Definition
 

Freehold property refers to the owner’s complete and indefinite ownership of both the land and the constructed building on it.

Description

Freehold property ownership is perpetual, allowing the owner to use, modify, or transfer the property at their discretion. There are no annual fees or lease terms to adhere to, and the ownership is not bound by a time limit. 

This complete control over the property, free from external restrictions or renewal requirements, provides significant security and flexibility, making it a highly desirable form of real estate ownership.

Importance of freehold property

This is why freehold property is important to know:

Absolute Ownership: Freehold property grants complete ownership of the land and any structures on it, allowing for complete management over the property without the limits of a lease.

Long-term Security: Because there is no temporal restriction on ownership, freehold property provides long-term security and stability, making it a wise investment for the future.

No Renewal Fees: Owners of freehold property are not subject to annual lease renewal fees or conditions, which reduces ongoing costs and administrative requirements.

Greater Flexibility: Owners can make alterations, renovations, or sell the property without obtaining permission from a leaseholder or incurring restrictions.

Higher Market Value: Freehold properties frequently have higher market value and greater resale potential than leased buildings, making them a more appealing investment.

How to indicate freehold property in final accounts?

Steps to Indicate Freehold Property in Final Accounts

These are the steps to indicate the freehold property in final accounts:

Step 1: Identify the property value.

Obtain a professional appraisal or use the purchase price to calculate the worth of the freehold property.

Step 2: Record Initial Acquisition

In the asset register, enter the freehold property as "Fixed Assets" or "Non-Current Assets" at the purchase price or valuation.

Step 3: Include in the Balance Sheet

List the freehold property on the balance sheet under the "Property, Plant, and Equipment" column, including its historical cost and cumulative depreciation (if applicable).

Step 4: Depreciation Calculation

If the property depreciates, calculate annual depreciation based on a suitable method (e.g., straight-line or reducing balance). However, land typically does not depreciate.

Step 5: Accumulate Depreciation

Record accumulated depreciation in the balance sheet, reducing the property's book value accordingly. Note that only the building, not the land, should be depreciated.

Step 6: Profit and Loss Account Impact

Include the annual depreciation expense in the profit and loss account under "Depreciation Expense."

Step 7: Notes to Accounts

Provide extensive information in the account notes, including the nature of the freehold property, its location, valuation method, and any depreciation strategies used.

Step 8: Revaluation (if applicable)

If the property is revalued, adjust the book value accordingly and reflect any revaluation surplus or deficit in the revaluation reserve under equity.

Step 9: Disclosures

Disclose any liens, mortgages, or encumbrances on the freehold property in the notes to ensure transparency.

Trends that affect freehold property in final accounts

Some of the trends that affect the freehold property in final accounts include:

• ​​Market Value Fluctuations

Real estate market price changes can impact property valuations, balance sheet asset values, and financial health.

• Regulatory Changes

Accounting standards changes, such as IFRS or GAAP, might affect how freehold properties are depreciated, revalued, and declared.

• Sustainability and Environmental Regulations

New environmental rules, although increasing property valuations for eco-friendly features or necessitating costly modifications for compliance, also ensure the long-term value and sustainability of the properties, favourably improving asset values and depreciation.

• Technological Advancements

Using AI and big data in property valuation might result in more accurate evaluations and frequent revisions, which affects how properties are reported in financial statements.

Example

Tata Consultancy Services, India's premier IT services corporation, owns multiple freehold buildings, including its worldwide headquarters in Mumbai. These freehold properties are classified as fixed assets in their financial statements, reflecting the company's major infrastructure investments and adding long-term stability and value to its balance sheet.

FAQ

What is freehold property?

Freehold property is real estate in which the owner has entire and indefinite ownership of both the ground and any buildings on it and the right to use, lease, or sell the property without regard to time limits or renewal requirements.

What are freehold premises in trial balance?

Freehold premises in a trial balance refer to the properties owned outright by the business without lease obligations. They are recorded as fixed assets and reflect the value of land and buildings owned by the company.