IFM22315 | Real Estate Investment Trust : Group conditions and rules: Financial Statements: property rental business and residual business: general principles

The financial statements for the property rental business (CTA2010/S532(2)(a) and the residual business (CTA2010/S532(2)(c)) cover the activities of all members of the group, wherever they are resident and regardless of the location of their business activities. They are drawn up by reference to the accounting period of the principal company of the group.

The two statements also reflect the contributions to the group of a number of other entities in which members of the group may have an interest, such as companies owned less than 75%, joint ventures, partnerships and unit trusts (see IFM22320).

The principal company must provide a reconciliation between the property rental business and residual business financial statements and the audited accounts of the group (SI 2006/2865 Reg 5(4)). This is to ensure that all the activities of the group are accounted for, either in one or other of the financial statements or in the reconciliation to the group’s accounts. For example, property revaluations will appear only in the latter. There is no requirement for the two financial statements to be audited.

Although the two financial statements are similar in concept to group consolidated accounts, in drawing them up, the principal company does not have to start with the group accounts and then deconstruct them to give the appropriate figures. If they prefer, they may start with the accounts of each of the group members and build them up to provide the figures. Where group members are using UK GAAP (or other overseas GAAPs) rather than IAS, the former may be more straightforward.

Use of International Accounting Standards (IAS)

The financial statements for the property rental business and residual are drawn up using IAS to measure income, expenses and valuations (CTA2010/S533(1)). If IAS allows a choice of methods in valuation of assets, fair value must be used. Note that the value of an asset is determined without reference to any liabilities, charges etc relating to it.

Financing costs - amounts to be shown separately

As part of the process for deciding if the interest cover test is met, the financial statements for the property rental business and residual have to show financing costs separately from all other expenses (SI 2006/2865 Reg 5(5)). ‘Financing costs’ are defined in section CTA2010/S544 and include finance leasing costs as well as interest – see IFM22200 for more detail.

SI 2006/2865 Reg 6 sets out the steps that need to be taken to work out Financing Costs (External) from the financial statements for the property rental business and for residual (see IFM22355). This figure is needed to work out whether the group meets the financing-cost ratio test in CTA2010/S543.