying to Anony1974:
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By Ranse
18th Jul 2018 12:09

the Intent of holding asset comes before planning permission. so i am inclined to believe that this should have been treated as IP.

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paddle steamer
By DJKL
18th Jul 2018 12:18

To be clear, am I correct in considering this as land that was used in the trade previously, thus treated as a fixed asset, but now planning has been obtained with an intention to build on it and then sell what is subsequently built?

In that case, imho, the asset needs transferred from FA to stock, to me there would be a clear trading intention.

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By Anony1974
18th Jul 2018 12:26

Yes you're right it was previously used in the business and was classed as a FA.

So is it now stock or IP?!

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By WhichTyler
18th Jul 2018 12:47

Are they holding the land for investment purposes or are they using it in business operations?

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By Anony1974
18th Jul 2018 14:21

They are holding the land with the intention of building on it and selling the properties - so would this in fact be FA WIP?

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Replying to Anony1974:
paddle steamer
By DJKL
18th Jul 2018 14:48

Current asset stock in hand, augmented by the costs of building the houses etc and in the absence of contracts to sell the houses at the end of the process valued at the lower of cost and NRV, all imho.

TCGA s 161 seems on point though I think there were relatively recent changes re treatment re assets with latent CGT losses, though given revaluations mentioned that is possibly not on point here,

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