Proposed changes to accounting standards are likely to force businesses across Northamptonshire to shake-up how they account for future property transactions.
Commercial property agent, Prop-Search and accountants Isis Business Solutions are advising local companies to be aware of new standards and carefully plan their property leases and portfolios to avoid being caught out.
Companies with investment properties will see their profit and loss accounts change when new accounting standards come into force 01 January 2015. As headline results such as profit before tax are used for credit scoring, this academic change may have a real world unexpected effect on a company’s credit rating.
Companies with investment properties have for many years followed existing UK Generally Accepted Accounting Practice (UK GAAP) and have been required to value their investment properties at market value each year. Any changes to that market value have not been shown in the reported profit or loss for the year but were in most cases, only a balance sheet entry.
Under the new version of UK GAAP, FRS102, which is based on International Financial Reporting Standards for small and medium entities, this new standard will be compulsory for accounting periods starting after 01 January 2015 and will still require investment properties to be at market value. The big difference is that the changes in the market value will now be shown as part of the reported profit or loss for the year. There will be no revaluation reserve in the balance sheet - instead all the previous revaluation reserve will need to be shown as part of the profit and loss account reserve.
A reduction in property value can be larger than the normal profit on the rental income, so there could easily be a reported loss for the year with these new standards - where previously that reduction in value would have hit the balance sheet only.
Under FRS 102 investment properties are still recognised initially at cost but then subsequently measured at ‘Fair Value’, a concept which replaces market value as required by existing UK GAAP. This is to be completed only where value can be measured ‘reliably and without undue cost or effort’. If such measurement is not possible then the property can be included at its cost.
It should also be noted that although unrealised gains on investment property must now be accounted for in the profit and loss account, they are considered as non-taxable income. Similarly, unrealised losses will continue to be treated as non-deductible expenditure for corporation tax purposes.
Another change is the way lease incentives are treated. At present any lease incentive received for entering into a lease, for example a rent free period, is spread over the period to the first break clause. Under the new standards the lease incentive would be spread over the period of the lease regardless of any break clauses.
Transition rules mean that any existing lease could continue under the old rules but new ones would have to be on the new basis. This means that the profit effect will be spread over a longer period and can have a major impact where previously there were long leases with short break clauses.
01 January 2015 still seems a long time away but the problem is that all the comparatives will need to be changed to the new presentation. The property value at 31 December 2013 will affect those comparatives - now the issue seems a lot more urgent.
Further information can advise can be obtained from Prop-Search - Tel: 01933 223300 / 01604 492000 or Isis Business Solutions - Tel: 0845 345 7785.