Accounting for your business' investment property
Changes to UK accounting standards for Limited Companies and Limited Liability Partnerships (LLP’s) mean that you have some additional considerations and information to collate, prior to the end of your financial year.
What are the changes?
- The investment property must be held at fair value i.e. similar to market value, so an annual valuation should be obtained where possible
- If a fair value cannot be obtained without undue cost or effort on an on-going basis, it will have to be accounted for as a fixed asset and depreciated which in most circumstances will result in a negative impact on the balance sheet
- Any movements in valuation from year to year will now go through the profit and loss account, meaning more potential for volatility in reported profits
- Deferred tax must now be provided for in relation to the revaluation
- Neither the valuations gains/loss or deferred tax have an impact on reserves that can be paid as dividends because they are ‘unrealised’
- These changes include properties that may be occupied by other group companies
What actions do you need to take?
- Identify if you do actually own investment property. This is defined as land and/or buildings held by the owner or by a lessee under a finance lease to earn rentals and/or for capital appreciation rather than using the property for day to day business use or for sale in the ordinary course of business. Note that property which has mixed use will need to be separated into investment property and fixed assets.
- Obtain a professional valuation. Ideally this should be obtained as close as possible to your year end date each year. It should be an independent valuation from a third party. A directory of possible Surveyors can be found on the website for Royal Institute of Chartered Surveyors (RICS) http://www.rics.org/uk/
- Adjust for valuation movements in your accounting records. If the valuation has increased, you will need to debit the balance sheet for Investment property revaluation and credit the profit and loss for Unrealised valuation gains/losses. If the valuation has decreased, the opposite adjustment will be required.
- Please provide a copy of the valuation report to us at A4G. We will need this as supporting information for your annual accounts.
If you have not had your investment property valued for some time, doing this now may well provide a welcome boost to your balance sheet. If you have any questions, please give your Client Manager a call or complete the Contact Form and one of us will get back to you.