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"Where fair value gains are presented as a separate component of equity, some professional bodies are advising against calling the reserve a ‘Fair value reserve’ which is what some automated accounts production software systems are referring to the reserve as by default. Instead, they are advising member firms to call it a ‘Non-distributable reserve’..."
I'd love to see a reference to this as I hadn't picked this up from commentary by other experts.
Given the FV adjustment on investment properties is similar to FV movements on other investments I don't see the issue on the naming convention.
Is there any way to claim true and fair override, on the basis that the FRS is stupid.
The cost of implementing this for owner managed businesses massively outweighs the benefit, so they have been able to escape those costs to date.
It also distorts the balance sheet and the ROI as the trading properties are in at cost and the Investment properties will be at current value.
I presume there is no get out and i'm clutching at straws but all this does is increase costs.
T&F doesn't work on this I'm afraid, but you seem to think there is an implicit cost of implementing the FRS, which implies you haven't read it!
There's no requirement to undertake formal valuations of investment properties, so the director(s) can do their own as long as they comply with the requirements of section 11 and the valuation technique, assumptions etc are disclosed. The only issue arises if the company is subject to audit and the technique could be challenged if materially incorrect.
On deferred tax the only difference is this is now recognised rather than disclosed in the accounts (something that was usually missed) so the necessary paperwork and calculations should just be rolled up from previous years and then updated..
On ROI isn't the purpose of an investment property to make a return, whether that be capital, revenue or both? How you decide to measure this is then a choice.
I don't understand the moral panic around "non distributable reserve". Fixed assets or prepayments aren't readily converted to cash, and nobody has suggested that they be added back from distributable reserves. And I don't think that the balance sheet approach is a particularly appropriate metric of the legality of dividends.
I think a better test would be whether a company can meet its debts *as they fall due* on the basis of cashflow projections. That may be more onerous to evidence, but less onerous in terms of assets.
I think the company's act is quite clear on legality of dividends and directors' responsibilities to ensure companies can continue to meet their debts as they fall due based on reasonable assessments of going concern.
I don't understand the moral panic either but I do understand the legal one. I think it's fair to say that many assets/liabilities may not be readily convertible into the balances shown on the balance sheet, but directors are responsible for ensuring these are true and fair and not materially incorrect.
Prepayments have a value assuming the going concern basis remains appropriate on the basis they will reverse to P&L (reducing distributable reserves), if not, the accounts would be prepared on a break up basis with no prepayments.
Fixed assets are similar to the above - directors are obliged to assess all fixed assets for impairment and adjust as necessary. I think it's a reasonable assumption that many companies, and their advisors, fail to get depreciation and impairment policies that are accurate. Such that many assets are over depreciated and impaired assets tend not to be.
Hi
I am new on here, just signed up today !
I understand the deferred tax journals on the first example where you have revalued investment property and taken the gain to PL. You have then provided DT by:
DR Profit/loss Deferred tax
CR DT provision.
This is what I am happy with. However, in the second example the gain is shown within revaluation reserve, which is fine as it cannot go direct to PL. However, the DT journal on this is:
DR revaluation reserve
CR DT provision.
My question is why do we take the DT off the Revaluation reserve credit in this case? Why not do the same journal as in example 1? ie CR revaluation reserve and DR P/l DT expense.
Regards
Hi there,
The deferred tax charge follows the accounting treatment of the differences in market value (fair value).
In the examples given we have:
an investment property where fair value movements hit P&L, therefore so does the deferred tax movement; and
a revaluation (fair value adjustment) of property, plant and equipment (used in the trade of the business) whereby the fair value movement is required to be accounted for in a revaluation reserve, hence the deferred tax movement is here.
As the investment property is held for this purpose (investment returns), just as say a share or other investment would be expected to, the accounting treatment is to recognise gains and losses in P&L.
As the PPE is used in the trade of the business any valuation gains are incidental to the trade and purpose of owning the assets so these are not recognised in P&L and instead in other comprehensive income resulting in a revaluation reserve. The same can be done for valuation losses, in certain circumstances, but these may also hit P&L if they are deemed to be a permanent impairment (i.e. treat in same way as depreciation).
This change in treatment from old UK GAAP is controversial for some but I think better represents the purposes of holding different types of assets - investments or to facilitate the trade of the business.
Hi sorry forgot to say that I completely agree with what you have said. However, in the ICAEW model accounts I have seen a revaluation of investment property go through PL for £30k but the corresponding entry into the other non distributable reserves within equity section is only £25k it is reduced by the amount of deferred tax. In effect they have CR Deferred tax prov and rather than take the DR entry to PL tax charge they have taken the DR to the non dist reserve. This is not consistent with what we had discussed. So I am more confused now !
Which model accounts are these? Without seeing them it's hard to pass comment but I'll try...
Without trying to make this too confusing - if the net profit after tax is £125k ie £100k trading profit (after CT and DT), £25k FV gain (after DT) then this would go to P&L reserve and non-distributable reserve respectively. Technically it all goes to P&L reserve first and you transfer/ring fence the non-distributable part.
The tax charge/credit in P&L should be made up as follows:
CT on trading profit/loss
DT on timing differences
DT on FV gain/loss through P&L
Hi
Here is the link to the sample accounts.
https://www.bloomsburyprofessionalonline.com/view/example_financial_stat...
You will see that the revaluation of £30k has gone to the PL as it was an investment property. The entry to reserves is only £24.9k because they have deducted DT of £5.1k from this. Surely they should be doing the following:
DR PL tax with DT £5.1K
CR DT provision £5.1k
CR PL gain on revaluation £30k
DR Investment property b/sheet £30k
The PL gain of £30k gets ring fenced and should be £30k in non dist reserves but they have shown this as £24.9k. This is the bit I am confused with.
Thanks so much
Those example accounts are correct. As there's no tax note (not requireed in 1A accounts) you're not seeing the DT charge hitting P&L but it will be part of that charge in the P&L, which is correct. The hyperlink to the notes refers to the same.
I wouldn't religiously follow those example accounts as an operating profit note isn't required - it's a bit misleading as there are some exceptional items, which have to be disclosed under 1A included there correctly. Again see the hyperlinks to the notes.
FRS 102 Am I correct in saying that there is no requirement to have investment property valued by a professional surveyor? It is my understanding that valuations are normally based on land registry transactions for similar properties. Is anyone aware what other valuation methods could be used to comply with the standard?
Dears,
We have a scenario whereby the group wants to transfer it's revalued building to one of it's subsidiary at zero consideration. The revalued assets has a deferred tax as well.
How current balances will be eliminated at group level
Rgds
Ange