[et_pb_section admin_label=”Header – All Pages” global_module=”1221″ transparent_background=”off” background_color=”#1e73be” 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″ custom_padding=”||0px|”][et_pb_row global_parent=”1221″ admin_label=”row”][et_pb_column type=”4_4″][et_pb_post_title global_parent=”1221″ admin_label=”Post Title” title=”on” meta=”off” author=”on” date=”on” categories=”on” comments=”on” featured_image=”off” featured_placement=”below” parallax_effect=”on” parallax_method=”on” text_orientation=”left” text_color=”light” text_background=”off” text_bg_color=”rgba(255,255,255,0.9)” module_bg_color=”rgba(255,255,255,0)” title_all_caps=”off” use_border_color=”off” border_color=”#ffffff” border_style=”solid” title_font=”|on|||” title_font_size=”35″ custom_padding=”10px|||”] [/et_pb_post_title][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” global_module=”1228″ fullwidth=”off” specialty=”off” transparent_background=”off” allow_player_pause=”off” inner_shadow=”off” parallax=”off” parallax_method=”off” custom_padding=”0px||0px|” padding_mobile=”on” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” make_equal=”off” use_custom_gutter=”off” gutter_width=”3″][et_pb_row global_parent=”1228″ admin_label=”Row” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” use_custom_gutter=”off” gutter_width=”3″ custom_padding=”0px||0px|” padding_mobile=”off” allow_player_pause=”off” parallax=”off” parallax_method=”off” make_equal=”off” parallax_1=”off” parallax_method_1=”off” column_padding_mobile=”on”][et_pb_column type=”4_4″][et_pb_text global_parent=”1228″ admin_label=”Text” background_layout=”light” text_orientation=”left” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”]
[/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=”Main Body Text” background_layout=”light” text_orientation=”justified” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]Initial and subsequent measurement
Extract from FRS 102 Section 16.5-16.7
16.5 An entity shall measure investment property at its cost at initial recognition. The cost of a purchased investment property comprises its purchase price and any directly attributable expenditure such as legal and brokerage fees, property transfer taxes and other transaction costs. If payment is deferred beyond normal credit terms, the cost is the present value of all future payments. An entity shall determine the cost of a self-constructed investment property in accordance with paragraphs 17.10 to 17.14.
16.6 The initial cost of a property interest held under a lease and classified as an investment property shall be as prescribed for a finance lease by paragraphs 20.9 and 20.10, even if the lease would otherwise be classified as an operating lease if it was in the scope of Section 20 Leases. In other words, the asset is recognised at the lower of the fair value of the property and the present value of the minimum lease payments. An equivalent amount is recognised as a liability in accordance with paragraphs 20.9 and 20.10. Any premium paid for a lease is treated as part of the minimum lease payments for this purpose, and is therefore included in the cost of the asset, but is excluded from the liability.
16.7 Investment property whose fair value can be measured reliably without undue cost or effort shall be measured at fair value at each reporting date with changes in fair value recognised in profit or loss. If a property interest held under a lease is classified as investment property, the item accounted for at fair value is that interest and not the underlying property. Paragraphs 11.27 to 11.32 provide guidance on determining fair value. An entity shall account for all other investment property as property, plant and equipment using the cost model in Section 17.
OmniPro comment
Investment property is initially required to be recognised at purchase cost plus legal, brokerage fees, stamp duty etc. Assessment studies carried out prior to the purchase cannot be capitalised as they are not directly related.
Investment property is subsequently measured at fair value which can be reliably measured unless it results in undue costs or effort. Fair value is defined in FRS 102 as the amount at which an asset could be exchanged between knowledgeable willing parties in an arm’s length transaction. There is no requirement to use a professional valuer, however if one is not used this has to be disclosed.
The fair value movement posted to the profit and loss account would not be deemed to be a realised profit as the property is not readily convertible into cash without incurring costs and taking time. Therefore, in order to keep track, it may be appropriate for an entity to create a non-distributable reserve and transfer the fair value movement from profit and loss reserves to a non-distributable reserve in the statement of changes in equity.
The fair value movement is posted to the profit and loss account. In assessing whether fair valuing will result in undue costs or efforts, a certain degree of judgment will be required and will be based on facts and circumstances of the entity.
For small entities, it may be possible to prove this undue cost based on the results and economics of the entity. However in reality where an entity was able to fair value investment property under old GAAP it would be very difficult for the client to make this argument. This will require judgment on a case by case basis.
Section 29 requires deferred tax to be recognised on the uplift in value and posted to the tax line in the profit and loss account. The deferred tax rate to use is the sales tax rate. Indexation should be applied to the tax cost where relevant.
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
Self-constructed properties
Section 16 does not exclude self-constructed property from being classed as investment property where it can be measured reliably. Initially self-constructed property should include all directly attributable purchase costs in line with Section 17, it can also include directly attributable borrowing costs where a policy of capitalisation of borrowing costs has been chosen. Only costs incurred in getting it to its present condition up to the time it is ready to use can be capitalised, hence where a property is ready for use but requires necessary legal sign off, then capitalisation can continue until that sign off has been obtained.
At the end of each period during construction assuming it can be reliably measured, the purchase cost is uplifted for the valuation. In subsequent periods during self-construction, the purchase cost capitalised are compared to the updated valuation, however the difference is reduced for any uplift reflected in prior periods so that fair value adjustments are not double counted.
However, if this approach in relation to self-constructed property is taken care needs to be taken to ensure that the valuation incorporates all risks on completion of the full contract, the stage of completion and the likelihood of future cash flows.
[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section]