Property Revaluation

Revaluation Gains in Equity for Owner-Occupied Property

When you own a property that you use within your operations, FRS 102 offers a revaluation model. You do not place the entire fair value gain in profit and loss if there is no past impairment to reverse. Instead, you record an upward revaluation in your revaluation reserve within equity, net of deferred tax if applicable.

Here is a typical double entry for a £51,000 upward revaluation on an owner-occupied property, assuming this is the first revaluation and you have not recognized any earlier deficit:

• Debit: Property (Balance Sheet) £51,000

• Credit: Revaluation Reserve (Equity) £51,000

This preserves the surplus in equity. You exclude this amount from your profit and loss statement so that your operating performance remains unaffected by fair value adjustments.

Investment Property: Gains in Profit and Loss

Investment properties follow different guidance under FRS 102 Section 16. You record all fair value movements in profit or loss. This approach provides a more immediate reflection of market changes in your reported earnings. For instance, if you have a £51,000 gain on your investment property, you apply the following entries:

• Debit: Investment Property (Balance Sheet) £51,000

• Credit: Fair Value Gain (Profit or Loss) £51,000

This gain boosts your reported profits for the period since FRS 102 requires direct recognition in profit and loss. You do not use a revaluation reserve for investment properties.

Deferred Tax on Revaluation Surpluses

Many companies wonder whether they must recognize deferred tax. FRS 102 requires recognizing a deferred tax liability whenever the carrying amount of an asset exceeds its tax base. A first-time revaluation or recurring fair value increases both create a temporary difference between the asset’s accounting value and its tax base. You usually calculate the deferred tax at the rate you expect to apply when you sell the property or realize the difference.

For example, if the surplus is £51,000 and your corporation tax rate is 19%, the calculation is:

• Deferred Tax Liability = £51,000 × 19% = £9,690

In an owner-occupied setting, you offset that liability against your revaluation reserve. With an investment property, you recognize that amount in the deferred tax expense line of profit and loss. Either way, the same principle applies: record the deferred tax liability if the revaluation creates a temporary difference.

Double Entry for Investment Property Gain with Deferred Tax

When you classify the property as an investment property and you experience a fair value gain, you recognize the entire gain in profit and loss and immediately record deferred tax. Suppose you discover a £51,000 gain:

1. Record the gain in Profit or Loss

   • Debit: Investment Property £51,000

   • Credit: Fair Value Gain (P&L) £51,000

2. Record the Deferred Tax (assuming 19%)

   • Debit: Deferred Tax Expense (P&L) £9,690

   • Credit: Deferred Tax Liability £9,690

Your net profit impact in that period equals £41,310 (the £51,000 gain minus the £9,690 tax).

Under FRS 105 (the Micro-Entities Regime)

Revaluation of property is not permitted. Micro-entities must measure property at historic cost (less any accumulated depreciation and impairment), with no option to subsequently revalue upwards. Consequently:

1. No Upward Revaluation
   You cannot recognize a revaluation surplus in the financial statements.

2. Deferred Tax
   Since revaluation isn’t allowed, there’s no revaluation gain to create a temporary difference—hence no deferred tax liability from revaluation.

3. Impairment-Only Approach
   If the property’s value falls below its carrying amount, you record an impairment loss. But increases in fair value are not recognized.

Under UK company law, FRS 105 applies to companies qualifying as micro-entities. To qualify as a micro-entity, the business must meet two out of the following three criteria, for two consecutive years (except in the first year of incorporation, where it only needs to meet them once):

1. Turnover of £632,000 or less

2. Balance sheet total (total assets) of £316,000 or less

3. Average number of employees of 10 or fewer

If, at your accounting year-end, your company meets two of these three thresholds for a second year running, you generally qualify for micro-entity status and can adopt FRS 105. However, there are exclusions: for instance, certain companies (e.g., charities, financial institutions, public companies) cannot use the micro-entities regime even if they meet the size thresholds.

Therefore, to determine if you can follow FRS 105:

1. Check the size criteria against your last two year-ends.

2. Confirm you are not an excluded type of entity (e.g., charity, bank, insurance).

3. If you meet both requirements, you can apply FRS 105 and prepare micro-entity accounts. If not, you must use another accounting standard (e.g., FRS 102, FRS 102 Section 1A, or full FRS 102).

CT600 Corporation Tax:

Revaluation gains and deferred tax on investment property under FRS 102 Section 16 do not affect the CT600, as HMRC does not recognise unrealised gains for tax purposes. These gains are adjusted out in the tax computation and excluded from taxable profit. Similarly, deferred tax is an accounting entry only and does not appear on the CT600. The revaluation only becomes relevant for Corporation Tax when the property is actually sold — at that point, any gain is treated as a chargeable gain and included in the CT600.

Conclusion

FRS 102 outlines separate rules for owner-occupied properties and investment properties. You do not send an owner-occupied property’s first-time revaluation surplus to profit and loss unless it reverses a past impairment recognized in P&L. Instead, you credit the gain to a revaluation reserve in equity. However, you always place an investment property’s revaluation gain directly in profit and loss. You must also track deferred tax if there is a temporary difference between the asset’s carrying amount and its tax base.

This distinction is crucial for proper financial reporting and helps users of your accounts appreciate how changes in property values affect your business performance. FRS 102 ensures consistency in reporting while offering clarity for stakeholders who rely on accurate financial statements.

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