Classification of property as either investment property or owner-occupied property. Investment property Investment property can be accounted for
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Ministry of Education and Science Russian Federation
federal state budgetary educational institution higher professional education
Tomsk State University of Control Systems and Radioelectronics (TUSUR)
CENTER FOR PROFESSIONAL RETRAINING
ABSTRACT
DISCIPLINE: IFRS
TOPIC: IAS 40 Investment Property
Specialty: Management. Finance and credit
Listener:
_____________ / Kuznetsova E.V. /
Signature
Introduction
1. IAS 40 Investment Property
1.1 Classification of investment property
1.2 Recognition and initial assessment
1.3 Subsequent valuation of investment properties
1.4 Disclosure requirements under IAS 40
1.5 Transformation entries upon transition to IFRS
2. Comparative characteristics international standard financial reporting and its Russian analogues
Conclusion
Bibliography
Introduction
International Financial Reporting Standards (IFRS) dates back to 1971, when the largest and most famous experts in the field of financial accounting it was decided to create a toolkit for the preparation of financial statements, unified and understandable for the world economic community. And in those days there were a lot of skeptics about the work, then still the IASB. It is understandable - how to create a tool for the preparation and presentation of financial statements for the world economic community with its uniqueness and accounting features in a particular country, or even industry. But everything changed dramatically after 2001, when the events related to Enron occurred in the US, and then skeptics for the most part became ardent supporters of the development of a single set of understandable and widely applied standards. Now we can say that more than 100 countries of the world have already switched or are going to switch to IFRS in one way or another. And the statement of US representatives about the possible rejection of US GAAP is a clear confirmation that the weight of IFRS in the global economic environment is constantly increasing. Although there is also enough criticism, the standards are in a constant process of improvement, which cannot irritate both the preparers of financial statements and potential users, since they constantly have to be rebuilt. Yes, just recently, representatives of Islamic countries expressed the opinion that it is desirable for Islamic countries to change IFRS so that they comply with Sharia norms. So there are both internal and external problems.
On this moment 37 (for comparison, in US GAAP - 159) standards of the old and new platforms have already been released (IAS (International Accounting Standards) - the old platform, they were released before 2001 - there are 29 of them; IFRS (International Financial Reporting Standards) - a new platform, after 2001 - there are 8 of them.
The issues of valuation and accounting of fixed assets are the most important when preparing financial statements in accordance with international standards (IFRS), which is caused by the high share of fixed assets in the composition of assets for most Russian organizations. From the correct assessment and recognition of fixed assets, ultimately, the balance sheet of the organization depends to the greatest extent.
In International Financial Reporting Standards, the main standard governing the accounting for property, plant and equipment is IFRS 16 “Property, plant and equipment”. This standard discloses the procedure for recognizing and measuring the cost of fixed assets from the moment of initial costs incurred until the sale or disposal for any other reason, methods of depreciation, disclosure in financial statements.
For the purpose of recognizing property, plant and equipment in the financial statements, the requirements of the following standards must also be taken into account: IFRS 17 “Leases” (“Leases”) and IFRS 40 “Investment Property” (“Investment Property”).
IAS 17 Leases requires an entity to apply the transfer of risks and rewards as a criterion for recognizing a leased item of property, plant and equipment. At the same time, other aspects of accounting for such assets, including depreciation, are determined by the requirements of IFRS 16 Property, Plant and Equipment. investment property financial statements
IAS 40 Investment Property shall be applied by an entity to account for items of property, plant and equipment that are under construction or development and are intended to earn income in the future. IAS 40 also applies to property, plant and equipment that is being redeveloped for the purpose of further use as investment property. An entity using the cost model for investment property in accordance with the requirements of IAS 40 Investment Property will also use the cost method of accounting in accordance with IAS 16 Property, Plant and Equipment. IAS 40 Investment Property also applies to property, plant and equipment that is being remodeled to be used as investment property.
1 . IAS 40 investment property
Investment property is real estate held by an entity (either as an owner or a lessee under a finance lease) for the purpose of leasing or increasing its value, and not for the purpose of use in the production process and for administrative purposes, or for sale.
In Russian practice, fixed assets that are intended solely to be provided by an organization for a fee for temporary possession and use are accounted for as part of profitable investments in material values.
Investment property is recognized as an asset only when it is probable that it will provide future economic benefits and the value of the investment property can be measured reliably.
