Accounting for investment property under FRS 102

This helpsheet has been issued by ICAEW’s Technical Advisory Service to help ICAEW members understand key aspects of accounting for investment property under FRS 102.

Members may also wish to refer to the following related helpsheets and guidance:

• Deferred tax under FRS 102
• Transfers between investment property, PPE and inventories under FRS 102
• ICAEW TECH 02/17 BL Guidance on realised and distributable profits under the Companies Act 2006

Investment property is defined in the glossary of FRS 102 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.

This would therefore include investment property in the course of construction.

In the context of a group, where a property is held by one group member and rented out to another group member, in the individual accounts of the property owner, this will also meet the definition of investment property (although note that in consolidated accounts which include both the property owner and occupier, applying the single-entity principle, the property will not be investment property and instead will normally fall under the definition of property, plant and equipment).

The requirements for accounting for investment property are set out in Section 16 of FRS 102. Investment property is initially measured at cost and is subsequently remeasured to fair value at the end of each reporting period. Any gains or losses are recorded in the profit and loss account.

Undue cost or effort

The September 2015 version of FRS 102 states that if the fair value of an investment property cannot be measured reliably without undue cost or effort, the investment property is accounted for as property, plant and equipment using the cost model (i.e. cost less depreciation and impairment). In practice this is expected to be rare.

This undue cost or effort relief was removed by the Triennial Review and as such is not available for periods commencing 1 January 2019 or if the Triennial Review amendments are early adopted.

Reporting gains and losses

FRS 102 does not specify where gains and losses should be presented. Therefore management should select the most appropriate presentation given the nature of the business and apply that presentation consistently. For example, a property investment company might present gains and losses within ‘other operating income’. Alternatively, the line item ‘income from other fixed asset investments‘ might be appropriate or entities may wish to adapt the format of the profit and loss account and include a separate line item such as ‘gain arising on remeasurement of investment property’.

By default, since gains and losses on investment property pass through the profit and loss account, they will automatically accumulate in the profit and loss reserve. Whilst it is perfectly acceptable to leave them there, it is important to remember that any fair value gains are not realised profits in law and are therefore not available for distribution. Further guidance on this particular point is available in paragraph 4.13 of ICAEW TECH 02/17 BL Guidance on realised and distributable profits under the Companies Act 2006. Fair value losses on investment property are normally considered realised in accordance with paragraphs 4.29 to 4.33 of the same guidance.

Accordingly, it may be preferable to maintain a separate ‘other’ or ‘non-distributable’ reserve, and transfer investment property gains from the profit and loss reserve into this other reserve, so as to keep track of what is distributable and what is not.

Prior to adopting the Triennial Review amendments to FRS 102, properties rented to another group entity would (subject to the rare undue cost and effort relief) be required to be measured at fair value through profit and loss in the individual accounts of the property owner.

For accounting periods commencing on or after 1 January 2019, or with early adoption of the Triennial Review amendments, entities have an accounting policy choice under FRS 102 paragraph 16.4A to either account for the property at fair value through profit and loss, or transfer it to property, plant and equipment (PPE) and apply the cost model in accordance with Section 17 of FRS 102. Where an entity elects to transfer the property to PPE the revaluation model is not available.

Applying this amendment should not impact the consolidated accounts.

FRS 102 16.4 states that mixed use property should be separated between investment property and property, plant and equipment and the components should be accounted for accordingly. However, if the fair value of the investment property component cannot be reliably measured without undue cost or effort, the entire property must be treated as property, plant and equipment. 
As above, the undue cost or effort exemption is removed by the Triennial Review and mixed use property must be split unless the fair value of the investment property component cannot be measured reliably. In such cases the entire property is accounted for as property, plant and equipment in accordance with Section 17 of FRS 102.

FRS 102 requires investment property to be measured at fair value, with changes in fair value recognised in profit or loss. However, the current tax consequences of changes in the property’s value are likely to arise only on the sale of the property. This is a timing difference and will therefore give rise to deferred tax.

Deferred tax on investment property will be measured using the tax rates and allowances that apply to the sale of the property in line with FRS 102 paragraph29.16, irrespective of whether or not the entity actually intends to sell it (and always with the proviso that those rates must be enacted or substantively enacted at the reporting date).

Members may wish to refer to the Deferred tax under FRS 102  helpsheet for further information.

A company purchased an investment property during the year for £300,000. At the year end its fair value was £320,000.

On purchase of the investment property, it is initially recognised at cost:

At the year end, as the fair value of the investment property has increased, the following double entries will be required to increase the investment property to its fair value:

As the gain to the profit or loss account is not usually distributable, the entity may opt to transfer this gain from the P&L reserve into a separate non-distributable reserve:

Deferred tax will also need to be considered in relation to the fair value movement. When there is a timing difference between taxable profits and the profit as stated in the accounts, then deferred tax is generally required. To understand whether a timing difference exists, it is necessary to understand the tax rules applicable to the entity. Without this knowledge, it is not possible to determine whether or not deferred tax is required. Consultation with tax specialists may be needed.

When deferred tax is recognised, this will be through the tax line in the profit or loss account. However, the deferred tax effect on the P&L reserve is also non-distributable and, if the entity opts to maintain a separate non-distributable reserve, the deferred tax effect will also be transferred to the non-distributable reserve as above. Therefore the net movement on the non-distributable reserve will be the fair value gain, net of deferred tax.

ICAEW members, affiliates, ICAEW students and staff in eligible firms with member firm access can discuss their specific situation with the Technical Advisory Service on +44 (0)1908 248 250 or via webchat.