Generally, when a property is used to earn rental income then it will fall under the definition of investment property.
The problem is that FRS 102 (Sept 2015) simply states that the where a property that is owned by one group company and is rented out to another group company it should be treated as an investment property. In the individual company as an investment it should be held at fair value. However, on consolidation it should be held at cost. This causes an anomaly.
FRS 102 (Mar 2018) resolves this problem by offering two choices:
- At the individual company level, the property may be held at fair value. Changes in fair value would go to the P&L; or
- The individual company can transfer the asset to fixed asset property and then hold it at cost.
Further complications will arise if:
- The property was used part of the year within the group and part of the year rented to a third party; or
- The property was developed in the year and then rented out to a group company; or
- The property is partly used internally and partly let out to a third party; or
- The property was sold in the year; or
- The rental charge is materially different to the market rent; or
- The companies cease being part of a group in the year; or
- You change your accounting policy from one year to the next.
Remember that deferred tax will need to be considered where the investment property has been fair valued.
For auditing purposes, the auditors will want to substantiate the original cost, by reviewing completion statements and purchase invoices. In terms of providing the auditor with sufficient audit evidence over the fair value the auditor is likely to want to see a valuation carried out by a reputable firm of Chartered Surveyors. Such valuation should be carried out as close as possible to the year-end date.
It is important that the financial statements fully and clearly disclose the accounting policy.
FRS 102, otherwise known as UK GAAP is the UK accounting standard for small companies. A small company is one where 2 of 3 conditions are met:
- Turnover – not more than £10.2m
- Balance sheet total – not more than £5.6m
- Number of employees – not more than 50
For micro-entities companies must apply the cost model, as stipulated under FRS 105. As such, there should never be a revaluation reserve in the balance sheet.
Attached are some related articles: