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 new 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 abbreviated accounts of Old UK GAAP.
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, £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.
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, will qualify as ‘micro’.
The advantages of using FRS105
The advantage is the reduced disclosure. 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. It is particularly worth noting that loans to the company from the directors, or from other related entities, are not required to be disclosed.
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.
Other important considerations
It is important to be aware that when using FRS 105 investment properties will have to be recorded at cost, not valuation. This will be an important consideration if the company relies on loan to asset ratios. On the plus side, FRS105 means that directors do not to have to comply with compulsory annual revaluation reviews of their property portfolio.
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.