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Investment Property vs. PPE FRS 102: Key Differences & Accounting Treatment

In this article we will discuss the differences between investment property and property, plant and equipment (PPE) under FRS 102, the UK accounting standard for financial reporting. We will also explain how to account for transfers between these categories of property and the implications for fair value measurement.

What is the difference between investment properties and PPE?

FRS 102 clearly distinguishes between investment properties and property, plant, and equipment (PPE). While both represent tangible assets, their primary purpose and accounting treatment differ significantly. Investment properties generate rental income or capital appreciation, with their fair value reflected in the financial statements. Conversely, PPE is used in the entity’s core operations, and its cost, less accumulated depreciation and any impairment losses, is reported. This distinction ensures transparency and facilitates informed decision-making by stakeholders, highlighting the income-generating potential of investment properties versus the operational utility of PPE.

What is investment property?

Investment property is property (land, a building, or part of a building, or both) held by the owner or a lessee under a finance lease to earn rentals or for capital appreciation or both, rather than for:

  • use in the production or supply of goods or services or for administrative purposes; or
  • sale in the ordinary course of business.

Investment property must be measured at fair value at each reporting date with changes in fair value recognised in profit or loss. This is consistent with the IAS 40 standard that applies under IFRS.

What is PPE?

PPE are tangible assets that:

  • are held for use in the production or supply of goods or services or for administrative purposes; and
  • are expected to be used in more than one period.

PPE can be measured using either the cost model or the revaluation model. Under the cost model, PPE are carried at cost less accumulated depreciation and impairment losses. Under the revaluation model, PPE are carried at fair value at the date of revaluation less subsequent depreciation and impairment losses. Revaluation gains and losses are recognised in other comprehensive income, except to the extent that they reverse previous losses recognised in profit or loss.

How to account for transfers between investment property and PPE?

For accounting periods commencing on or after 1 January 2019, or with early adoption of the Triennial Review amendments, entities have an accounting policy choice under FRS 102 paragraph 16.4A to either account for the property at fair value through profit and loss, or transfer it to PPE and apply the cost model in accordance with Section 17 of FRS 102.

This accounting policy choice applies to investment property rented to another group entity. Previously, such property had to be measured at fair value under Section 16, but now entities can opt to transfer it to PPE and use the cost model. However, the revaluation model in Section 17 is not available to such property. If an entity wanted to measure investment property rented to another group entity at fair value, it must apply the requirements of Section 16.

On transition to this new accounting policy, an entity is permitted to use the fair value of such an investment property as its deemed cost at the date of transition to the Triennial Review 2017 Amendments (i.e. the start of the comparative period).

For other transfers between investment property and PPE, the following rules apply:

  • When an entity transfers a property from PPE to investment property that will be carried at fair value, any difference between the carrying amount and fair value of that property at the date of transfer is recognised in other comprehensive income and accumulated in equity as a revaluation reserve.
  • When an entity transfers a property from investment property that was carried at fair value to PPE, any difference between the fair value and carrying amount of that property at the date of transfer is treated as a revaluation under Section 17.
  • When an entity transfers a property from PPE to investment property that will be carried at fair value, any difference arising from previous revaluations under Section 17 is transferred directly from one component of equity (revaluation reserve) to another (fair value reserve).
  • When an entity transfers a property from investment property that was carried at fair value to PPE, any difference arising from previous changes in fair value under Section 16 is transferred directly from one component of equity (fair value reserve) to another (revaluation reserve).

Conclusion

The accounting for investment property and PPE under FRS 102 can be complex and requires careful judgement. Entities should consider their accounting policies and disclosures in light of the latest amendments and guidance. If you have any questions or need assistance with your financial reporting, please contact us today.