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digging | accountingweb | Gains and losses, profits and losses and OCI as well

FRS 102: Digging into gains and losses treatments


To help understand the logic behind the different types of accounting treatments for gains and losses, Steve Collings decided to delve a bit deeper.

16th May 2023
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During a recent conference, there were lots of questions asked about why we take certain gains and losses to profit and loss and why certain gains and losses are taken via reserves (such as a revaluation reserve) and reported as other comprehensive income (OCI). Some delegates at the conference questioned the usefulness of all these different types of accounting treatments. 

The easiest answer to this is because accounting standards, such as FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland tells us to. However, it is often worthwhile digging a bit deeper into this to try to understand the logic behind the treatments.

The profit and loss account (or income statement as it is referred to in FRS 102) reports the company’s performance during the reporting period. Profit or loss is defined in FRS 102 as: “The total of income less expenses, excluding the components of other comprehensive income.”

Other comprehensive income (OCI) is defined as: “Items of income and expense (including reclassification adjustments) that are not recognised in profit or loss as required or permitted by this FRS or by law.”

We then have total comprehensive income, which FRS 102 defines as: “The change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions from equity participants (equal to the sum of profit or loss and other comprehensive income).”

FRS 102 requires certain gains and losses to be reported in profit or loss and others to be reported in OCI. Some preparers suggest it is because some gains and losses are realised and others are not, but this is not correct. For example, FRS 102, Section 17 Property, Plant and Equipment requires fair value gains on a revalued asset to be recognised in the revaluation reserve within equity (in other words, the gain does not pass through the profit and loss account). Section 16 Investment Property requires a fair value gain to be recognised directly in profit or loss and will end up in retained earnings (or a “non-distributable reserve” if one is used by the entity). Both types of gain are unrealised, but one goes to equity via a revaluation reserve, the other goes to profit and loss and ends up in retained earnings. 

Accounting standards, such as FRS 102, will set out the relevant accounting treatment(s) (depending on the transaction and/or accounting policy choice of the entity). The accounting treatment may also be based on the requirements of company law.

Fair value gains and losses on investment property

As noted above, FRS 102, Section 16 requires all investment property to be remeasured to fair value at each reporting date through profit and loss. The exception to this rule is where the investment property is an intra-group investment property (in other words, a property rented from one group member to another and the group has elected to measure the intra-group investment property under the cost model (cost less depreciation less impairment) as permitted in FRS 102, para 16.4A(b)). 

FRS 102, Section 16 applies the fair value accounting rules in company law. The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008/410), Sch 1, para 40(2) is the source of the accounting treatment and states: “Notwithstanding paragraph 13 in this Part of this Schedule, and subject to sub-paragraphs (3) and (4), a change in the value of the financial instrument or of the investment property or living animal or plant must be included in the profit and loss account.” 

The equivalent provision is also found in The Small Companies and Groups (Accounts and Directors’ Report) Regulations 2008 (SI 2008/409).

Hence, a fair value gain on investment property is recorded as follows:

  • Dr Investment property
  • Cr Fair value adjustments (profit and loss).

As gains (and losses) on investment property are unrealised, they may be segregated into a separate component of equity if the entity so wishes. Where the entity does wish to segregate them, it is advisable to call the separate reserve a “non-distributable reserve”.  

Revaluation gains and losses on property, plant and equipment

FRS 102, Section 17 allows an entity to revalue an item of property, plant and equipment (PPE) provided it revalues all items of PPE in that asset class at the same time. In practice, the most common item to be revalued is a building, but there are other items of PPE that could be subject to revaluation such as a specialist piece of machinery.

FRS 102, Section 17 applies the alternative accounting rules in company law where the revaluation model is concerned. The alternative accounting rules are set out in SI 2008/409, Sch 1, paras 30 to 35 (the same paragraphs in SI 2008/410). 

Sch 1 to SIs 2008/409 and 410, para 35, states: “With respect to any determination of the value of an asset of a company on any basis mentioned in paragraph 32, the amount of any profit or loss arising from that determination (after allowing, where appropriate, for any provisions for depreciation or diminution in value made otherwise than by reference to the value so determined and any adjustments of any such provisions made in the light of that determination) must be credited or (as the case may be) debited to a separate reserve (‘the revaluation reserve’).”