The cost of an investment property includes the initial acquisition costs and all direct acquisition costs. The value of the constructed investment property is determined at the time the construction or renovation is completed. Until construction is completed, IFRS 16 is applied to account for the facility.
Subsequent valuation of investment property is carried out in one of the following ways:
Fair value accounting - after the initial recognition of objects in the amount of costs for their acquisition, all objects are measured at fair value, which reflects the state of market prices at the reporting date. Gains (losses) from changes in fair value are recognized in the income statement in the period in which they occur.
Acquisition cost accounting - investment property is valued at cost less accumulated depreciation and accumulated impairment losses.
In the process of financial economic activity investment property may need to be reclassified. The transfer of an object to investment property or withdrawal from its composition is carried out only in the event of a change in the method of its operation, confirmed by the following events:
The beginning of the use of the object in production activities - the transfer of the object from investment property to the composition of fixed assets;
Start of preparation for sale - transfer of the object from investment property to reserves;
End of use in production activities - transfer of an object from property, plant and equipment to investment property;
Commencement of an operating lease - transfer of an object from reserves to investment property;
Completion of construction or reconstruction - the transfer of an object from property under construction or reconstruction (fixed assets) to investment property.
When an item carried at fair value is transferred from investment property to other types of assets, the item begins to be accounted for in its new capacity at fair value.
1.1 Classification of investment property
Table 1 - Classification of investment property
|
Relate to investment property |
Does not qualify as investment property |
|
|
Land held to receive income from capital appreciation |
Renewable Natural resources, forest land, etc. |
|
|
Land, the purpose of which is not defined |
Subsoil, minerals, other non-renewable natural resources (except land) |
|
|
Buildings and facilities (owned or finance leased) under operating lease |
Buildings and structures intended for sale, or objects under construction for the same purpose |
|
|
Unoccupied buildings and structures held for operating lease or capital appreciation |
Construction in progress of buildings and structures or their reconstruction on behalf of third parties, or intended for future use as an investment value |
|
|
Buildings and structures used as investment property under renovation for later use for the same purpose |
Buildings (structures) used in production, commercial or management activities; reconstructed for the same purposes, intended for disposal, as well as occupied by employees of the company, regardless of the size of the rent for use |
Reclassification of objects of investment value, that is, their inclusion in this category or exclusion from it, is carried out according to the actual purpose of this or that object of the organization's property.
The transfer of an object from investment property to a property for sale is made with the beginning of its reconstruction in preparation for sale. However, if the decision is made to sell the investment property without refurbishment, it continues to be classified as investment property until it is disposed of as a result of the sale.
The object is included in the investment property:
After completion of construction or reconstruction;
After the end of its application in production, management, commercial operations;
After transfer to an operating lease to a third party.
An object is excluded from investment property:
With the beginning of its application in production, management or commercial operations;
With the beginning of the reconstruction as a preparatory pre-sale operation.
1.2 Recognition and Initial Evaluation
Investment property is recognized as an entity's assets as a separate item of accounting when it is reasonably probable that rental payments or capital appreciation will be received in accordance with the requirements for investment property, and the value of the latter can be measured reliably.
Investment property is initially valued at its cost of acquisition or construction, including construction economic way.
The cost of acquiring investment value includes the price of the object and direct transaction costs (legal, consulting services, registration, etc.). Interest for deferred payment is not included in the cost price, it is included in recurring expenses during the term this loan. Objects built by contractors are valued according to the price of the contract.
The cost of a home-built investment property is determined by the sum of all costs as of the completion date of the facility. Costs for items in progress are accounted for like any other costs for capital construction. Separate accounting for investment property begins from the date of completion of construction and acceptance of the object into operation.
The cost of excess consumption of materials and other resources consumed during the construction or reconstruction of facilities is not included in their initial cost. Costs associated with the commissioning of an investment property are not included in its cost, with the exception of those costs that are necessary to bring the property to working condition. But the initial losses associated with temporary difficulties in attracting tenants, other similar losses are written off as expenses of the reporting periods in which they arose.
Subsequent additional expenses are treated as increases in the carrying amount of investment property if they increase the profitability of the investment property.
In all cases where a loss of profitability is reflected in the original price of an item, its recovery through modernization or other subsequent costs should be reflected in an increase in the carrying amount of the item. Other subsequent expenses are not capitalized. They should be written off as expenses of the period in which they arose.
