Route 102 – One man’s year-long journey……Day 61

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 61 (3 Jun)

So let's get stuck in to this key issue for investment property accounting: what does 'undue cost or effort' mean and when (and how often) is it expected to apply in reality?

Before diving into the detail, it's worth a pause to consider why the standard includes this alternative treatment based on undue cost or effort (and, more specifically, why it includes it here). After all, the phrase is a rare occurrence in FRS 102. In fact it's only used twice: on accounting for associates in section 14 (where the fair value approach is adopted) and here, for investment properties. It isn't scattered here and there whenever fair value raises its head. For instance, we noted in section 11 that investments in shares (other than subsidiaries, associates, JVs etc) should be valued at fair value wherever this can be reliably measured - the standard does not add 'without undue cost or effort'. If you can reliably measure share values, irrespective of how much it would cost you to do so or how much effort would be needed, then value them you must.

So why add 'undue cost or effort' here? It's worth remembering that FRS 102 is based on a standard intended for global use - the IFRS for small and medium entities (IFRSSME), and the IASB training material accompanying this section of the IFRSSME states that estimating fair value is an issue 'especially in countries where the valuation profession is less well established' (p3). So that's the reason for an undue cost or effort opt-out - in some countries, obtaining property valuations is inevitably difficult and costly, in a way not expected for investments such as shares.

But FRS 102 is a UK standard, and we clearly have a well-established valuation profession here. So what's interesting is that this opt-out was retained in the UK version. Now, there are sensible reasons for this of course - the fact that we have RICS professionals on every street corner doesn't mean that every property can be easily valued. A UK investment property could be highly unusual and abnormally difficult (and costly) to value. So there is good reason to conclude that, while we would expect that for the vast majority of UK investment properties, obtaining fair values would not incur undue cost or effort, there will be the odd exception to this.

But is the 'undue cost or effort' opt-out only restricted to oddball properties? The short answer is no - we need to look deeper into the phrase and how it is interpreted within and outwith the standard. We'll do this tomorrow....

P.S. If you missed the last instalment click here