We have finally made it to the last in our series of blogs on accounting standards changes. As mentioned in our previous blog, transition for a small company from FRSSE to FRS 102 gives rise to an opportunity! (We like them!). On moving over to the new standard, there is a one-off chance to revalue fixed assets to their fair value (generally market value), freeze this and take it as the deemed cost into the new regime. You may already be aware that revaluation, as opposed to cost less depreciation, has been an option for small companies in the past but there is a difference…. If your accounting policy is to hold assets at valuation then you have to regularly revalue and this is what puts people off – there is a trade off between wanting a strong balance sheet which is more representative of the true value of the assets of the company, and the added work of regularly having to revalue all the assets in question. Equally, all assets of a certain class need to be treated the same way currently (i.e. held at valuation).
This is where the opportunity to revalue on transition gets a little more interesting…… Firstly, revaluing on transition does not affect the accounting policy of the company, it is a one-off – therefore there is no need for revaluations going forward, and depreciation will be charged in the future on the “deemed cost”. Secondly, this can be applied to a single asset, cherry-picked single assets, a whole class, or all assets – it’s entirely flexible! So in reality you could have one large piece of machinery that has a real value in excess of that shown in the accounts, and you can simply revalue that one asset on transition. The value of plant and equipment should be the market value determined by appraisal; the accounting standard does not dictate that this needs to be a professionally qualified valuer, and therefore could be undertaken by the director. However, the standard does say that the value of land and buildings would normally be determined by a qualified valuer.
So what are the implications of this on the accounts?
Firstly there will be an up-lift in the balance sheet for the difference between the value in the accounts for the asset now, and the re-valued amount. This will be shown on the balance sheet as a reserve but it is not distributable, i.e. dividends cannot be paid out of it, as it is not realised profit. Additionally, there will also be deferred tax that will need to be provided on the revaluation, which will be a reduction in the balance sheet, coming out of the non-distributable revaluation reserve. The deferred tax will be based on the estimated corporation tax cost if the asset was sold at the re-valued amount, which will take into account the indexation allowance (an allowance given to companies to remove the effect of inflation from the tax charge).
From the date of transition, the depreciation charged will be on the “deemed cost” which is higher than the original cost and as a result, the depreciation charge each year will be higher than it was previously (or if the revaluation had not taken place). This means the reported profit in the accounts will be lower in the future, which may or may not be an issue, depending on the business. It will have no effect on taxable profits as depreciation is not included for tax purposes. Also, it will not affect distributable profits as the additional depreciation charge as a result of the revaluation will be transferred between distributable and non-distributable profits – this means that the amount of profit available for distribution as a dividend will be the same with or without a revaluation.
This is only available for companies preparing small or medium accounts under FRS 102, not micro accounts under FRS 105 as valuation is explicitly not permitted; this could therefore, be one of the deciding factors in the small vs. micro decision.
If you think that this could be of benefit to your company, please contact us! And start to think now what the value of the assets in question are – this is an adjustment that would be applied retrospectively, and therefore it is the value at 2 years prior to the first year end under the new standard that is key. For small companies, if you have a December year end, your first year under the new standard would be 31 December 2016, so it’s the valuation at 31 December 2014 that is required. If you have a June year end, your first year under the new standard would be 30 June 2017, and you would need the valuation of the asset(s) at 30 June 2015.
We have finally made it to the end of our series of blogs on the forthcoming changes in accounting standards and company law. We will be discussing these changes with our clients over the coming months on a one-to-one basis so that they can all make informed decisions on what is the most appropriate path for their companies, but it you have any questions in the mean time, please do not hesitate to get in touch on 0116 242 3400.
Katie Kettle, Technical Manager