To mark this momentous year for UK GAAP, I'm embarking on a mission to work my way through FRS 102, reading a portion on each working day of 2015 and writing a short blog entry on my thoughts and musings (be they few or many).
DAY 65 (17 Jun)
Today, let's clear up three further paragraphs in section 16 on defining which properties should be treated as investment properties. Firstly, para 16.3:
A property interest that is held by a lessee under an operating lease may be classified and accounted for as investment property using this section if, and only if, the property would otherwise meet the definition of an investment property and the lessee can measure the fair value of the property interest without undue cost or effort on an on- going basis. This classification alternative is available on a property-by-property basis.
Properties held under operating leases will not normally appear on the balance sheet, of course (in contrast to those held under finance leases). This paragraph allows balance sheet recognition if the property is being held for rental (presumably not for capital appreciation) and the fair value of the interest can be obtained. It's likely to be an infrequently-used option but there is some logic for recognising such an asset interest at fair value on the basis that it is earning rental income for the entity.
Para 16.4 makes clear that social housing should not be treated as investment property, since it is not held primarily for a return but to provide social benefit. Again, there's logic to this approach.
Finally, para 16.5 deals with mixed-use properties:
Mixed use property shall be separated between investment property and property, plant and equipment. However, if the fair value of the investment property component cannot be measured reliably without undue cost or effort, the entire property shall be accounted for as property, plant and equipment in accordance with Section 17.
Again, a sensible approach in my view. In the classic example of an office block in which one floor is occupied by the owner and two floors are rented out, one can probably arrive at a fair split of the property between investment and PPE (it might not be quite as simple as a 1:2 split, but this will be the starting point).
Of course, in other cases it will be much harder to analyse, and indeed where the investment component is small, the entity may baulk at having to fair value the entire property just to arrive at the fair value for this small component (in which case, we're back to the 'undue cost or effort' debate).
What's clear is that the standard doesn't allow the entire property to be classed as investment where there is mixed use - even if most of the office block is rented out, your choice is either to split it out or to classify the whole lot as PPE.
P.S. If you missed the last instalment click here