Couple of questions

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Gill Gittings
Gill Gittings Registered Posts: 121 Dedicated contributor 🦉
Is it possible to not charge depreciation on fixed assets in the year of purchase but charge a full year in the year of sale? We've been arguing about this today and want others views.

Also a property costs say £90k which was revalued to £150k then it is sold for £150k If for arguments sake tax is calculated on the full surplus where would you post the tax on the previous revaluation?

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  • Gill Gittings
    Gill Gittings Registered Posts: 121 Dedicated contributor 🦉
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    Sorry i meant the property was sold for £180k. Blonde moments again
  • Steve Collings
    Steve Collings Registered Posts: 997 Epic contributor 🐘
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    Hi Gill,

    Fixed Assets Depreciation Q
    This is not possible. FRS 15 requires depreciation to be allocated on a systematic basis over fixed assets' useful lives. It also goes on to say that depreciation methods should reflect the pattern in which the entity is consuming this asset. This means that depreciation must commence as soon as the asset is brought into use.

    Revaluation and Tax
    You do not state exactly when the property was purchased, revalued and then subsequently sold. I will assume that it is purchased in year 1, revalued in year 2 and sold in year 3.

    In Y2 the revaluation surplus of £60k will be credited to the revaluation reserve and it will
    appear in the STRGL. Under FRS 3, on disposal the entries would be:

    DR cash/bank £180k
    CR property cost £150k
    DR revaluation reserve £60k
    CR P&L account £90 (shown as an exceptional item, possibly)

    Only the tax attributable to the previous revaluation surplus of £60k would be charged in the STRGL.

    Regards
    Steve
  • Gill Gittings
    Gill Gittings Registered Posts: 121 Dedicated contributor 🦉
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    Thanks Steve. I Thought you could get away without charging depreciation in the first year but now it makes sense why not. The property sold is an investment property would it make any difference? I dont think it would but not sure???
  • beverly hudson
    beverly hudson Registered Posts: 95 Regular contributor ⭐
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    Revaluation and Tax
    You do not state exactly when the property was purchased, revalued and then subsequently sold. I will assume that it is purchased in year 1, revalued in year 2 and sold in year 3.

    In Y2 the revaluation surplus of £60k will be credited to the revaluation reserve and it will
    appear in the STRGL. Under FRS 3, on disposal the entries would be:

    DR cash/bank £180k
    CR property cost £150k
    DR revaluation reserve £60k
    CR P&L account £90 (shown as an exceptional

    Regards
    Steve

    The profit and loss account would receive less than the £90k due to the depreciation charge which all assets must be subjected to.
  • Steve Collings
    Steve Collings Registered Posts: 997 Epic contributor 🐘
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    Thanks Steve. I Thought you could get away without charging depreciation in the first year but now it makes sense why not. The property sold is an investment property would it make any difference? I dont think it would but not sure???

    No, it would not apart from you might disclose the £90k gain separately on the face on the P&L account if it is classed as an exceptional item (see FRS 3).

    Cheers
    Steve
  • Steve Collings
    Steve Collings Registered Posts: 997 Epic contributor 🐘
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    The profit and loss account would receive less than the £90k due to the depreciation charge which all assets must be subjected to.

    Yes, if it was a property used in the business, which would then fall under FRS 15 but the poster has said it is an investment property. Investment properties are carried at market value - they are not depreciated.

    Regards
    Steve
  • beverly hudson
    beverly hudson Registered Posts: 95 Regular contributor ⭐
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    Steve IAS40 does allow two options so there could be depreciation.
  • Gill Gittings
    Gill Gittings Registered Posts: 121 Dedicated contributor 🦉
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    @Beverly the client is doing accounts under UK standards not IAS but thanks.

    @Steve thanks.
  • beverly hudson
    beverly hudson Registered Posts: 95 Regular contributor ⭐
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    OK Gill but the 2 standards at identical in terms of cost and fair value measurement.
  • Steve Collings
    Steve Collings Registered Posts: 997 Epic contributor 🐘
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    Steve IAS40 does allow two options so there could be depreciation.

    Beverly,

    IAS 40 does allow the cost OR the market value option, however, it does specifically state that the cost model for investment properties can be used in exceptional circumstances where fair value cannot be determined reliably. As far as investment properties are concerned, obtaining fair values would be relatively easy - you appoint a valuation agent.

    SSAP 19, which is the standard that the poster's client will report under (or FRSSE) does not have the option of valuation at depreciated historic cost. SSAP 19/FRSSE only recognises market value therefore in terms of the OP question, the gain carried to P&L in her example would be the full £90k as depreciation wouldn't exist.

    Regards
    Steve
  • beverly hudson
    beverly hudson Registered Posts: 95 Regular contributor ⭐
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    I see. I thought the requirements were the same.
  • Gem7321
    Gem7321 Registered Posts: 1,438 Beyond epic contributor 🧙‍♂️
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    SSAP 19, which is the standard that the poster's client will report under (or FRSSE) does not have the option of valuation at depreciated historic cost. SSAP 19/FRSSE only recognises market value

    Agreed

    Nice to hear from you again Beverly
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