SORP What happens next
IFRS Roadshows 2012
Property Plant and Equipment
IFRS Roadshows 2012
The 2 big issues in the FRSME re PPE • Non capitalisation of interest • Non valuation of property
IFRS Roadshows 2012
Capitalisation of interest • “An entity may adopt a policy of
capitalising borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of the asset.”25.2
IFRS Roadshows 2012
Borrowing costs • “The borrowing costs which are directly attributable to the construction are those borrowing costs that would have been avoided if the expenditure on the qualifying asset had not been made.” Para 25.2A
IFRS Roadshows 2012
Borrowing costs Dos and Don’ts • Specific borrowing costs should be used • Weighted average borrowing cost to be used if no specific borrowing • Capitalised amount cannot exceed the cost of borrowing • Capitalisation should be suspended during period of inactivity.
IFRS Roadshows 2012
Property valuation • Choice of cost model or revaluation model • Must apply to all of the same class of assets • Held at its fair value less subsequent depreciation and impairment losses
IFRS Roadshows 2012
Property valuation • 17.15B After recognition under the revaluation model, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses.
IFRS Roadshows 2012
Property valuation • Valuations shall be made with sufficient regularity • Fair value is usually determined using market based evidence • Normally by professionally qualified valuers
IFRS Roadshows 2012
Property valuations
• “If there is no market based evidence of fair value, because of the specialised nature of the property..... and entity may need to estimate fair value using an income or a depreciated cost approach.” Para 17.15D • SORP will probably advise the use of EUV – SH , No Change
IFRS Roadshows 2012
Investment properties • Definition: • Not property held for social benefits P 16.3A • Held to earn rentals or for capital appreciation
IFRS Roadshows 2012
Investment properties • Measured at fair value at each reporting date • Changes in fair value recognised in profit or loss. Para 16.7 • Fundamentally different to current UK GAAP
IFRS Roadshows 2012
Investment properties • Distinction between investment property and fixed asset is critical therefore • Different accounting treatment in both PPE and I & E • Need to consider the intentions relating to the property on acquisition/construction
IFRS Roadshows 2012
Different types of tenure • SORP Working party considered the following to be PPE, to be consulted upon: • General Needs • Shared ownership – Fixed • Affordable rent
IFRS Roadshows 2012
PPE types • • • • •
Intermediate renting Rent to buy Almshouses Care Key worker
IFRS Roadshows 2012
Investment property types • • • • •
Market renting Shared equity Commercial accommodation Student accommodation To be consulted on
IFRS Roadshows 2012
Fixed asset additions (section 17) • New name: Property, Plant and Equipment • Component accounting: essentially the same as now – If the major components of an item of PPE have significantly different patterns of consumption of economic benefits, an entity shall allocate the initial cost of the asset to its major components and depreciate each such component separately over its useful life
• However capitalisation of improvements is different
IFRS Roadshows 2012
FRS 15 Subsequent expenditure should be capitalised where the subsequent expenditure provides an enhancement of the economic benefits of the tangible fixed asset in excess of the previously assessed standard of performance.
IFRS Roadshows 2012
SORP 2010 • 126F Works which result in an enhancement of economic benefits of the asset (eg,an increase in the net rental stream over the life of the property) should be deemed to be improvements and capitalised and works which do not should be expensed. An increase in the net rental stream may arise through an increase in the rental income, a reduction in future maintenance costs or a significant extension of the life of the property.
IFRS Roadshows 2012
The Draft FRS para 17.6 An entity shall add to the carrying amount of an item of PPE the costs of replacing part of such an item when that cost is incurred if the replacement part is expected to provide incremental future benefits to the entity. The carrying amount of those parts that are replaced is derecognised.
IFRS Roadshows 2012
Component accounting • Principles are the same as the SORP • No significant changes – a component of a fixed asset is separately accounted for and depreciated over its useful economic life. • The actual standard…..
IFRS Roadshows 2012
Component accounting • 17.16 If the major components of an item of property, plant and equipment have significantly different patterns of consumption of economic benefits, an entity shall allocate the initial cost of the asset to its major components and depreciate each such component separately over its useful life. Other assets shall be depreciated over their useful lives as a single asset.
IFRS Roadshows 2012
Component accounting • There will only be minor wording changes in the SORP. • The status of the Technical Note on component accounting? • Will all have been doing it for a few years by then.
IFRS Roadshows 2012
Pre-contract costs • Pre-contract costs incurred in bidding for and securing contracts for the supply of products and services should be recognised as expenses as incurred, except that directly attributable costs should be recognised as an asset when it is virtually certain that a contract will be obtained and the contract is expected to result in future net cash inflows with a present value no less than all amounts recognised as an asset. The point when the award of a contract becomes virtually certain will depend on the particular circumstances of the case.
