How to account for investment assets in company accounts?
Discussion
Hopefully this should be a straight forward question.
I do the book keeping for my small “one man band” limited company.
Company assets (computers, equipment, furniture, etc) are listed in the asset register and depreciation of 25% per year is applied in the usual way.
What is the situation with assets that the company buys for investment purposes (e.g. gold, sovereigns, etc)?
I presume that the annual depreciation calculation shouldn’t apply to such assets, and in that situation, how should such assets be accounted for in the company books?
Thanks.
I do the book keeping for my small “one man band” limited company.
Company assets (computers, equipment, furniture, etc) are listed in the asset register and depreciation of 25% per year is applied in the usual way.
What is the situation with assets that the company buys for investment purposes (e.g. gold, sovereigns, etc)?
I presume that the annual depreciation calculation shouldn’t apply to such assets, and in that situation, how should such assets be accounted for in the company books?
Thanks.
This is a question that needs to be put to the company's accountant. This is because the answer can vary depending on the specifics. For example investments often pay dividend, or interest, so that would be declared in a particular way. If the company purchased an item, that they believed would appreciate, then this would be shown differently, and may not be recorded, in some cases, until sold!
Road2Ruin said:
This is a question that needs to be put to the company's accountant. This is because the answer can vary depending on the specifics. For example investments often pay dividend, or interest, so that would be declared in a particular way. If the company purchased an item, that they believed would appreciate, then this would be shown differently, and may not be recorded, in some cases, until sold!
if the company buys an asset (of anything at all) then it definitely gets recorded. It's the whole point of bookkeeping.Thanks for the quick replies.
My thinking is for the company to buy a limited edition item, (e.g. piece of artwork, gold sovereign or similar) with the view of the value (hopefully) appreciating in the medium to long term, say 10+ years.
The item won't generate any interest or dividend income, and will just be a physical product that will be displayed / stored in the office, waiting to be sold off (hopefully at a profit) at an indeterminate point in time in the future.
I'm thinking that this would be listed as a fixed asset on the company balance sheet.
My thinking is for the company to buy a limited edition item, (e.g. piece of artwork, gold sovereign or similar) with the view of the value (hopefully) appreciating in the medium to long term, say 10+ years.
The item won't generate any interest or dividend income, and will just be a physical product that will be displayed / stored in the office, waiting to be sold off (hopefully at a profit) at an indeterminate point in time in the future.
I'm thinking that this would be listed as a fixed asset on the company balance sheet.
Eric Mc said:
It would be looked on as a Long Term Investment Asset.
There may be a requirement to carry out a revaluation revue every year to ensure that the value of the asset in the balance sheet reflects its current valuation.
Thanks. I'll do some further reading on this aspect.There may be a requirement to carry out a revaluation revue every year to ensure that the value of the asset in the balance sheet reflects its current valuation.
In the meantime, I guess that in simple terms, I will need to set up a new asset category on the balance sheet, which isn't subject to the annual 25% depreciation cost?
HootersGsy said:
Have you considered the tax aspects of this? Certain assets aren't subject to CGT if you hold them personally but would attract corporation tax charges on the gains in a Ltd company.
Personal money is already tied up in other investments, but in any case, I am specifically looking for ways to utilise surplus company funds, which would otherwise sit in a bank account earning 0%.Mandat said:
Thanks. I'll do some further reading on this aspect.
In the meantime, I guess that in simple terms, I will need to set up a new asset category on the balance sheet, which isn't subject to the annual 25% depreciation cost?
Depreciation is only charged when the asset loses its value over time due to age. If an asset APPRECIATES in value - or at least doesn't lose value - then depreciation isn't required.In the meantime, I guess that in simple terms, I will need to set up a new asset category on the balance sheet, which isn't subject to the annual 25% depreciation cost?
What should be done is for the directors to check the value of the asset at least before the end of the company's financial year end and decide if the valuation as shown in the balance sheet is correct. Which ever way the asset is moving value wise, a revaluation should be carried out.
Countdown said:
Road2Ruin said:
This is a question that needs to be put to the company's accountant. This is because the answer can vary depending on the specifics. For example investments often pay dividend, or interest, so that would be declared in a particular way. If the company purchased an item, that they believed would appreciate, then this would be shown differently, and may not be recorded, in some cases, until sold!
if the company buys an asset (of anything at all) then it definitely gets recorded. It's the whole point of bookkeeping.2 GKC said:
First paragraph is nonsense. Buildings are depreciated.
Depreciation is not about value. It’s about matching the cost of an asset to the income it generates.
Buildings arent depreciated, they may be revalued with the corresponding gain or charge booked to the revaluation account. Building maintenance costs would be directly expensed.Depreciation is not about value. It’s about matching the cost of an asset to the income it generates.
Leaseholds maybe depreciated as the lease runs down.
Eric Mc said:
Mandat said:
Thanks. I'll do some further reading on this aspect.
In the meantime, I guess that in simple terms, I will need to set up a new asset category on the balance sheet, which isn't subject to the annual 25% depreciation cost?
Depreciation is only charged when the asset loses its value over time due to age. If an asset APPRECIATES in value - or at least doesn't lose value - then depreciation isn't required.In the meantime, I guess that in simple terms, I will need to set up a new asset category on the balance sheet, which isn't subject to the annual 25% depreciation cost?
