Asset Growth : Property Valuations

Accounting
1

ONE Year ago: I purchase a house for £100,000

  1. I raise a purchase invoice from “vendor” for the sum of £100,000
    (the money comes from a Mortgage Bank account I set up… but I think that is irrelevant for my query)
  2. I select the “Freehold Property [Asset]” journal.
  3. I look at my Balance Sheet and see a Freehold Property under Fixed Assets of £100,000
    :slightly_smiling_face: :white_check_mark:

TODAY: I re-value the house and it is now worth £120,000 (… a £20K capital growth)
Maybe through capital improvements or a change in the market.
Capital improvements I can prove as I have invoices but what about the hidden growth of the general housing market ?

  1. I look at my Balance Sheet and see a Freehold Property under Fixed Assets of £100,000
    :thinking:

  • How do I show the Asset worth of my company has increased by £20k ?

  • EDIT: How to post “Appreciation” of my Assets

  • Should I have specific Asset accounts for each property ?

2

Hello @SystemsModellingLtd

The support team are able to advise on how to use the software but not on general accountancy queries.

These types of queries are better dealt with by your accountant who can provide tailored professional advice.

I will leave this feed open for you as some of the community are accountants who may comment.

3

It depends on your reporting framework for company accounts, so which one is it?

1 Like
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Quickfile Question was how to post “Appreciation” or “Equity” to my accounts. ?

Reporting Framework:
All companies in the UK need to use the UK-adopted international accounting standards (IAS) : FRS102

16.7 An investment property shall be measured at fair value at each reporting date with
changes in fair value recognised in profit or loss. If a property interest held under a
lease is classified as an investment property, the item accounted for at fair value is
that interest and not the underlying property. The Appendix to Section 2 provides
guidance on determining fair value.
…
Pervasive recognition and measurement principles
…
2.36 An entity shall prepare its financial statements, except for cash flow information, using
the accrual basis of accounting. On the accrual basis, items are recognised as assets,
liabilities, equity, income or expenses when they satisfy the definitions and recognition
criteria for those items.

So am I identifying “equity” (property capital growth) on my P&L and balance sheet ?

5

Hi,

I might be able to point you in the right direction.

If the property qualifies as an investment property, then there is an accounting standard IAS 40.

A google search for “what is IAS 40 investment property” brought this back (for me)

image

If you have determined that the property is an investment property (IP) then you record the initial cost in your accounts as:

Initial measurement
Investment properties should initially be measured at cost plus directly attributable costs.

In your example this is £100,000.

There are then two choices on how to deal with it, known as the Fair Value Model and the Cost Model.

Let’s assume you choose the Fair Value Model, then

Subsequent measurement
Fair value model

  • The investment properties are revalued to fair value at each reporting date
  • Gains or losses on revaluation are recognised directly through profit or loss
  • The properties are not depreciated

If, say, you bought the IP on 1st Jan 2022 and your year end was 31st Dec 2022 this will have happened:

1st Jan 22: Purchase IP for £100,000
31st Dec 22: Book value of IP still showing as £100,000 (No depreciation)
31st Dec 22: Fair (Market) Value £120,000
31st Dec 22: IP Gain of £20,000.

The double entry to recognise this gain at 31st Dec 22 would be:

Debit : Freehold Property [Asset] (Balance Sheet Account) with £20,000
Credit: IP Gain (P&L account) with £20,000.

You might have to create new account codes in QF for the IP Gain entry - somewhere around Miscellaneous Income.

There is also deferred tax to throw a spanner in the works! But hopefully for now, this might help you a bit.

There is a brief explanation of the differences between FRS 102 and IAS 40 at THIS link.

.

6

FRS 102A worth looking at

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Edited:
First of all, is the property you are looking at held as an investment, or for some other purpose, such as for use within the business or to sell in the course of the business? You don’t specify and it’s important to distinguish. The definition of investment property is:

“Property (land or a building, or part of a building, or both) held by the owner or by the lessee under a finance lease to earn rentals or for capital appreciation or both, rather than for:
(a) use in the production or supply of goods or services or for administrative purposes, or
(b) sale in the ordinary course of business”

Secondly, it’s important to determine, as @FaradayKeynes says, which reporting framework you are using - FRS102/A or FRS 105. Investment property can be reported under FRS105, but must be carried at historical cost.

FRS105 is for micro-entities, FRS1021A for small entities otherwise it would be FRS102 (not1A)?

If FRS105 you carry the property at cost. If FRS102 you carry it at “fair value”. You would make the entry by way of a journal at year-end, Dr. Asset Cr. Revaluation (in the P&L), The accumulated revaluations are non-distributable reserves though, so you then need to hold them separately from the general retained earnings, or at least keep track of them separately from the accounts, so you don’t inadvertently pay them out as dividends.

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Hi SystemsModellingLtd,

I’ve noticed that FaradayKeynes and cbstephensaca have posted here after I posted.

What I didn’t see is any attempt to provide any practical help to your question.

FaradayKeynes says to look at FRS 102A and cbstephensaca makes a comment that well …makes no sense.

I can’t be bothered to go through everything in public on this post, but I’ll be happy to help you out - send a private message if you want.

.

1 Like
9

“Fair Value” Equity as Journal Entry

Fair Value => Evidenced.

:white_check_mark:

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I think your best option, to be honest, is to ask your accountant. It’s not necessarily straightforward.

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