Member Article

Financial changes to property business accounts

Changes in financial reporting are having a significant impact on property business accounts.

Since 1st January 2015, all existing UK accounting standards have been replaced by a single standard. This means that properties in the financial statements of accounts for businesses need to be restated in a move which could give rise to a tax charge due to prior year adjustments.

The accounting for investment properties, lease incentives, deferred tax, construction contracts, financial instruments and holiday accruals going forward is significantly different and includes:

• Revaluation of investment properties through the profit and loss account;
• Deferred tax to be recognised in full on all revaluations;
• Lease incentives to be recognised over the lease term as opposed to the period up to the first break clause;
• Construction contracts may result in revenue being recognised earlier increasing a property developers tax charge;
• Financial derivatives such as SWAPS will now be held at fair value; and
• Unused holiday will be accrued at the relevant year end, potentially giving rise to a tax deduction.

The effect on a property company’s net assets and reportable profit could therefore be hugely significant.

Investment properties are assets held for generating rental income or capital appreciation. These will now be recognised at cost but after this will be valued at their fair value at the balance sheet date.

For an investor this means the recognised change in property value movements on investments will be shown in the profit and loss account, even though the gains or losses might not have been crystallised.

There is also a need to identify all contractual commitments, such as: purchase, construction, development, maintaining or enhancing an investment property. This disclosure will have to be dealt with in the accounts to give greater transparency over the financial operation of the business.

Where it comes to lease incentives, these used to be granted at the commencement of a lease and taken into account over the period to the next rent review. The incentive is now to be taken into account over the term of the lease, which could see a higher tax bill result because the lease incentive offered by the property investor is spread over the longer term.

As accounts that are to be prepared for the 31 December 2015 and beyond will look radically different, affecting bank covenants, distributable reserves and tax charges, we’re advising property investors to be fully aware of the changes at the earliest opportunity.

This was posted in Bdaily's Members' News section by JK Property Consultants .