Triennial review: Investment property
Sally Baker discusses the changes to accounting for investment property following the triennial review amendments to FRS 102
One of the more significant changes to FRS 102 The Financial Reporting Standard applicable in the UK and the Republic of Ireland following the 2017 Triennial review relates to investment property. In a nutshell, the amendments remove the ‘undue cost or effort’ exemption, meaning that investment property must be measured at fair value through profit or loss. However, an accounting policy choice is introduced for investment property rented to another group entity between either the fair value or the cost model.
Removal of undue cost or effort exemption
When FRS 102 was first issued, all property meeting the definition of investment property was required to be classified as such, and measured at fair value through profit or loss. However, when fair value could not be measured reliably without undue cost or effort on an ongoing basis, entities were required to measure investment property under the cost model (ie, at cost less depreciation and impairment) in accordance with Section 17 Property, Plant and Equipment.
Due to the cost and effort exemption being applied inconsistently in practice and insufficient rigor being applied in assessing its availability, the Financial Reporting Committee (FRC) removed the exemption in the Triennial review 2017 amendments.
Entities that previously took advantage of the exemption to measure investment property under the cost model will be required to fair value such property going forwards (unless the property is rented to another group entity, see below).
When investment property has previously been carried at cost less depreciation and impairment, it will be necessary to apply the change in accounting policy retrospectively and establish fair value at the date of transition to the amendments ie, the beginning of the comparative period. Assuming an entity applies the amendments for an accounting period beginning on 1 January 2019, fair values will need to be established as at 1 January 2018.
Investment property rented to other group entities
For investment property rented to another group entity, an accounting policy choice is introduced. An entity can choose between measuring either at fair value through profit or loss or under the cost model ie, at cost less depreciation and impairment. It is worth noting that when only part of a property is rented to another group entity, the accounting policy choice is only available for that component of the property.
When the cost model is adopted, it is either:
• applied retrospectively; or
• an option is chosen to use the fair value at the date of transition to the amended standard as deemed cost.
If applied retrospectively, the carrying value will be restated to the original cost less depreciation from the date of purchase. Fair value gains or losses previously recognised will be reversed and deferred tax adjusted accordingly.
If the entity chooses to use fair value at the date of transition to the amendments as deemed cost, fair value gains or losses recognised since the transition date will be reversed. Depreciation will be charged from the transition date and deferred tax adjusted accordingly. The use of fair value as deemed cost means that, in effect, the entity is taking advantage of the Alternative Accounting Rules. A revaluation reserve will need to be recognised for any fair value uplift included within the deemed cost amount, and additional disclosures made going forwards.
The Triennial review amendments are generally effective for accounting periods beginning on or after 1 January 2019. The changes in respect of investment property are likely to be popular and some entities may wish to adopt these changes early. This is permitted provided that all of the amendments are applied at the same time.
The Financial Reporting Faculty will shortly be publishing FAQs on the Triennial review amendments to complement existing resources that are available to support all members, including a podcast and blogs. Further information can also be found here.
Sally Baker, Technical Manager, Financial Reporting Faculty
Practicewire, June 2018