Financial reporting standards are put into place by financial reporting councils, such as the International Financial Reporting Standards (IFRS), as an accountancy requirement.
Issued by the International Accounting Standards Board (IASB), the IFRS are a set of accounting rules for the financial statements of public companies and are intended to make them consistent and transparent globally.
As building surveyors, we are brought in from various companies asking us to do a Dilapidations Liability Assessment, which may also incorporate an exit strategy for single or entire property portfolios across the country.
So, here it is – everything you need to know about FRS 102.
What is FRS 102?
First things first, what is FRS 102? To put it simply, it applies to financial statements that have the sole purpose to provide a true and fair view of a reporting entity’s financial position, as well as its profit or loss for a specific period.
It also applies to the general-purpose financial statements as well as the financial reporting of entities, including those that are not comprised of companies and those that are not profit orientated.
FRS 102 is based upon the IFRS for SMEs, however the IASB standard has been altered in a variety of ways in order to;
- Comply with the Companies Act
- Allow additional accounting policy choices
- Reflect feedback during the consultation process
In some cases, entities applying for FRS 102 will need to refer to other accounting standards.
How does this relate to building surveyors?
As building surveyors, we have an understanding of leases and repairing obligations and how these apply to buildings and the impact on dilapidations. This puts us in a great position to be able to help and support our clients, allowing us to prepare accurate Dilapidations Liability Assessments.
Although FRS 102 does not specifically require businesses leasing commercial properties to undertake a Dilapidations Liability Assessment, they do however, have a requirement to account for known contractual liabilities, such as lease end dilapidations.
But, as with most things, forearmed is forewarned, and a Dilapidations Liability Assessment allows for potentially large sums to be accrued in profit and loss accounts, helping to take the sting away from a landlord’s dilapidations claim when it arrives.
What is a Dilapidations Liability Assessment?
Since the introduction of FRS 102, surveyors have seen an increasing number of occupiers of commercial property commissioning Dilapidations Liability Assessments.
Dilapidation assessments identify a tenant’s probable lease end repair, maintenance, and/or reinstatement liability, and normally consist of a single figure or range with an explanation of how it was arrived at.
Of the things identified, the tenant will be financially liable for the lease expiry under the terms of their lease.
Here at Arc Building Consultancy, we are able to produce Dilapidations Liability Assessments for all our clients.
Occupiers are able to charge dilapidations to the profit and loss account over the period of the lease, as opposed to creating a provision at the end of the term to cover said dilapidations costs, as well as larger, one-off hits to profits that can otherwise be avoided.
Apart from a capital element, dilapidations costs will be deductible for corporation tax purposes, and this can have a significant impact on maintaining the financial strength of businesses.
Based on the work we have conducted with clients, we have discovered that those clients that hold properties for distribution and/or retail which have forklifts and products moving around within their properties, that the damage can often be quite significant, with the cost of upkeep often ignored.
We’re here to help
Before our clients enlisted the help of our knowledgeable experts, the assessments being made were simply just approximate estimates of liability, and were often based on an area, multiplied by a rate that they believed to be appropriate.
Very rarely accurate, we have regularly seen instances where liability has been underestimated by as much as 50%, which then has a significant impact on the profits of a business at lease expiry.
As building surveyors tasked with producing terminal dilapidation schedules on lease expiry and negotiating dilapidations at lease expiry, our team have the ability to produce the required Dilapidations Liability Assessment and Schedule of Works with costs. This can be done by using up to date pricing books, tender prices and our wealth of experience. And, as a result, our assessments are more accurate and reflect condition.
Typically, the process is a one-off assessment, however, if conditions of properties are likely to change either change either due to use, improvements or alterations, then assessments may need updating.
If there is little churn within the portfolio, then this assessment could be limited to properties which are due to fall within 3-5 years. This limits the number of inspections and as a result, costs, too.
Over the years, we have found that trying to be proactive in dealing with these matters and phasing in programmes to provide the information as necessary, whether that be Dilapidations Liability Assessments or Planned Preventative Maintenance Plans, it helps to put forward more accurate revenue expenditure in a planned and professionally managed manner.
If you need help or more information regarding FRS 102 or Dilapidations Liability Assessments, please contact our team of experts today, by calling us on 0115 784 7008.