Fair Value Accounting – Investment Property under the new FRS 102
For accounting periods beginning on or after 1 January 2015, FRS 102, based on the International Financial Report Standard for Small and Medium-sized Entities, will replace UK GAAP. This will have a big impact on the financial statements for many entities who have historically prepared accounts under UK GAAP, including key changes in the way investment properties are accounted for.
Under UK GAAP there is a requirement for investment property to be revalued at the end of the accounting period or every five years by an external valuer. FRS 102 however dictates that valuations are required at sufficient intervals such that carrying value is not materially different to fair value.
The treatment of the resulting movements in value will also change; any increases or decreases in valuations under FRS 102 are taken through the profit and loss account, rather than through the Statement of Recognised Gains and Losses, a significant difference which is likely to mean that annual profits or losses may become much more volatile under the new regime.
In addition, the new rules require deferred tax to be recognised on the re-valued amounts. Deferred tax is measured using rates and allowances applicable on the theoretical sale of the investment property. As with valuations, this charge will also go through the profit and loss account, any deferred tax charge being set against the valuation gain accompanying it.
Last, but by no means least, UK GAAP currently requires a separate revaluation reserve to be created in the balance sheet to account for the change in property value, however, under FRS 102 a separate reserve is no longer mandatory. The problem with this is that under Companies Act 2006, dividends can only be paid to shareholders from distributable reserves; as valuation movements and deferred tax are now going through the profit and loss account (both of which represent non-distributable reserves), it will no longer be obvious from the balance sheet how much distributable reserves are available for dividends.
Clearly it is going to be prudent to maintain separate records regarding the levels of distributable and non-distributable reserves to ensure that no unlawful dividends are distributed.
For more information regarding the impact of FRS102 on investment properties contact Ben Lee.