FRS 102 will introduce a number of key accounting changes for those companies that hold investment properties.
Similar to current UK GAAP (SSAP 19 Accounting for Investment Properties), FRS 102 requires investment properties to be revalued at each reporting date. However, unlike SSAP 19, FRS 102 permits the use of cost less depreciation but only if fair value cannot be measured reliably without undue cost or effort.
Where investment property is revalued under FRS 102, it should be measured at fair value at each reporting date with changes in fair value recognised in profit or loss. This is a key change from SSAP 19 where movements were usually recognised in the Statement of Recognised Gains and Losses. As a result, profit or loss will be more volatile and there may be implications for agreements based on profit such as employee remuneration, earn outs and loan agreements.
In another change from current UK GAAP (FRS 19), FRS 102 requires deferred tax to be recognised on these fair value changes. The tax is measured at the rates and allowances that would apply to the sale of the investment property unless the property has a limited useful life and is held as part of a business model whose objective is to consume substantially all of the economic benefits embodied in the property over time.
Investment property is property held either by the owner or by the lessee under a finance lease to earn rentals or for capital appreciation or both. The property is not held for:
- use in the production or supply of goods or services or for administrative purposes; or
- sale in the ordinary course of business.
- FRS 102 permits an interest held under an operating lease to be classified as investment property on a property by property basis if specific criteria are met.
A property interest held under a lease and classified as an investment property must initially be accounted for as a finance lease, even if the lease would otherwise be accounted for as an operating lease. This is an area where no guidance is given under current UK GAAP other than for SSAP 19 to note that investment property held under a lease should be depreciated where the lease term was less than 20 years.
Another change from current UK GAAP concerns properties held by one Group Company and occupied by another. SSAP 19 prohibits such properties from being treated as investment properties in both the lessor entity accounts and the group accounts. Under FRS 102, treatment as investment property would still not be permitted in the group accounts but would be required in the lessor's entity accounts if the property met the definition of investment property. Thus additional costs might be incurred in obtaining the valuation for the lessor's entity accounts, even though the property continues to be carried at depreciated cost in the group accounts.
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