We are sharing this update from ACCA, our professional body, for the interest of clients and contacts. The content is (c) ACCA
ACCA has produced a technical factsheet, which provides detailed guidance on how to account for property valuations under FRS 102. The factsheet outlines and covers various issues such as:
- What is the most acceptable method of property valuation for accounting purposes?
- How easy is it to switch accounting policies?
- What is the difference between accounting treatment of an investment property and owner-occupied property?
- What is the impact on distributable profits?
In relation to the valuation techniques, the factsheet suggests that there are no active markets for investment properties, as an active market requires the asset to be homogenous. Even apartments within the same apartment block will be different (such as the floor on which it is situated), so although prices may be available, it fails to meet the definition of an active market. However, a valuation based on a recently sold similar property may be sufficient to indicate the valuation for accounting purposes. Otherwise, an external professionally qualified valuer will be seen as most appropriate for an investment property.
Impact on distributable profits
For distributable profits impact, the guidance highlights ‘net gains on fair value fluctuations of investment property are not distributable to the shareholders. This is because profits must be “realised” in order to be classed as distributable which, in essence, means that they have been converted into cash or can be readily converted into known amounts of cash. There is no guarantee that an investment property can be sold instantly and so any net gains recorded in profit or loss will be classed as non-distributable.’
You must remember that it is the directors’ responsibility to decide a suitable accounting policy and provide valuation to the accountant for the true and fair view of the financial statement. Nonetheless, accountants do play an important role by providing meaningful insight of accounting jargon about this whole process and its implications on the business of the entity.