FRS 102 Tangible Fixed Assets and Investment Properties
Background
For accounting periods commencing on or after 1 January 2015, current UK GAAP has been replaced by a single standard. The transition requires all UK companies’ financial information to be prepared in accordance with FRS 102. The only exceptions will be those applying International Financial Reporting Standards (IFRS) or Financial Reporting Standard for Smaller Entities (FRSSE).
Summary of the key changes to accounting for tangible fixed assets and investment properties.
Tangible fixed assets
Tangible fixed assets will continue to be recognised initially at their cost. However, there is a new criterion for recognition that it is probable (more likely than not) that there will be an inflow of economic benefits from the asset. As under FRS 15, costs will include the direct purchase costs, costs of bringing the asset to its location in a working state, costs for dismantling the asset at the end of its useful life and relevant borrowing costs.
For assets where significant components are regularly replaced, separate allocation of costs and depreciation of each individual component is required. As under FRS 15, assets can then be held at cost and/or at valuation. All assets of the same class must be treated similarly.
FRS 102 relaxes the requirements for revaluation of land and buildings. Instead of the absolute requirement in FRS 15 of an independent valuation every fifth year, with at least a review of the valuation on the third year, there is a general requirement that revaluations are carried out with sufficient regularity to ensure the carrying value does not differ materially from the fair value at the end of the reporting period. In practice, it is difficult to imagine how this could be justified if a valuation had not been carried out within five years).
The valuation basis has also changed slightly. Land and buildings will now be valued at fair value, not open market value on an existing use basis. This will affect the valuation of certain assets where redevelopment will significantly change their value. Specialised properties can continue to use the depreciated replacement cost basis. Deferred tax will be recognised in full on revaluation of fixed assets. This represents a significant change.
Disclosure will also be required of the date of the last valuation, whether an external valuer was used and the methods applied in estimating the valuation. The depreciated historical cost of the asset as if it had not been revalued will also need to be disclosed.
There will be little change in the approach to depreciation and impairment of assets. Unlike FRS 15, there is no limit to the expected useful life which would trigger the requirement for a full annual impairment review. Except for this point, all assets need to be considered for impairment annually, but an impairment review is only required when there are indications of impairment.
Investment properties
Financial reporting for investment properties has been substantially revised. Investment properties are now defined as assets held for generating rentals income or capital appreciation.
In limited circumstances this, can include assets held under operating leases.
A key change is that there is now no prohibition for treating as investment property premises let to another group company. Investment properties will now be initially recognised at cost but will thereafter be valued at their fair value at the balance sheet date, with all changes to this value being recognised through the profit and loss account.
The only exception will be when the fair value cannot be measured reliably; in this case the asset is treated as a normal fixed asset, carried at cost and depreciated over its expected useful life.
Another key change is that any deferred tax on uplifts in the carrying value of investment properties will be provided in full. Previously, they were only recognised if the asset was intended to be sold.
The disclosures relating to investment properties have been extended significantly. The methods and significant assumptions used to determine fair value will need to be disclosed, together with the extent to which it is based upon an independent valuation performed by an appropriately qualified valuer. If there has been no such valuation, this must be disclosed.
In addition to this, any contractual commitments the entity has entered into to purchase construct, develop maintain, or enhance investment property will need to be disclosed and there will be disclosure on the term and amounts of leases entered into in relation to investment property.
Heritage assets
The provisions on accounting for heritage assets introduced in FRS 30 are bought into FRS 102 virtually unchanged.
Heritage assets are recognised at their fair value if it can be determined reliably and at a cost commensurate with the benefit obtained. Extensive disclosure on all heritage assets is required.
Assets actually used in an entity’s operations, such as historic buildings are not considered to be heritage assets, although it is recommended that the disclosures relating to heritage assets are applied.
Assets such as fine art held by a commercial organisation for purposes other than a contribution to knowledge and culture (e.g. appreciation in value as an investment) are not treated as heritage assets.