IFRS Roadshows 2012
Start up costs • Start-up costs should be accounted for on a basis consistent with the accounting treatment of similar costs incurred as part of the social landlord’s ongoing activities. In cases where there are no such similar costs, start-up costs that do not meet the criteria for recognition as assets under the FRS should be recognised as an expense when they are incurred. They should not be carried forward as an asset.
IFRS Roadshows 2012
Impairment • •
•
General principles are the same under the FRS as SORP and Technical Note. Although the requirement for an annual impairment is not included in the FRS, it will probably be retained for the sector. Use of EUV-SH as a recognised method of valuation as it is income based is probable
IFRS Roadshows 2012
Impairment and service potential • 27.14B For assets held for their service potential a cash flow driven valuation may not be appropriate. In these circumstances, value in use (in respect of assets held for their service potential) is determined by the present value of the asset's remaining service potential plus the net amount the entity will receive from its disposal.
IFRS Roadshows 2012
Impairment and service potential • In some cases, this may be taken to be costs avoided by possession of the asset. Therefore, depreciated replacement cost, may be a suitable measurement model but other approaches may be used where more appropriate.
IFRS Roadshows 2012
Impairment • The Technical Note will be updated to be in line with the FRS. Include such areas as • “planned internal subsidy” • Valuation method • Timing of impairment reviews
IFRS Roadshows 2012
Land acquired at below value • • • •
IFRS does not have any specific requirements The FRS does not have any guidance The SORP be drafted to include guidance Should specifically refer to “land and buildings” not just land as principles are the same
IFRS Roadshows 2012
Mixed-tenure • Under the current SORP there is the limitation on cross-subsidisation • No such guidance in the FRS as it is industry specific • SORP Working Party to consider whether guidance is necessary and whether restriction can be lifted.
IFRS Roadshows 2012
Land-banks • Those with development plans in place should be PPE • Those with no development plans are investment properties and should be held at market value • Valuation judgements
IFRS Roadshows 2012
Accounting for VAT shelters • Under the FRS there should be no netting off of debtors and liabilities. • Accounting for VAT shelters should therefore gross up liabilities and debtors under the FRS • To be consulted on
Property Plant and Equipment
IFRS Roadshows 2012
The 2 big issues in the FRSME re PPE • Non capitalisation of interest • Non valuation of property
IFRS Roadshows 2012
Capitalisation of interest • “An entity may adopt a policy of
capitalising borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of the asset.”25.2
IFRS Roadshows 2012
Borrowing costs • “The borrowing costs which are directly attributable to the construction are those borrowing costs that would have been avoided if the expenditure on the qualifying asset had not been made.” Para 25.2A
IFRS Roadshows 2012
Borrowing costs Dos and Don’ts • Specific borrowing costs should be used • Weighted average borrowing cost to be used if no specific borrowing • Capitalised amount cannot exceed the cost of borrowing • Capitalisation should be suspended during period of inactivity.
IFRS Roadshows 2012
Property valuation • Choice of cost model or revaluation model • Must apply to all of the same class of assets • Held at its fair value less subsequent depreciation and impairment losses
IFRS Roadshows 2012
Property valuation • 17.15B After recognition under the revaluation model, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses.
IFRS Roadshows 2012
Property valuation • Valuations shall be made with sufficient regularity • Fair value is usually determined using market based evidence • Normally by professionally qualified valuers
IFRS Roadshows 2012
Property valuations
• “If there is no market based evidence of fair value, because of the specialised nature of the property..... and entity may need to estimate fair value using an income or a depreciated cost approach.” Para 17.15D • SORP will probably advise the use of EUV – SH , No Change
IFRS Roadshows 2012
Investment properties • Definition: • Not property held for social benefits P 16.3A • Held to earn rentals or for capital appreciation
IFRS Roadshows 2012
Investment properties • Measured at fair value at each reporting date • Changes in fair value recognised in profit or loss. Para 16.7 • Fundamentally different to current UK GAAP
IFRS Roadshows 2012
Investment properties • Distinction between investment property and fixed asset is critical therefore • Different accounting treatment in both PPE and I & E • Need to consider the intentions relating to the property on acquisition/construction
IFRS Roadshows 2012
Different types of tenure • SORP Working party considered the following to be PPE, to be consulted upon: • General Needs • Shared ownership – Fixed • Affordable rent
IFRS Roadshows 2012
PPE types • • • • •
Intermediate renting Rent to buy Almshouses Care Key worker
IFRS Roadshows 2012
Investment property types • • • • •
Market renting Shared equity Commercial accommodation Student accommodation To be consulted on
IFRS Roadshows 2012
Fixed asset additions (section 17) • New name: Property, Plant and Equipment • Component accounting: essentially the same as now – If the major components of an item of PPE have significantly different patterns of consumption of economic benefits, an entity shall allocate the initial cost of the asset to its major components and depreciate each such component separately over its useful life
• However capitalisation of improvements is different
IFRS Roadshows 2012
FRS 15 Subsequent expenditure should be capitalised where the subsequent expenditure provides an enhancement of the economic benefits of the tangible fixed asset in excess of the previously assessed standard of performance.