Hence, a revaluation gain on an item of PPE is recorded as follows:

  • Dr PPE
  • Cr Revaluation reserve (within equity).

It is worth noting that the revaluation reserve can only be called the revaluation reserve in company law. It cannot be called alternative names, such as a “revaluation surplus” or “revaluation gain”. This is because The Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015 (SI 2015/980) made amendments to paragraph 35 by deleting the phrase “… but need not be shown under that name”.

There may be a subsequent movement on reserves between the revaluation reserve and retained earnings in respect of the excess depreciation that has been charged relating to the revalued portion of the asset. SI 2008/409 and 410, Sch 1, para 35(3) states: 

An amount may be transferred

a) from the revaluation reserve:

  1. to the profit and loss account, if the amount was previously charged to that account or represents realised profit, or
  2. on capitalisation.

b) to or from the revaluation reserve in respect of the taxation relating to any profit or loss credited or debited to the reserve.

This is consistent with s841(5) of Companies Act 2006 which states:


a) on the revaluation of a fixed asset, an unrealised profit is shown to have been made, and

b) on or after the revaluation, a sum is written off or retained for depreciation of that asset over a period,

an amount equal to the amount by which that sum exceeds the sum which would have been so written off or retained for the depreciation of that asset, if that profit had not been made, is treated as a realised profit made over that period.

If the entity does not make this transfer, there will not be a breach of company law because there is no specific requirement to make it (note the wording in Sch 1, para 35(3) above which states that “an amount may be transferred…”). However, if the transfer is not carried out, the balance on retained earnings will understate the profits available for distribution to shareholders. 

On disposal of an item of PPE that has been subject to the revaluation model, the balance remaining on the revaluation reserve is transferred to retained earnings. Do not recycle the balance through profit and loss as recycling from equity through profit and loss is generally not permitted under FRS 102. 

Financial instruments

Some financial instruments are measured at fair value under FRS 102. For example, most financial instruments accounted for under Section 12 Other Financial Instruments issues will be measured at fair value through profit and loss. Even some basic financial instruments accounted for under FRS 102, Section 11 Basic Financial Instruments may be measured at fair value. For example, investments in another group entity that fall within the scope of FRS 102, Section 11 may be measured at fair value through OCI (FRS 102, para 11.14(d)(ii)) or at fair value through with changes in profit or loss (FRS 102, para 11.14 (d)(iii)). 

Where an entity has an equity investment that has been designated as at fair value through OCI at inception, then fair value gains and losses are accumulated within equity. However, if fair value through profit or loss is available and the entity elects this policy (as in FRS 102, para 11.14(d)(iii)), then the gains or losses will be recognised in the profit and loss account and hence will form part of retained earnings (profit and loss account reserves).

Micro-entities applying FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime will have none of these challenges to contend with because that standard prohibits the use of fair values or revaluation amounts. 

Understandable confusion

It is understandable that there is some confusion between fair value gains and losses and revaluation gains and losses and whereabouts in the financial statements these different types of gains and losses are to be recorded. In difficult or contentious situations, it is always advisable to consult FRS 102 or the technical advisory helpline of your relevant professional body to ensure the treatments you apply when preparing the financial statements are correct. 

If, for example, fair value gains and losses on an investment property are taken to a revaluation reserve (instead of directly to profit and loss), this is likely to materially misstate the financial statements. Similarly, if a revaluation gain is taken to profit or loss instead of the revaluation reserve, this will also result in materially incorrect financial statements being produced

Replies (1)

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By Andrew3018
19th May 2023 10:10

I believe the underlying principle is that if current asset meaning prospect of realising gain/loss through disposal or trade could be foreseen or anticipated in the next 12 mos then FV adjustment should be at P/L and on the other hand if non-current asset revaluation goes to revaluation reserve.

What would be even more interesting to read is HMRC's point of view on these valuation adjustments.

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