Property in director /shareholder name be shown as asset of limited company

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mehranmichail
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Joined: 14 Apr 2019, 04:54

Property in director /shareholder name be shown as asset of limited company

Post by mehranmichail »

Hi marek
Case in hand;
1. Property is in director/shareholder personal name
2. He has a limited company. All receipts and payments Associated with property like rent and expenses are done through company bank account.
3. He gets salary from his company as is on payroll of company.
4. There is no documentation for property and company linkage.
Can property be shown in the financial statements of the company and related income and expenses?
My own initial assessment is;
1. Coming of economic benefits/income in bank accounts and incurring of expense out of it in respect of trading/business activity is indication in support of control and accruing of economic benefits to the company from use of asset.
2. Payment of salary to the owner of property out of bank account / trading income generated from use of asset strengthen the idea that company is controlling the asset.
3. The main argument against showing asset in company accounts is lack of any legal documents showing the link between company and the asset like lease of property by owner /director to the limited company.
Since the concept looks at economic reality rather than legal form, I am inclined to treat it as asset in company accounts.
Will this be right? Guidance plz
Last edited by mehranmichail on 12 May 2019, 11:36, edited 1 time in total.
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Marek Muc
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Re: Property in director /shareholder name be shown as asset of limited company

Post by Marek Muc »

Hi, this is unusual, normally there should be a clear distinction between assets of a limited company and their owners. If the entity has no legal/ contractual right to the property, I would say that the entity does not control the property. How can the entity direct the significant activities related to the property without any consent from the owner? For example, can the entity sign contracts with new tenants or sell the property to a new investor without any written consent from the owner? I suppose it can't...

But maybe the case is that the entity does have a legal title, but the registration has not been done properly. I assume that the initial entry was Debit Property/Credit Issued Capital, right? Do you have access to founding documents of the entity? Do they mention contributing this property to the entity in exchange for the equity?
mehranmichail
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Joined: 14 Apr 2019, 04:54

Re: Property in director /shareholder name be shown as asset of limited company

Post by mehranmichail »

Thanks for feedback. Yes it looks confusing but you will see a lot of similar cases here in UK with owners of properties doing rental business.

You wrote "If the entity has no legal/ contractual right to the property, I would say that the entity does not control the property".
Do you think this will be in accordance with substance over form concept where transactions are to be recorded on the basis of economic reality rather than legal/contractual consideration.?
Do you think receipt of property income by company and incurring of operational expenses by company is not evidence of economic reality or control?
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Marek Muc
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Re: Property in director /shareholder name be shown as asset of limited company

Post by Marek Muc »

No, the mere fact that the cash flows go through an entity does not mean control, even when taking substance over form. Important IFRS question here is whether the entity (taken separately from its owner) has the ability to direct the use of the property.
mehranmichail
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Joined: 14 Apr 2019, 04:54

Re: Property in director /shareholder name be shown as asset of limited company

Post by mehranmichail »

Got it. However, have a question on "Important IFRS question here is whether the entity (taken separately from its owner) has the ability to direct the use of the property."
Is it a must that this ability is required to be supported by evidence of some legal document?
The property is in his name, however, he is director/shareholder of the company as well. Can his actions as director of the company regarding decisions about rent fixing and other matters be regarded as control?
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Marek Muc
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Re: Property in director /shareholder name be shown as asset of limited company

Post by Marek Muc »

As I understand it, a limited company should be separate from its owner when it comes to assets and liabilities. Let's think about it this way: if you were to prepare two sets of financial statements : 1/ of the owner and 2/ of the entity - where would you show this property as an asset and why? Who has the ability to direct the use of the property? To decide which tenant to choose and set the rent? The owner or the entity?

coming back to my previous post:
But maybe the case is that the entity does have a legal title, but the registration has not been done properly. I assume that the initial entry was Debit Property/Credit Issued Capital, right? Do you have access to founding documents of the entity? Do they mention contributing this property to the entity in exchange for the equity?
mehranmichail
Posts: 39
Joined: 14 Apr 2019, 04:54

Re: Property in director /shareholder name be shown as asset of limited company

Post by mehranmichail »

Yes u r right, separate legal entity concept is here.
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