FRS 102: Intra-group investment property
As part of its triennial review amendments, the FRC has made various changes to the UK’s accounting standards, the majority of which apply to accounting periods commencing on or after 1 January 2019 (with limited exceptions that have been examined in previous articles).
In this latest article, Steve Collings looks at one of these amendments that is proving quite popular, relating to intra-group investment property,
Investment property defined
The glossary to FRS 102 defines ‘investment property’ as:
‘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:
Use in the production or supply of goods or services or for administrative purposes, or
Sale in the ordinary course of business.
Essentially when a property generates rental income for a business and/or is being held for capital appreciation purposes the definition of an investment property is met.
Accounting treatment for standalone investment property
When a property meets the definition of investment property then it must be accounted for under the provisions of FRS 102, Section 16. Section 16 requires all investment property to be measured at fair value through profit and loss at each reporting date (with associated deferred tax consequences brought into account also).
There are no undue cost or effort exemptions in FRS 102 (March 2018), Section 16 as there were in the September 2015 edition. The FRC removed the undue cost or effort exemptions on the grounds that they were being applied incorrectly as accounting policy choices, which they were never intended to be.
Hence all investment property that is not rented to a group member must be remeasured to fair value at each balance sheet date through profit and loss not the revaluation reserve. This applies to small entities also who have investment property on the balance sheet.
The removal of the undue cost or effort exemptions formed part of the triennial review amendments which apply mandatorily for accounting periods commencing on or after 1 January 2019. Early adoption is permissible, provided all of the triennial review amendments are applied at the same time.
Intra-group investment property
As noted above, the FRC removed the undue cost or effort exemptions from Section 16 during the triennial review (hence there are none in the March 2018 edition of FRS 102). Instead, the FRC included an accounting policy choice in FRS 102, Section 16 which applies only to groups.
FRS 102 (March 2018), paragraph 16.4A states:
‘An entity that rents investment property to another group entity shall account for those properties either:
at fair value with changes in fair value recognised in profit or loss in accordance with this section (the Appendix to Section 2 provides guidance on determining fair value); or
by transferring them to property, plant and equipment and applying the cost model in accordance with Section 17.
An entity choosing to apply (b) above shall provide all the disclosures required by Section 17, other than those related to fair value measurement.’
FRS 102 (March 2018), paragraph 16.4B states:
‘When only part of a property is rented to another group entity and the remainder is used for other purposes (such as being rented to an external third party or owner occupied), paragraph 16.4A only applies to the component of that property that is rented to another group entity.’
It is expected that many groups will want to apply the accounting policy choice of measuring intra-group investment property under the cost model (i.e. at cost less depreciation less any impairment) as this is a more efficient way of accounting for such properties.
Many groups complained that obtaining a valuation for a property rented out to another group member which would be eliminated on consolidation would result in undue cost or effort and so the inclusion of the accounting policy choice in FRS 102 (March 2018), paragraph 16.4A effectively resolves this problem.
The accounting policy choice of measuring intra-group investment property under the cost model arose through the triennial review amendments which apply mandatorily for accounting periods commencing on or after 1 January 2019.
Some groups have expressed their desire to early adopt this particular amendment, which is permissible provided that all the amendments arising from the triennial review are applied at the same time.
Applying the change of accounting policy
When a group wishes to change its policy of measuring intra-group investment property from fair value at each balance sheet date to the cost model, then it must apply the change to the date of transition to the Triennial Review 2017 Amendments.
Hence, a group wishing to early adopt the accounting policy choice in its 31 December 2018 financial statements will apply the change retrospectively to the start date of the earliest period reported in the financial statements, which will be 1 January 2017.
FRS 102 (March 2018), paragraph 1.19(a) states:
‘When an entity first applies the Triennial review 2017 amendments, as an exception to retrospective application, it:
may elect to measure an investment property rented to another group entity, that is measured on an ongoing basis at cost less accumulated depreciation and accumulated impairment losses, at its fair value and use that fair value as its deemed cost at the date of transition for the Triennial review amendments…’
Therefore, there is a choice of accounting treatment at the date of transition:
the group can apply the transitional provision which allows an entity to take the fair value at the date of transition and use that as the property’s deemed cost going forward. Note, that it is the fair value at the date of transition, not the current carrying amount; or
it can use the historical cost of the property and depreciate or impair the asset as if it had always been carried at cost.
It is likely that many groups will opt for the fair value at the date of transition as deemed cost going forward. Where this option is taken, keep in mind that the property is not being carried in the balance sheet on a cost basis, but instead the alternative accounting rules are being applied (as the fair value as deemed cost is essentially a revaluation amount).
Hence, any fair value uplift on transition is taken to the revaluation reserve and the historical cost comparable disclosures required by paragraph 34 of Schedule 1 to the Regulations must also be disclosed.
The accounting policy choice to measure intra-group investment properties under the cost model has been welcomed by many groups as it will provide a more proportionate way of accounting for such properties and reduce the cost/effort burdens.
If the group wishes to early adopt the accounting policy choice, then it must early adopt all the amendments arising from the triennial review as the accounting policy choice cannot be early adopt on its own.