Companies with investment properties will see their profit and loss accounts change when new accounting standards come into force. As headline results such as profit before tax are used for credit scoring this academic change may have a real world unexpected effect on a company’s credit rating.

Companies with investment properties have for many years followed existing UK Generally Accepted Accounting Practice (UK GAAP) and have been required to value their investment properties at market value each year. Any changes to that market value have not been shown in the reported profit or loss for the year but were in most cases only a balance sheet entry.

In March 2013 the new version of UK GAAP was published, FRS102, which is based on International Financial Reporting for small and medium entities. This new standard will be compulsory for accounting periods starting after 1 January 2015 and still requires investment properties to be at market value. The big difference is that the changes in the market value will now be shown as part of the reported profit or loss for the year. There will be no revaluation reserve in the balance sheet; instead all the previous revaluation reserve will need to be shown as part of the profit and loss account reserve.

A reduction in property value can be larger than the normal profit on the rental income, so there could easily be a reported loss for the year with these new standards; where previously that reduction in value would have hit the balance sheet only.

1 January 2015 still seems a long time away but the problem is that all the comparatives will need to be changed to the new presentation. The property value at 31 December 2013 will affect those comparatives – now the issue seems a lot more urgent.

If you are concerned about this then please contact me to discuss further.