Investment properties under FRS 102 (2018)
The introduction of FRS 102 (2018) will lead to a number of changes to UK reporting effective from 1 January 2019, although early adoption is possible. In this article, James Waller CA looks at the impact on investment properties.
What is an investment property?
The glossary in FRS 102 (2018) states that an investment property is an asset that is held for either long-term capital appreciation, or to earn rental income, or both, and can be the whole o the asset or a definable part. Buildings where the entity has ‘ownership’ through a finance lease can also be classified as investment properties.
The glossary also highlights what would not be an investment property, such as when an asset is owner occupied (should be classified as property plant and equipment), held for sale (classified instead as inventory) or in construction.
Once the classification has been established, the accounting treatment for the investment property should be determined in accordance with Section 16 of FRS 102 (2018).
The initial measurement rules remain unchanged from the previous version of FRS 102, with only directly attributable costs being capitalised. For leased investment property, the lower of the fair value of the leased property or the present value of the minimum lease payments will be the initial cost.
Subsequent measurement of investment properties is at fair value, with all gains and losses going to the profit and loss account, preferably within operating profit. However, gains should not be treated as distributable (as they are unrealised) so the profit and loss reserves should be carefully analysed for dividend purposes.
FRS 102 (2018) removes the undue cost and effort exemption, meaning an annual assessment of the fair value is required. There is no requirement for this to be external although auditors may wish to do additional testing if a valuation is internal.
Transfers to other categories
FRS 102 (2018) also adds detail on how to transition from different classifications:
- When a property ceases to be classified as an investment property, the fair value shown in the accounts will become the deemed cost;
- Where a property moves from PPE to investment property, this will be treated under the requirements in section 17, and will depend on the treatment of previous gains and losses; and
- When a property moves from inventory, the asset will be shown at fair value on the balance sheet. The change in value, which is generally upward, will be taken to the profit and loss in the same way as an annual valuation.
FRS 102 (2018) reintroduces a policy choice in group situations. Where an individual entity lets out a property to another within the group, the standard permits a choice between measuring at fair value, or under the cost model. It is expected that most groups will choose the latter option, restoring the choice from previous UK GAAP and ensuring that potentially complex consolidation adjustments are not required.
Where a group wishes to transition to the new accounting policy of the cost model, it can use the fair value of the investment property as deemed cost at the date of transition to FRS 102 (2018) (i.e. the start of the comparative period).
Differences for small and micro entities
For entities reporting under Section 1A, the key disclosure difference is that there is no requirement to provide any information on the valuation method.
Entities that report under FRS 105 must measure investment properties under the cost model.
For even more detailed accounting guidance, including updates and commentary on developments as they happen, see Croner-i’s range of tax, accounting, and audit products.