What does FRS102 mean for Investment Properties?
From 1 January 2015, there is a fundamental change in the way accounts are prepared in the UK. Where previously accounting treatment was covered by existing Statements of Standard Accounting Practices (SSAP), Financial Reporting Standards (FRS) and existing Urgent Issue Task Force notices (UITF); from 1 January 2015 General Accepted Accounting Principles (GAAP) will be in accordance with FRS 100-102.
This article gives an overview of how the accounting and tax issues that need to be considered with investment property going forwards.
Accounting for Investment Properties
Currently SSAP No 19 states that properties should be held at open market value and the changes in the open market value should be accounted for in the Statement of Total Recognised Gains and Losses. However, FRS 102 takes a different viewpoint and states that changes to the fair value (not open market value) should be taken to the profit and loss account in the year the change arises. Effectively, this means that the revaluation reserve will no longer apply to investment properties.
To complicate matters further, the gains or losses on a change in the fair value of an investment property cannot be distributed, so even though the movement will be included in the profit and loss account reserve, a note will need to be kept of the distributable and non distributable reserves.
It must be noted that FRS 102 does permit the use of the cost model where the fair value cannot be reliably measured without undue cost or effort.
Taxation of Investment Properties
Whilst tax treatment normally follows the accounting treatment, movements in fair value are not included in the annual taxable profits. They are instead covered by capital gains tax at the time of disposal.
Unlike the UITF 28, which makes no requirement to provide for deferred tax on gains or losses on revaluation unless there is an intention to sell, FRS 102 requires deferred tax to be provided.
If you need any advice with how to account for the new standards, please get in touch with one of our property directors, Wendy Patterson on 020 8545 7630.