Route 102 – One man’s year-long journey……Day 64

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 64 (15 Jun)

In Friday's post, I tackled the issue of properties let out to group companies, and the different approach within FRS 102 to such properties. Whereas SSAP 19 clearly excludes these from being treated as investment properties, FRS 102 takes a more principle-based approach. I gave an example in which a subsidiary (X) happens to rent a property to a fellow subsidiary Y (charging it market rent) for use in the latter's trade - this is an investment property in the subsidiary's own balance sheet, but a trading property in the group accounts.

Now, this is annoying because it entails more work at the consolidation stage, but one can see the logic. After all, why should this particular property be dealt with any differently to any other property that X rents out to third parties? However, this logic breaks down in other cases in which no rent is being charged, and there is no particular expectation of a capital gain.

For instance, many owner-managed groups in the UK are structured with a holding company which does not trade. The holding company owns the shares in its subsidiaries but frequently also owns the freehold to the group's properties, rather than these residing on the books of the companies who in fact occupy and use them. This is often done to ring-fence the properties for tax purposes and also to protect them from creditors should the trading entities get into difficulty. The parent will not normally charge a market rent to the trading subsidiaries; however it might recharge any (typically minor) administrative costs. The question is: should these properties be treated as investment or trading properties in the parent's own balance sheet?

On the face of it, the parent isn't holding the properties for any of the reasons outlined in section 16 - it isn't earning rentals and (in many cases) may not expect significant capital appreciation on the properties, but is equally not holding them for use in production or supply of goods/services, for its own administration, or for sale (as trading stock). But perhaps the closest match is administration. It isn't using the properties for administrative purposes, but it is holding them as the result of an administrative decision (to shelter the properties for tax and liability purposes). On these grounds, perhaps the best treatment is as trading assets (which will harmonise with the group accounts).

No blog entry tomorrow, as I am lecturing all day in lovely Scotland and then enjoying a 5-hour drive home; but will be back on Wednesday.

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