accounting for properties

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Accounting for properties



Is the property a fixed asset?




Yes No

Is the property an investment property?

Trading property




Yes No


Yes No

Investment property

Owner-occupied property

Trading property

An investment property is one that is let to a tenant outside one’s corporate

group at an arm’s length rent

Eg. a company’s offices, retailer’s

shop




Yes No


Yes No

Investment property

Owner-occupied property

Trading property

A current asset is one that when

acquired is intended to be

liquidated


Investment properties – International Standards (IAS)

•Investors have a choice of showing investment properties at either market value (“fair value”) or “cost”

•See the owner-occupied section for details on the “cost” model (with one extra bit for IP owners: investors must still declare the value in a note to the account)



•The fair value model means that the company needs to use an annual up to date valuation, undertaken by a suitably qualified value

•The valuer does not need to be independent of the company

•Movements in value pass through the income statement



•You buy a property for £10m at the start of year 1; revalue it to £12m at the end of year 1 and then sell it for £15m in year 2.

Start yr1 Property 10Cash -Debt (10)

-Retained profits -Income statement

Surplus on valuation -Profit on disposal -

Profit -

You buy the property for

£10m using debt







Profit -

End yr 1 12-(10) 2 2

2-

2

You revalue the property by £2m

which passes through the

income statement







Profit -

End yr 1 12-(10) 2 2

2-

2

End yr 2- 15(10) 5 5

-3

3

You sell the property for

£15m making a £3m profit in

year 2


Investment properties – UK gaap

•Unlike IAS where there is a choice, under UK gaap investors must revalue their investment properties

•The movement in values goes to the balance sheet (not the income statement) onto a line called the revaluation reserve.


Owner-occupied properties

•Investors may either revalue the property or show it at cost•The “cost” option involves splitting the purchase price (together with fees) between the land and building elements•There is a presumption that the land element does not depreciate but that the building does •If the owner opts for the valuation option then the movement in value passes through the revaluation reserve on the balance sheet and not the income statement


Trading properties

•Trading properties are treated like “stock”

•They are held on the balance sheet at the LOWER of purchase price (plus fees) and sales value (after sales costs)


Aqhuman Financial Training

Aqhuman’s principal is Kevin Amor, FCA. Kevin qualified as a chartered accountant with PWC. He spent 12 years working in commerce at financial controller/director level. Kevin now has more than 12 years experience in financial training. He trains managers at all levels and gives 1 to 1 financial coaching to senior executives.He also teaches corporate finance andaccounting for a number of business schools’ MBA programmes.

accounting for properties

Economy & Finance

financial coaching

yr1 property

end of year

start of year

valuation profit

sales value

disposal profit

qualified value