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[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” fullwidth=”off” specialty=”off”][et_pb_row admin_label=”Row”][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”http://www.frs102.com/members/premium-toolkit/” type=”big” color=”red”] Return to Main Index[/button] [/et_pb_text][/et_pb_column][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”http://frs102.com/members/premium-toolkit/section-16/” type=”big” color=”red”] Return to Section 16 Home[/button] [/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” fullwidth=”off” specialty=”off” transparent_background=”off” allow_player_pause=”off” inner_shadow=”off” parallax=”off” parallax_method=”off” padding_mobile=”off” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” make_equal=”off” use_custom_gutter=”off” gutter_width=”3″][et_pb_row admin_label=”Row”][et_pb_column type=”4_4″][et_pb_text admin_label=” ” background_layout=”light” text_orientation=”justified” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]
Example 1: Fair value movements and deferred tax impact
Company A purchased a property on 1 February 2015 for CU200,000 which was rented out on 1 March 2015 and therefore met the definition of investment property. Legal costs of CU10,000 were incurred on the purchase and property assessment costs were incurred of CU5,000. At the 31 December 2015 the fair value was CU250,000. The sales deferred tax rate is 20%. The accounting requirements are as follows are:
| On initial recognition | CU | CU |
| Dr Investment Property | 210,000 | |
| (property assessment costs are not directly attributable) | ||
| Cr Bank | 210,000 |
On 31 December 2015
|
|
CU |
CU |
|
Dr Investment Property |
40,000 |
|
|
Cr Fair Value Movement on Investment Property in P&L |
|
40,000 |
|
Dr Deferred Tax P&L (CU40,000*20%) |
8,000 |
|
|
Cr Deferred Tax in Balance Sheet |
|
8,000 |
Being journal to reflect the movement in fair value during the year including the deferred tax impact
Example 2: transfer to/from investment property
Company A purchased a property which met the definition of an investment property in year 1. At the end of year 3, the company transferred it to own use. The fair value as stated in the trial balance prior to the end of year 3, was CU200,000. Therefore given the change in use, Section 16 no longer applied from that date, therefore there would be a journal posted to credit investment property and debit PPE for CU200,000. At that date the company determined the remaining life was 20 years. Therefore with effect from the start of year 4, the property will be depreciated each year at CU10,000.
Example 3: Fair value and tax adjustments
Assume the date of transition is 1 January 2014. Under old GAAP the company purchased a property for CU100,000. The valuation at 31 December 2013 was CU200,000 which equated to the open market value which also equates to the fair value at that date. Under old GAAP the open market value at 31 December 2014 and 2015 was CU250,000, the movement of which was posted to the STRGL in the year ended 31 December 2014. The revaluation reserve under old GAAP was CU100,000 and CU150,000 for year ended 31 December 2013 & 2014 respectively. Assume the deferred tax rate is 20% (the sales (CGT) rate). Assume indexation is not applicable for tax purposes.The transition adjustments required on adoption of FRS 102 are:
Transition journals to be posted on 1 January 2014
|
|
CU |
CU |
|
Dr Revaluation Reserve |
100,000 |
|
|
Cr Non-Distributable Reserve |
|
100,000 |
Being journal to transfer the old revaluation reserve to a non-distributable reserve.
|
|
CU |
CU |
|
Dr Non-Distributable Reserve for Deferred Tax ((CU200,000-CU100,000)*20%) |
20,000 |
|
|
Cr Deferred Tax Liability Balance Sheet |
|
20,000 |
Being journal to reflect the deferred tax liability on the uplift in value at the future expected sales tax rate
Transition journals to be posted on 31 December 2014 assuming the journals above are posted to reserves etc
|
|
CU |
CU |
|
Dr STRGL |
50,000 |
|
|
Cr Fair Value Movement on Investment Property in P&L (CU250,000-CU200,000) |
|
50,000 |
Being journal to transfer the fair value uplift to the profit and loss account from the STRGL.
|
|
CU |
CU |
|
Dr Deferred Tax in P&L (CU50,000*20%) |
10,000 |
|
|
Cr Deferred Tax Liability Balance Sheet |
|
10,000 |
Being journal to reflect the deferred tax on the uplift in value at the future expected sales tax rate
|
|
CU |
CU |
|
Dr Revaluation Reserve |
50,000 |
|
|
Cr Non-Distributable Reserve |
|
50,000 |
Being journal to transfer the old revaluation reserve to a non-distributable reserve.
No journals are required at the 31 December 2015 assuming the above journals are posted and the fair value remains at CU250,000. If the fair value moves then journals similar to the 31 December 2014, above should be posted.
