Audit and Technical Partner Leavitt Walmsley Associates Ltd
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Accounting for property valuations under UK GAAP

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Accountants have reported a lot of confusion and challenges around property valuations under both FRS 102 and FRS 105. Steve Collings addresses the concerns.

15th Jun 2021
Audit and Technical Partner Leavitt Walmsley Associates Ltd
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At a recent virtual conference, there was a stream of questions coming through from delegates around the issue of property valuations.

Some accountants were querying the accounting treatment for investment property, while others were saying they had received challenges through reviews of financial statements as to the accounting treatment they had applied (including deferred tax aspects) as well as the disclosure requirements and were unsure where the criticism came from.

Investment property classification

One of the most common questions surrounds the classification of investment property and when property should, or should not, be classified as such. The Glossary to FRS 102 provides the definition of investment property which is:

Property (land or a building, or part of a building, or both) held by the owner or by the lessee under a finance lease to earn rentals or for capital appreciation or both, rather than for:
  1. use in the production or supply of goods or service or for administrative purposes, or
  2. sale in the ordinary course of business.

This is quite a broad definition. Investment property can include just land or just a property or both. In practice where a property generates a rental income stream for the business, the property would fall to be classed as investment property. Similarly, if land is being held for long-term capital appreciation, then that too would be classed as investment property. Correct classification is critical because it can affect the subsequent accounting treatment.

Where property meets the definition of investment property, it must be accounted for under FRS 102, Section 16 Investment Property. Micro-entities choosing to report under FRS 105 would apply FRS 105, Section 12 Property, Plant and Equipment and Investment Property.

At initial recognition, the investment property is measured at cost (being its purchase price plus all directly attributable costs, such as legal fees). After initial recognition, FRS 102, Section 16 applies the Fair Value Accounting Rules in company law. This means that at each reporting date, the entity must remeasure investment property to fair value with fair value gains and losses being recorded in profit or loss.

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Replies (3)

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By Fred Hoad
16th Jun 2021 10:28

At one point the article states "Fair value gains and losses on investment property must pass through profit or loss. Once this has happened, they can be ring-fenced into a separate component of equity (eg a ‘non-distributable reserve’). Although there is nothing in company law that requires this, it is an efficient means of segregating distributable and non-distributable reserves."

Later, under Deferred Tax it states "Deferred tax in respect of investment property will follow its underlying transaction and be recorded in profit or loss. Deferred tax in respect of revalued property, plant and equipment will also follow its underlying transaction and will be recorded in the revaluation reserve."

So, is/should there be a revaluation reserve or not?

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By Tony Wood
17th Jun 2021 18:41

As I book keeper I feel I don't have the skills to reply on this forum normally, but love reading the replies. But I have a question re this article, which I'd be interested in peoples views. I'm in a housing co-op, where all tenants are members of the co-op and all have a £1 share in the co-op. Our rules state none of us can take profits from co-op and if the organisation/co-op folds all surpluses have to go to a like minded organisation. We have had advice from an accountant that we treat our properties as investment properties. Be interested in hearing people's views, but if I'm waisting this forums time please ignore.

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By Bashirian
24th Jun 2021 10:05

When revaluation of assets is valued at more than the carrying amount of the asset on the balance sheet, the increased bubble shooter value is referred to as other comprehensive income and recognized in the difference. asset valuation bias (which is an equity item)

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