What should be done is for the directors to check the value of the asset at least before the end of the company's financial year end and decide if the valuation as shown in the balance sheet is correct. Which ever way the asset is moving value wise, a revaluation should be carried out.
Any annual revaluation movement is chargeable to the P&L but does not become taxable until the asset is sold. There is an option to set up a specific balance sheet reserve to hold the unrealised gains or losses but I believe this is no longer mandatory on the face of the balance sheet.
The relevant code extracts are 16, 29.6-29.9 & 29.16 of FRS102 and 24 to 29a of IAS12.
Expected entries on a downward revaluation:
Step 1
Cr Investment Property
Dr Loss on Revaluation
Cr Tax Expense
Dr Deferred tax asset (debtor)
On future sale:
Dr Cash
Cr Investment Property
Cr Gain on Sale (assuming sale proceeds>carrying value)
Dr Tax Expense
Cr Deferred tax asset (clearing debtor up to the value created above)
Dr Current Tax Liability (if tax due on chargeable gain exceeds deferred tax asset)
Edited by Sargeant Orange on Monday 17th January 21:24
Abdul Abulbul Amir said:
Buildings arent depreciated, they may be revalued with the corresponding gain or charge booked to the revaluation account. Building maintenance costs would be directly expensed.
Leaseholds maybe depreciated as the lease runs down.
You need to be clear that you're talking about Investment properties here and not trading premises. Also your statement is still wrong- FRS105...Leaseholds maybe depreciated as the lease runs down.
MaxFromage said:
Abdul Abulbul Amir said:
Buildings arent depreciated, they may be revalued with the corresponding gain or charge booked to the revaluation account. Building maintenance costs would be directly expensed.
Leaseholds maybe depreciated as the lease runs down.
You need to be clear that you're talking about Investment properties here and not trading premises. Also your statement is still wrong- FRS105...Leaseholds maybe depreciated as the lease runs down.
Abdul Abulbul Amir said:
I was talking about trading premises in response to the quoted post.
Ok, well you're still wrong then. I should start here:https://stevecollings.co.uk/frs-102-property-plant...
Sargeant Orange said:
Eric has pretty much covered it.
Any annual revaluation movement is chargeable to the P&L but does not become taxable until the asset is sold. There is an option to set up a specific balance sheet reserve to hold the unrealised gains or losses but I believe this is no longer mandatory on the face of the balance sheet.
The relevant code extracts are 16, 29.6-29.9 & 29.16 of FRS102 and 24 to 29a of IAS12.
Expected entries on a downward revaluation:
Step 1
Cr Investment Property
Dr Loss on Revaluation
Cr Tax Expense
Dr Deferred tax asset (debtor)
On future sale:
Dr Cash
Cr Investment Property
Cr Gain on Sale (assuming sale proceeds>carrying value)
Dr Tax Expense
Cr Deferred tax asset (clearing debtor up to the value created above)
Dr Current Tax Liability (if tax due on chargeable gain exceeds deferred tax asset)
The fair value model applied to investment property as described in section 16 is indeed the next best approach in the absence of specific guidance. However it should be noted that the assets in question are not "investment property", which FRS 102 specifically defines as land and buildings, and they should not be labelled as such to avoid confusion. They just happen to copy the accounting treatment.Any annual revaluation movement is chargeable to the P&L but does not become taxable until the asset is sold. There is an option to set up a specific balance sheet reserve to hold the unrealised gains or losses but I believe this is no longer mandatory on the face of the balance sheet.
The relevant code extracts are 16, 29.6-29.9 & 29.16 of FRS102 and 24 to 29a of IAS12.
Expected entries on a downward revaluation:
Step 1
Cr Investment Property
Dr Loss on Revaluation
Cr Tax Expense
Dr Deferred tax asset (debtor)
On future sale:
Dr Cash
Cr Investment Property
Cr Gain on Sale (assuming sale proceeds>carrying value)
Dr Tax Expense
Cr Deferred tax asset (clearing debtor up to the value created above)
Dr Current Tax Liability (if tax due on chargeable gain exceeds deferred tax asset)
Edited by Sargeant Orange on Monday 17th January 21:24
They are not financial instruments like someone else suggested as they not contracts that give rise to financial assets of another entity. Likewise section 34.49 Heritage Assets doesn't apply as the assets are not held and maintained primarily for their contribution to knowledge and culture. They're not cash equivalents either.
Actually, under the "prudence" priniciple, buildings themselves should really be depreciated. A building is like any man made object, the actual value of the bricks and mortar (or metal, or plastic) reduces over time due to aging and will eventually need to be replaced. Most buildings, especially industrial buildings, have a life of less than 100 years - often much less.
However, the land on which they sit rarely depreciates - unless there is some underlying problem with it , like an old mine seam or underground river eroding it from below, or a cliff top about to dump itself and the building into the sea.
So it is the LAND element that stops the "Land and Buildings" from being depreciated.
However, the land on which they sit rarely depreciates - unless there is some underlying problem with it , like an old mine seam or underground river eroding it from below, or a cliff top about to dump itself and the building into the sea.
So it is the LAND element that stops the "Land and Buildings" from being depreciated.
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