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FRS 102 Factsheet 5 - Property - fair value measurement and company law
This factsheet has been prepared by FRC staff to aid preparers in applying Section 16 Investment Property and Section 17 Property, Plant and Equipment of FRS 102. It should not be relied upon as a definitive statement on the application of the standard nor is it a substitute for reading the detailed requirements of FRS 102.
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1. Introduction
Section 16 Investment Property and Section 17 Property, Plant and Equipment apply to investment property and property, plant and equipment respectively. These sections include requirements for recognition, initial and subsequent measurement, and disclosures. Section 16 generally requires investment property to be measured at fair value at each reporting date. Section 17 allows an item of property, plant and equipment whose fair value can be measured reliably to be carried at a revalued amount, being its fair value at the date of revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. (References: 16.7, 17.15)
This factsheet focuses on how to account for a remeasurement to fair value. It does not address the basic accounting for these assets.
Investment property
Investment property is property (land or a building, or part of a building, or both) held by the owner, or by the lessee as a right-of-use asset, to earn rentals or for capital appreciation or both, rather than for: (References: Glossary)
- use in the production or supply of goods or services or for administrative purposes; or
- sale in the ordinary course of business.
Entities will need to determine which of their properties are investment properties, based on the definition and classification requirements in FRS 102. These include special considerations for property held primarily for the provision of social benefits and for mixed use property. (References: 16.3, 16.4)
An investment property rented to another group entity may be transferred to property, plant and equipment or to right-of-use assets and accounted for using the cost model in accordance with Section 17 or Section 20 Leases respectively. Any such transferred property is no longer within the scope of Section 16 and therefore cannot be measured at fair value in accordance with that section; if an entity wants to measure investment property rented to another group entity at fair value, it must not choose to transfer it. (References: 16.4A)
Transition for investment property rented to another group entity
For investment property rented to another group entity and transferred to property, plant and equipment, a first-time adopter of FRS 102 is permitted to use the fair value determined in accordance with FRS 102 at the date of transition as the deemed cost of that property at that date, or use a revaluation determined under its previous financial reporting framework as the deemed cost of that property at the date of that revaluation. (References: 35.10(c), 35.10(d))
Property, plant and equipment
Property plant and equipment are tangible assets that: (References: Glossary)
- are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and
- are expected to be used during more than one period.
2. Remeasurement to fair value
Investment property
Investment property (other than any investment property rented to another group entity that has been transferred to property, plant and equipment or to right-of-use assets and accounted for using the cost model in accordance with Section 17 or Section 20 respectively) shall be measured at fair value at each reporting date with changes in fair value recognised in profit or loss. (References: 16.7)
When a lessee uses the fair value model to measure an investment property that is held as a right-of-use asset, it shall measure the right-of-use asset, and not the underlying property, at fair value. Section 2A Fair Value Measurement provides guidance on determining fair value.
Recognising changes in fair value in profit or loss is an application of the fair value accounting requirements of Schedule 1 to The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008/410) (the Regulations), specifically paragraph 40. 1 (References: A3.26 to A3.27)
As with other non-financial assets, a fair value measurement of investment property takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. Highest and best use takes into account the use of the asset that is physically possible, legally permissible and financially feasible. An entity's current use of a non-financial asset is presumed to be its highest and best use unless factors suggest that a different use by market participants would maximise the value of the asset. (References: 2A.9 to 2A.12)
An investment property within the scope of Section 16 is initially measured at cost in accordance with paragraph 16.5 or paragraph 16.6. Other than when applying the accounting policy option for investment property rented to another group entity, the only time when investment property within the scope of Section 16 is not subsequently measured at fair value will be if a reliable measure of fair value is not available, which is expected to be rare. (References: 16.5 to 16.7 and 2A.23)
If a reliable measure of fair value is no longer available for an asset measured at fair value, its carrying amount at the last date the asset was reliably measurable becomes its new cost. An entity shall measure the asset at this cost amount less impairment until a reliable measure of fair value becomes available.
