FRS 12 hits property leaseholders

UK companies holding leases for empty or sub-let buildings could find themselves faced with up to #9bn in new balance-sheet liabilities under FRS 12, according to a property expert.

Companies in the retail, banking and utilities sectors seeking to rationalise large estates will have to recognise outstanding leases under the provisions standard which comes into force after 23 March, explained Mike Ringer, chief executive of Fraser Trust, a property ‘liability management’ specialist.

The Fraser Trust worked with Deloitte & Touche consultants to estimate outstanding lease liabilities. Central government and local authorities are holding a similar amount in outstanding lease liabilities to the private sector.

These figures, said Ringer, could spell the end of the UK’s tradition of long-term leases. ‘This could eventually bring operating leases on to the balance sheet, which may display a lot of hidden gearing that exists in UK organisations. It might not help directors’ bonuses, but will give a truer picture of what is happening to the shareholders.’

Accounting Standards Board chairman Sir David Tweedie said the new provisions requirements would sometimes hurt leaseholders, but said: ‘It’s a question of telling the truth.

‘If you have a property you can’t let, you’ve got a charge going out for which you earn nothing – you’ve got a liability.’

FRS 12 FORCES TOMKINS TO MAKE #40M PROVISION

The new provisions standard, FRS 12, lay behind this week’s announcement of #40m in provisions made by industrial conglomerate Tomkins in its interim results.

The company’s finance director, Ian Duncan, said #32.5m was related to goodwill charges from four flour mills acquired from Spillers for #92m last year. The Monopolies and Mergers Commission has directed Tomkins to sell the mills by the end of March. A further #7.5m has been set aside, based on what the company thinks it can obtain for the mills.

‘If we’d had our freedom without FRS 11 or 12, we would not have made the provision at half year,’ Duncan told Accountancy Age. ‘We’re in negotiation with with lots of parties, and it doesn’t help. Hopefully, by the year-end, we will have sold the mills and have an answer,’ said Duncan. He added that Tomkins was one of the first companies to report a provision under FRS 12. ‘We’ve also adopted FRS 10, 11 and 14, which required a minor restatement of our eps. It’s been an interesting half-year.’