ASB closes freehold loophole

Accounting Standards Board proposals published this week would close the loophole that allows companies to avoid depreciating properties. But it has met with opposition from the accountancy profession and has sparked fears of a knee-jerk response from the City that will hit brewing and hotel stocks.

The ASB’s Discussion Paper, Measurement of Tangible Fixed Assets, says that companies should no longer be able to opt out of depreciating operating properties on the grounds that these assets are increasing in value or are being maintained or refurbished regularly.

Sir David Tweedie, chairman of the ASB, explained that auditors would have to use their judgement ‘in deciding on economic lives of assets and distinguish between pubs that have been around for hundreds of years and those that are less permanent constructions’.

But Chris Wilkins, corporate finance director at brewing and hotels giant Whitbread plc, warned: ‘If the ASB required full depreciation in our industry, we have a good case to say that depreciating to zero is nonsense.’

Gerry Acher, head of audit at KPMG, said he was worried about how ‘an unsophisticated City’ would react to such proposals. Hotels group Stakis, for example, carries #430m of undepreciated freehold and long leasehold properties (including land) in its 1995 balance sheet.

Stakis’s group finance director, Neil Chisman, said that the ASB’s proposals would have a big effect on his group’s reported profits, but he added: ‘I don’t think it would have any effect on the valuation of the company’s shares because people know that we have freehold properties that do not depreciate. It doesn’t affect cashflows.’

Acher was concerned, however, about ASB proposals that costs relating to, for example, the building of a hotel should be charged to the profit and loss account as soon as the asset is operational. ‘I find it hard to accept the right answer is full charging of the operation from the date of commissioning. We should be able to provide a sensible build-up period,’ he said.

But the discussion paper is indecisive on the matter of capitalised interest which, the document says, should be either prohibited or mandatory, rather than merely allowable as at present.

TANGIBLE FIXED ASSETS: THE ASB’S PROPOSALS

Depreciation:

A general requirement to depreciate properties

Assets should be disaggregated and depreciated over separate useful lives

Start-up costs:

Stop capitalising costs of self-constructed assets when they become operational

Capitalisation of interest should be made mandatory or prohibited

Valuation:

Revaluations allowable

Values must be current as of balance sheet date

All assets of the same class should be revalued

Professional valuations at least every five years

Interim, less detailed valuations in interim years

Valuation short-falls to be written off in the statement of gains; balance to p&l.