PROPERTY
Accounting for property valuations Steve Collings examines the accounting treatment for both fair value gains and losses on investment property and revaluation gains and losses on owner-occupied property under FRS 102. Steve Collings Partner, Leavitt Walmsley Associates Ltd
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Investment property
FRS 102 defines ‘investment property’ as: ‘Property (land or a building, or part of a building, or both) held by the owner or by the lessee under a finance lease to earn rentals or for capital appreciation or both, rather than for: a. use in the production or supply of goods or services or for administrative purposes; or b. sale in the ordinary course of business.’ Therefore, where a property generates a rental income stream for the business, the property will meet the definition of investment property and will be accounted for under FRS 102 Section 16. Land that is being held for capital appreciation purposes will also be classified as investment property. AIAWORLDWIDE.COM | ISSUE 123
Initial recognition
On initial recognition, a property that meets the definition of investment property is recognised at cost. Cost may comprise several elements and includes the initial purchase price plus all directly attributable costs, such as legal fees and property transfer taxes. An entity may incur certain costs which relate to the property’s subsequent use but are not directly attributable costs. Typical examples include marketing costs to attract new tenants and operating costs which are incurred prior to the property reaching its target occupancy rate. These sorts of costs are not recognised within the cost of the investment property on initial recognition – they are recognised in profit or loss as incurred.
Subsequent measurement
FRS 102 Section 16 applies the Fair Value Accounting Rules in company law and all investment property (with the exception of intra-group investment property, which can be measured under the cost model – see FRS 102 para 16.4A) must be remeasured to fair
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RS 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’ deals with investment property in Section 16 ‘Investment property’ and with property, plant and equipment in Section 17 ‘Property, plant and equipment’. Micro-entities choosing to prepare their financial statements under FRS 105 ‘The Financial Reporting Standard applicable to the micro-entities regime’ apply Section 12 ‘Property, plant and equipment and investment property’. This article covers the accounting treatment for both fair value gains and losses on investment property, and revaluation gains and losses on owner-occupied property under FRS 102; and examines some of the more notable accounting issues that preparers often face.
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