Property Firms Split Over Tax From New Accounting Rule

Source : The Business Times, August 2, 2007

(SINGAPORE) A new accounting rule has put frowns on the faces of some property companies here, as it could mean slimmer bottom lines for them from this financial year.

From Jan 1 this year, companies have had to comply with a new accounting standard for their investment properties - broadly defined as properties held to earn rent or capital appreciation or both. But what some don't know is that there is a related tax element that is set to eat into earnings.

Property companies are expected to be the most affected, because they have extensive portfolios of investment property.

The issue stems from this year's adoption of Financial Reporting Standard (FRS) 40. It says that companies who choose the fair value method of accounting for their investment properties will have to take any changes in the fair value of an investment property held to their profit and loss account. This is instead of taking the gain or loss to a revaluation reserve in the balance sheet, as previously allowed. This means, an upward revaluation of investment property will add to the bottom line, while a downward revaluation will whittle down earnings.

Companies are familiar with this new standard, but a debate is now raging about a related tax effect that comes with this new accounting treatment.

Some accountants believe that, according to another standard already in place - FRS 12, on income taxes - companies should account for the tax that is payable on any increase in the fair value of investment property. The logic is that an increase in the fair value of the property represents an expected increase in the future rental stream and/or proceeds from the ultimate disposal of the property.

And with FRS 40 saying that revaluation gains should be taken to the income statement, some are arguing that it is only right that the deferred tax payable is also taken to the income statement.

While there won't be any actual tax paid, the sum will be recognised as an expense in the books from this year on.

The impact could be significant, with property prices soaring as much as they have this year - it will mean substantial revaluation gains for most property firms, and also substantial deferred tax provisions.

But property companies and some accountants don't agree with this treatment. CapitaLand's group chief financial officer, Olivier Lim, says: 'Where there is no expectation of a tax liability payable now or in future, it would be inappropriate to book a liability.'

Some feel that since gains from the sale of properties are not taxed even when the property is sold - because there is no capital gains tax - the deferred tax shouldn't even be reflected in the accounts.

Some accountants - and property companies like City Developments - also worry that the new suggested treatment would distort financial accounts unnaturally.