Articles17 May 2023
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FRS 105 – What Property Investment Companies Need to Know
There are various reasons directors of property investment companies may wish to reduce the level of detail that is available on public record
There are various reasons why directors of property investment companies may wish to reduce the level of detail that is available on public record.
The accounting framework known as FRS 105 is available for use for ‘micro entities’ and contains a reduced level of disclosure which includes less detail than the nearest alternative framework FRS102 1A.
What is a micro entity?
The limits that apply to a stand alone company in order to qualify to use FRS 105 are relatively low at £632,000 turnover (pro-rated appropriately where an entity’s year is shorter or longer than a calendar year), £316,000 gross assets and 10 staff, and this may at first glance make it appear unusable for property companies. However, the company only has to satisfy two out of the three limits. After the first financial year of the entity, the criteria must be met in two consecutive years for an entity to qualify as a micro-entity and must be exceeded in two consecutive years to cease to qualify.
So let’s say a company holds a property at £5 Million cost, (or even more); generates rental income of £500,000 p.a; and employs fewer than 10 people, it will qualify as ‘micro’.
The advantages of using FRS105
The main advantage is the reduced disclosure required. The only notes in the accounts will be any guarantees, contingencies and commitments which the company is connected with, and any advances, loans or guarantees with the directors, plus the number of staff. It is particularly worth noting that loans to the company from the directors, or from other related entities, are not required to be disclosed.
There is also no requirement for the directors to have the property revalued each year as they would have to under FRS 102, as this is specifically prohibited under FRS 105, and this can give a saving in both time and cost. This may have the additional advantage that it will limit the disclosure of potentially market sensitive information in respect of rental yields that the company is achieving.
The disadvantages of using FRS105
The reduced disclosure of FRS 105 can be a draw back in some situations. If financing is needed, or if investors want to review what has happened over a period, FRS 105 may not be appropriate. In these circumstances a company could be better off producing accounts using FRS 102, particularly if they use the reduced disclosures under Section 1A for small companies.
Where banks or other lenders to the company are relying on loan to asset ratios, or are looking at the net asset values of the company, then the company may want to show the properties that they hold at market value, and therefore FRS 105 would not be the correct framework.
Is it for me?
There is no one size fits all answer and the decision whether to adopt FRS105 as an accounting framework for a property investment company needs to be considered carefully.
We work with directors of property companies in assessing their needs, along with those of any third parties and the funding requirements of a property portfolio, before making a recommendation for the best option.
If you require more information, please don’t hesitate to contact us