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