Presentation in reserves
When an entity is applying the fair value accounting requirements of the Regulations to the investment property, the change in fair value is recognised in profit or loss. An entity may choose to transfer a portion of its retained profit and loss account equal to the cumulative fair value gains to a separate reserve for presentation purposes, as the change in fair value is typically not realised, and not available for distribution. (References: A3.28)
Example
Entity A has an investment property. The property is measured at fair value at each reporting date. Its fair value at 31 December 20X0 was CU300,000 and its fair value at 31 December 20X1 was CU320,000. The change in fair value is recognised as follows:
Dr Investment property CU20,000 Cr Profit and loss account CU20,000
Entity A will also need to account for any deferred tax implications arising from the change in fair value. (References: 29.16)
Revaluation model for property, plant and equipment
After initial recognition, property, plant and equipment shall be measured using the cost model or the revaluation model. (References: 17.15)
When the revaluation model is selected, this shall be applied to all items of property, plant and equipment in the same class of asset. (References: 17.15)
Under the revaluation model, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. (References: 17.15B)
Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from the fair value at the end of the reporting period. (References: 17.15B)
Usually, any revaluation gains are recognised in other comprehensive income. However, the increase shall be recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss. (References: 17.15E)
Recognising changes in fair value in other comprehensive income is an application of the alternative accounting rules of Schedule 1 to the Regulations, specifically paragraph 35.
Presentation in reserves
Company law requires the revaluation reserve to be shown separately in the statement of financial position.
Example
Entity B has an office building and decides to use the revaluation model for the subsequent measurement of its buildings. Entity B makes revaluations at every reporting date. The fair value of Entity B's office building at 31 December 20X0 was CU200,000 and its fair value at 31 December 20X1 was CU215,000.
The change in fair value is recognised as follows:
Dr Land and buildings CU15,000 Cr Revaluation reserve (recognised in OCI) CU15,000
Entity B will also need to account for any deferred tax implications arising from the change in fair value.
Subsequently the depreciation charge for each period is based on the relevant revalued amount and Entity B may transfer an amount from the revaluation reserve to retained earnings to reflect the difference between the depreciation based on the revalued amount and depreciation based on the original cost.
3. Transfer from investment property to property, plant and equipment
An entity may have investment property that it subsequently decides to hold as owner-occupied property, by using the property itself in the production or supply of goods or services or for administrative purposes.
When a property ceases to meet the definition of an investment property, and there is evidence of that change, the deemed cost for subsequent accounting as property, plant and equipment, a right-of-use asset, or inventory shall be its fair value at the date of change in use. (References: 16.9 to 16.9A)
Example
Entity C owns an office building that was rented out to an unrelated party. The fair value of the office building at 31 December 20X0 was CU300,000 and on 1 January 20X1 it became owner-occupied. The cumulative fair value gains to 31 December 20X0 were CU100,000.
Its fair value at 1 January 20X1 becomes its deemed cost and the basis for future depreciation charges. Although the value of the property has not changed, accounting entries will be required to move the cumulative fair value gains from retained profits to a revaluation reserve because the property is now measured under the alternative accounting rules of the Regulations.
The change in reserves is recognised as follows:
Dr Profit and loss account (retained profits) CU100,000 Cr Revaluation reserve CU100,000
Company law and FRS 102 disclosure requirements for revalued properties will apply to the property on an ongoing basis even if Entity C applies the cost model going forward, including the need to disclose comparable amounts determined according to the historical cost accounting rules (in this case a cost of CU200,000). (References: 17.32A)
This example assumes that Entity C measures owner-occupied property under the cost model. If Entity C uses the revaluation model (which must be applied consistently to the same class of asset) the property would be carried at a revalued amount. The above entries would still be required on transfer to property, plant and equipment as the property will be measured under the alternative accounting rules of the Regulations.
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Similar fair value accounting rules exist in The Small Companies and Groups (Accounts and Directors' Report) Regulations 2008 (SI 2008/409). ↩