Accounting for Properties

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A revision presentation on accounting for properties, for clients of Aqhuman Financial Training

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Accounting for Properties

  1. 1. www.aqhuman.com Accounting for properties Aqhuman financial training & coaching
  2. 2. www.aqhuman.com Accounting for properties Aqhuman financial training & coaching Is the property a fixed asset?
  3. 3. www.aqhuman.com Accounting for properties Aqhuman financial training & coaching Is the property a fixed asset? Yes No Is the property an investment property? Trading property
  4. 4. www.aqhuman.com Accounting for properties Aqhuman financial training & coaching Is the property a fixed asset? Yes No Is the property an investment property? 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
  5. 5. www.aqhuman.com Accounting for properties Aqhuman financial training & coaching Is the property a fixed asset? Yes No Is the property an investment property? Yes No Investment property Owner- occupied property Trading property A current asset is one that when acquired is intended to be liquidated
  6. 6. www.aqhuman.com Investment properties – International Standards (IAS) Aqhuman financial training & coaching •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)
  7. 7. www.aqhuman.com Investment properties – International Standards (IAS) Aqhuman financial training & coaching •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
  8. 8. www.aqhuman.com Investment properties – International Standards (IAS) Aqhuman financial training & coaching •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 10 Cash - Debt (10) - Retained profits - Income statement Surplus on valuation - Profit on disposal - Profit - You buy the property for £10m using debt
  9. 9. www.aqhuman.com Investment properties – International Standards (IAS) Aqhuman financial training & coaching •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 10 Cash - Debt (10) - Retained profits - Income statement Surplus on valuation - Profit on disposal - Profit - End yr 1 12 - (10) 2 2 2 - 2 You revalue the property by £2m which passes through the income statement
  10. 10. www.aqhuman.com Investment properties – International Standards (IAS) Aqhuman financial training & coaching •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 10 Cash - Debt (10) - Retained profits - Income statement Surplus on valuation - Profit on disposal - 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
  11. 11. www.aqhuman.com Investment properties – UK gaap Aqhuman financial training & coaching •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.
  12. 12. www.aqhuman.com Owner-occupied properties Aqhuman financial training & coaching •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
  13. 13. www.aqhuman.com Trading properties Aqhuman financial training & coaching •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)
  14. 14. www.aqhuman.com 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 and accounting for a number of business schools’ MBA programmes. Aqhuman financial training & coaching

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