Example 4: Property leased to other group companies classified as investment property
Assume the date of transition to FRS 102 is 1 January 2014 and the deferred tax rate is 20% which is the sales tax (CGT) rate. Company A is a member of a group. Company A leases a property to a sister Company; Company B for 10 years and receives an annual rent of CU50,000. The property was purchased for CU150,000 and the net book value at 1 January 2014, 31 December 2014 and 2015 in the old GAAP books is CU100,000, CU90,000 and CU80,000 respectively. The directors have determined the fair value of the property at 1 January 2014 was CU200,000. Assume the property did not qualify for capital allowance purposes and the property remained at its fair value of CU200,000 at 31 December 2014 and 2015 as this still equated to fair value. Assume the property met the conditions for investment property from 1 January 2014. The adjustments required on transition are:
Transition journals to be posted on 1 January 2014
|
|
CU |
CU |
|
Dr Investment Property |
CU200,000 |
|
|
Cr Non-Distributable Reserve (200,000-150,000) – fair value uplift |
|
CU50,000 |
|
Cr Profit and Loss Reserves (150,000-100,000) – prior depreciation |
|
CU50,000 |
|
Cr Property, Plant and Equipment |
|
CU100,000 |
Being journal to transfer the property from PPE to investment property, derecognise prior years depreciation and recognise the fair value uplift.
|
|
CU |
CU |
|
Dr Profit and Loss Reserves for Deferred Tax ((200,000-150,000 cost)*20%) |
CU10,000 |
|
|
Cr Deferred Tax liability in Balance Sheet |
|
CU10,000 |
Being journal to reflect the deferred tax on the uplift in value at the future expected sales tax rate
Transition journals to be posted on 31 December 2014 assuming the journals above are posted to reserves etc
|
|
CU |
CU |
|
Dr Property, Plant and Equipment |
10,000 |
|
|
Cr Depreciation in P&L (being movement in book value yr on yr) |
|
10,000 |
Being journal to reverse depreciation posted in 2014 on the property under old GAAP.
The same journal as above is posted in 2015 to reverse the depreciation charged in the 2015 trial balance.
Example 5: Extract from an accounting policy & notes in the financial statements
Investment properties
The group owns a number of freehold office buildings that are held to earn long term rental income and for capital appreciation. Investment properties are initially recognised at cost. Investment properties whose fair value can be measured reliably are measured at fair value. Changes in fair value are recognised in the profit and loss account.
Example 6: Extract from the notes to the financial statements – note on investment property
|
12 Investment properties |
2015 |
2014 |
|
|
CU |
CU |
|
|
|
|
|
Investment property at fair value at 1 January |
1,000,000 |
1,000,000 |
|
Additions (see note (i) below) |
200,000 |
– |
|
Additions as a result of acquisitions |
50,000 |
– |
|
(Decrease)/uplift in fair value (see note (ii) below) |
(100,000) |
200,000 |
|
Transfer to property, plant and equipment (see note (iii) below) |
(50,000) |
– |
|
Transfer to property, plant and equipment (see note (iv) below) |
50,000 |
– |
|
Disposal |
(50,000)
|
|
|
Investment property at fair value at 31 December |
1,100,000
|
1,200,000
|
(i) During the year the company completed the construction of a number of units which are now rented to third parties. As a result these units were transferred at cost from inventory to investment properties.
(ii) The land and buildings of the company were valued by [state name], [state qualification] to open market value reflecting existing use [or state alternate basis if appropriate] on [state date] 20XX. The valuation was carried out in accordance with the SCS Appraisal and Valuation Manual. {If the valuer is an officer or employee of the company or a group company this fact must be stated}. The critical assumptions made relating to the valuations are set out below:
2015 2014
Yields X% X%
Inflation rate X% X%
OR WHERE APPLICABLE WHERE NO VALUATION WAS COMPLETED AT THE YEAR END
The land and buildings of the company were valued by [state name], [state qualification] to fair value reflecting existing use [or state alternate basis if appropriate] on [state date] 20XX. The valuation was carried out in accordance with the SCS Appraisal and Valuation Manual. {If the valuer is an officer or employee of the company or a group company this fact must be stated}. An updated valuation was not performed by the company as the directors believe the valuation performed in XXX is not materially different from the carrying value at 31 December 2015.
(iii) At 31 December 2015, the company could no longer reliably estimate the fair value of the investment property held at XXX due to market conditions in that location. As a result, in accordance with Section 16 of FRS 102, the property has been transferred from investment property and reclassified to property, plant and equipment at the carrying amount of CU50,000 and is depreciated from that date.
OR
At 31 December 2015, the company could no longer estimate the fair value of the investment property without undue cost and effort, therefore, the property has been transferred from investment property and reclassified to property, plant and equipment at the carrying amount of CU50,000 and is depreciated from that date.
(iv) At 31 December 2015, a property which met the definition of investment property but which could not be classified as investment property due the inability to reliably measure its fair value due to market conditions can now be reliably measured. As a result, in accordance with Section 16 of FRS 102, the property has been transferred from property, plant and equipment and reclassified to investment property at its fair value at that date with the uplift recognised in the profit and loss.
OR
At 31 December 2015, a property which met the definition of investment property but which could not be classified as investment property due the inability to reliably measure its fair value without undue cost or effort can now be reliably measured. As a result, in accordance with Section 16 of FRS 102, the property has been transferred from property, plant and equipment and reclassified to investment property at its fair value at that date with the uplift recognised in the profit and loss.
(v) All investment property has been pledged as security on loans taken out by the company.
(vi) The historical cost of the investment properties is as follows:
At 31 December 2015 CU600,000
At 31 December 2014 CU800,000
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