Transfers between investment property, PPE and inventories under FRS 102

This helpsheet has been issued by ICAEW’s Technical Advisory Service to assist ICAEW members in accounting for the transfer of property between Investment property, property, plant and equipment (PPE) and inventories under FRS 102.

This helpsheet includes references to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland (September 2024) (‘new FRS 102’) which is effective for accounting periods beginning on or after 1 January 2026 (except for paragraphs 7.20B and 7.20C which are effective for accounting periods beginning on or after 1 January 2025). This helpsheet also includes references to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland (January 2022) (‘old FRS 102’) which was effective for accounting periods beginning on or after 1 January 2019, or 1 January 2017 for small entities applying Section 1A, following the Triennial review 2017.

Members may also wish to refer to the following related helpsheet:

• Accounting for investment properties under FRS 102

Depending on its intended purpose and use, a property may be classified and accounted for as investment property (section 16 of old and new FRS 102), property, plant and equipment (PPE) (section 17 of old and new FRS 102) or inventories (section 13 of old and new FRS 102). The classification will depend on which of the below definitions, found in the glossary to old and new FRS 102, a property meets.

Investment property:

Property, plant and equipment:

Inventories:

Such properties may, however, need to be transferred between these classifications subsequent to initial classification, as a result of management action or a change in management’s intended use for the property. The application of judgement will often be required regarding the date of such a transfer, based on the surrounding facts and circumstances. 

Old FRS 102 paragraph 16.9 states that, unless otherwise required by the FRS, an entity shall transfer a property to, or from, investment property only when the property first meets, or ceases to meet, the definition of investment property. New FRS 102 expands this paragraph to include ‘and there is evidence of that change’.

Transfers from inventories to investment property

A transfer from inventories to investment property may occur when, for example, a house builder that has built a property for speculative sale decides, instead, to rent out the property. 
They are therefore now holding the property to earn rentals or for capital appreciation, rather than for sale in the ordinary course of business, and so the property would now meet the 
definition of an investment property under Section 16 of both old and new FRS 102.

Both old and new FRS 102 paragraph 16.9C requires that, where the investment property will be held at fair value, any difference between the fair value of the property at that date (i.e. the date of the transfer) and its previous carrying amount (i.e. as recorded in inventories) shall be recognised in profit or loss.

Subsequently, the investment property shall be measured at fair value at each reporting date with changes in fair value recognised in profit or loss in accordance with paragraph 16.7 of FRS 102.

Transfers from investment property to inventories 

Where a property ceases to meet the definition of investment property and is instead transferred to inventories, old and new FRS 102 paragraph 16.9A requires the fair value of the property at the date of the change in use to become the deemed cost for subsequent accounting as inventories.

The property would subsequently be measured at the lower of cost (i.e. the deemed cost) and estimated selling price less costs to complete and sell in line with old and new FRS 102 paragraph 13.4.

Transfers from PPE to investment property

Transfers from PPE to investment property may occur, for example, when an entity stops using a property for its own purposes and begins to rent it out to a third party instead.

In accordance with old FRS 102 paragraph 16.9B, when a property previously classified as PPE becomes an investment property, an entity shall apply Section 17 up to the date of change in use. The entity shall treat any difference at that date between the carrying amount of the property and its fair value as a revaluation in accordance with Section 17.

New FRS 102 paragraph 16.9B follows the same approach but makes the distinction between applying Section 17 for owned property and Section 20 for property held by a lessee as a right-of-use asset. Any differences at the date of the change in use between the carrying amount of the property and its fair value should be treated as a revaluation in accordance with Section 17 or Section 20 as applicable.

As such for both new and old FRS 102, where a property is accounted for by applying Section 17 and the fair value of a property is higher than its carrying value in PPE at the date of transfer to investment property, a revaluation increase is recognised in other comprehensive income and a revaluation reserve created as appropriate. The same conclusion could be reached under new FRS 102 where a property is accounted for by applying Section 20 and it is subsequently measured by applying the revaluation model for PPE (paragraph 20.55).

Transfers from investment property to PPE

Transfers from investment property to PPE may occur, for example, when an entity starts occupying a property for its own use rather than renting it out.

Where a property ceases to meet the definition of investment property and is instead transferred to PPE, old FRS 102 paragraph 16.9A requires the fair value of the property at the date of the change in use to become the deemed cost for subsequent accounting as PPE. New FRS 102 paragraph 16.9A contains the same requirement but also adds that this could be a transfer to a right-of-use asset due in accordance with Section 20.

The property would subsequently be measured under either the cost or revaluation model in accordance with Section 17 of old and new FRS 102 or under either the cost or revaluation models in accordance with Section 20 of new FRS 102.

The application of ‘deemed cost’ is generally accepted to be an application of the alternative accounting rules and therefore a revaluation reserve would usually be recognised on the transfer of an investment property to PPE, being the accumulated gains and losses that have previously been recognised through profit or loss.

Transfers from PPE to inventories

Where a property held as PPE is transferred to inventories, the property would usually be transferred at its carrying value on the date of transfer. This becomes the deemed cost for subsequent accounting as inventories.

The property would subsequently be measured at the lower of cost (i.e. the deemed cost) and estimated selling price less costs to complete and sell in line with old and new FRS 102 paragraph 13.4.

Transfers from inventories to PPE

Where a property held as inventories is transferred to PPE, the property would usually be transferred at its carrying value at the date of transfer. This becomes the deemed cost for subsequent accounting as PPE.

The property would subsequently be measured under either the cost or revaluation model in accordance with Section 17 of old and new FRS 102.

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.