IFRS Roadshows 2012
SORP 2010 • 126F Works which result in an enhancement of economic benefits of the asset (eg,an increase in the net rental stream over the life of the property) should be deemed to be improvements and capitalised and works which do not should be expensed. An increase in the net rental stream may arise through an increase in the rental income, a reduction in future maintenance costs or a significant extension of the life of the property.
IFRS Roadshows 2012
The Draft FRS para 17.6 An entity shall add to the carrying amount of an item of PPE the costs of replacing part of such an item when that cost is incurred if the replacement part is expected to provide incremental future benefits to the entity. The carrying amount of those parts that are replaced is derecognised.
IFRS Roadshows 2012
Component accounting • Principles are the same as the SORP • No significant changes – a component of a fixed asset is separately accounted for and depreciated over its useful economic life. • The actual standard…..
IFRS Roadshows 2012
Component accounting • 17.16 If the major components of an item of property, plant and equipment have significantly different patterns of consumption of economic benefits, an entity shall allocate the initial cost of the asset to its major components and depreciate each such component separately over its useful life. Other assets shall be depreciated over their useful lives as a single asset.
IFRS Roadshows 2012
Component accounting • There will only be minor wording changes in the SORP. • The status of the Technical Note on component accounting? • Will all have been doing it for a few years by then.
IFRS Roadshows 2012
Pre-contract costs • Pre-contract costs incurred in bidding for and securing contracts for the supply of products and services should be recognised as expenses as incurred, except that directly attributable costs should be recognised as an asset when it is virtually certain that a contract will be obtained and the contract is expected to result in future net cash inflows with a present value no less than all amounts recognised as an asset. The point when the award of a contract becomes virtually certain will depend on the particular circumstances of the case.
IFRS Roadshows 2012
Start up costs • Start-up costs should be accounted for on a basis consistent with the accounting treatment of similar costs incurred as part of the social landlord’s ongoing activities. In cases where there are no such similar costs, start-up costs that do not meet the criteria for recognition as assets under the FRS should be recognised as an expense when they are incurred. They should not be carried forward as an asset.
IFRS Roadshows 2012
Impairment • •
•
General principles are the same under the FRS as SORP and Technical Note. Although the requirement for an annual impairment is not included in the FRS, it will probably be retained for the sector. Use of EUV-SH as a recognised method of valuation as it is income based is probable
IFRS Roadshows 2012
Impairment and service potential • 27.14B For assets held for their service potential a cash flow driven valuation may not be appropriate. In these circumstances, value in use (in respect of assets held for their service potential) is determined by the present value of the asset's remaining service potential plus the net amount the entity will receive from its disposal.
IFRS Roadshows 2012
Impairment and service potential • In some cases, this may be taken to be costs avoided by possession of the asset. Therefore, depreciated replacement cost, may be a suitable measurement model but other approaches may be used where more appropriate.
IFRS Roadshows 2012
Impairment • The Technical Note will be updated to be in line with the FRS. Include such areas as • “planned internal subsidy” • Valuation method • Timing of impairment reviews
IFRS Roadshows 2012
Land acquired at below value • • • •
IFRS does not have any specific requirements The FRS does not have any guidance The SORP be drafted to include guidance Should specifically refer to “land and buildings” not just land as principles are the same
IFRS Roadshows 2012
Mixed-tenure • Under the current SORP there is the limitation on cross-subsidisation • No such guidance in the FRS as it is industry specific • SORP Working Party to consider whether guidance is necessary and whether restriction can be lifted.
IFRS Roadshows 2012
Land-banks • Those with development plans in place should be PPE • Those with no development plans are investment properties and should be held at market value • Valuation judgements
IFRS Roadshows 2012
Accounting for VAT shelters • Under the FRS there should be no netting off of debtors and liabilities. • Accounting for VAT shelters should therefore gross up liabilities and debtors under the FRS • To be consulted on
