22 May 2018

Micro management: dealing with property under FRS 105

Publications

Some common questions we receive from property investment clients are: do we really have to include so much information on our property values and various transactions in our annual financial statements?

The answer until 2016 was – yes you do, but since then Financial Reporting Standard 105 (“FRS 105”) was introduced, which allows ‘micro companies’ a get-out clause for many of these detailed disclosures.

Although the term ‘micro company’ suggests a low bar for qualification, it requires a turnover of less than £632,000 with fewer than 10 employees.  At a 5% residential yield, this means a company with a property portfolio of around £11 million could qualify – not a micro business at all.

As with all such matters, there are pros and cons of adopting FRS 105 for your property investment business:

  • Your property will be shown at original cost in the accounts rather than revalued to its current market value.
    • This can be a pro if you want to reduce the public information on the value of your portfolio to a minimum.
    • This can be a negative factor if you aren’t able to match the property value to the increasing value of your loan book – the balance sheet will appear less ‘healthy’ than it should.
  • Under non-micro accounting rules, your business will need to bring an ‘expected capital gains tax charge if sold’ creditor on to the balance sheet (called deferred tax) – whereas with micro accounts, this is not required.
    • These calculations can be complex, and such adjustments can clutter up your accounts making them harder to understand.
    • Equally, if you sold your company, the value of the company would reflect the latent tax charge within the company for your property assets – so in some ways, the deferred tax charge presents a more realistic value for the business.
  • Your filed accounts will only include a basic balance sheet and no detailed notes.
    • This could be a positive factor for you, if you’re keen to reduce the information publicly available on your business to an absolute minimum.
    • Minimising the information filed about your business can have an impact on credit ratings and terms offered to you by lenders. You may well need to provide them with additional information to improve their view of your business – especially if the balance sheet is reflecting the net position of your property at cost to loan value.
  • Your ‘full’ accounts will include a much simplified profit and loss account and balance sheet with no explanatory notes to the accounts.
    • Again, this could be considered a positive, as your accounts will appear much simpler.
    • If you have external investors/lenders, it is likely they’ll want something more detailed to base their understanding of your business on, so you may need to prepare additional financial documents for their purposes.

It is also important to bear these points in mind if you are considering investing into a property investment business. Have they prepared their accounts under the FRS 105 micro rules? If so, you should take the above issues into consideration while reviewing the financials.

As always, there are upsides to either route, depending on your circumstances, so for more information, please get in touch with your usual BKL contact or use our enquiry form.