1.3 Subsequent valuation of investment properties
IAS-40 allows to apply for the accounting of objects of investment property: fair value, and its changes to be reflected in profit and loss; acquisition cost, at which investment property is carried on the balance sheet at its residual value, ie less accumulated depreciation and impairment losses. The use of acquisition cost accounting does not preclude the need to disclose the fair value of investment property in the notes to the financial statements.
Table 2 - Main characteristics of investment property accounting models
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Index |
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|
Initial assessment |
Based on actual acquisition costs |
||
|
Subsequent evaluation and accounting |
All items are carried at fair value, except in exceptional circumstances |
All items are carried at cost less accumulated depreciation and accumulated impairment losses (cost model under IFRS 16 Property, Plant and Equipment) |
|
|
Reflection of changes in fair value |
Profit (loss) from changes in fair value is charged to net profit or loss in the period in which they arise, i.е. reflected in the income statement |
||
|
Depreciation |
Depreciation is not charged |
Depreciation is charged in the same way as for similar property, plant and equipment under IFRS 16 |
|
|
Exceptions |
In exceptional cases, when it is not possible to determine the fair value for accounting for investment property, the cost model is used, the salvage value is taken zero |
||
|
Impairment |
The provisions of IAS 36 do not apply (they have already been met because fair value accounting is applied) |
Impairment losses are recognized in accordance with IFRS 16 and IFRS 36 Impairment of Assets, included in the income statement |
|
|
Additional disclosure |
In exceptional circumstances where an entity accounts for investment property using the principal accounting method of IFRS 16, additional disclosures are required to explain why fair value cannot be accounted for. |
The financial statements must disclose information about fair value or the reasons why it cannot be determined. |
This model differs from revaluation accounting, which is commonly used for accounting for tangible assets, in that the excess of the revalued amount over the original carrying amount is recognized in the capital accounts as an increase in the value of property. The application of the fair value model assumes that all changes in value are recognized only in profit and loss.
The difficulties of determining the fair value for many objects of investment value are also obvious. The fair value of investment property should reflect market conditions and actual market and other conditions at the reporting date and not at any other date. changing market conditions lead to changes and inaccuracies in the fair value measurement. For many investment properties, active market prices cannot be relied upon, and tariff factors of rent also come into play.
Each organization undertakes to apply the selected valuation procedure for all investment properties. Often, for objective reasons, it is impossible to provide a fair value assessment of all available items.
Reclassification is measured using one of two models: historical cost or fair value. When measured at cost, any reclassification of investment property does not result in any change in its carrying amount and therefore does not require any accounting for variances. On the contrary, when measuring investment property at fair value, deviations arise that require accounting and reflection in the financial statements.
Investment property is reclassified to property, plant and equipment, inventories or other owner-occupied property categories at fair value, which is recognized as the carrying amount of the items at the time they change their use within the entity.
Investment property objects are disposed of by their sale or financial lease under a leasing agreement. The sale price of an object is determined by its fair value at the date of disposal. When a commercial loan or installment payment is granted, the difference between the actual consideration and the fair value (price) is accounted for separately as interest income received. Arising profits (losses) are reflected in the profit and loss account.
Upon the final decommissioning (writing-off) of an object of investment value, the possible amount of losses is reflected as a loss in that reporting period, in which the write-off of the object is registered.
1.4 Disclosure requirements under IAS 40
Table 3 - Disclosure requirements under IAS 40
|
Fair value model |
Cost accounting model |
|
|
Reconciliation of the carrying amount of investment property at the beginning and end of the reporting period (comparable information is not required) In exceptional circumstances where an entity accounts for an investment property using the principal accounting method of IFRS 16, the amounts relating to that investment property should be disclosed separately from other items in the reconciliation, and additional disclosures, primarily relating to an explanation of the reasons for the impossibility of accounting for fair value. |
Depreciation methods used; Useful lives of assets or depreciation rates used; The total carrying amount and accumulated amortization (together with accumulated impairment losses) at the beginning and end of the reporting period; Reconciliation of the carrying amount of investment property at the beginning and end of the reporting period (comparable information is not required) The fair value of the investment property or indicate the reasons for the inability to determine the fair value of the investment property with a reasonable degree of certainty |
|
|
Criteria distinguishing between investment property and owner-occupied property, as well as property held for sale in the ordinary course of business; Methods and significant assumptions used in determining the fair value of investment property, The fact that an independent professional appraiser has been engaged to determine the fair value of investment property and the fact that such an appraisal has not been carried out is disclosed in the notes to the financial statements; Indicators reflected in the income statement: Income from the provision of operating leases of investment property; Direct operating expenses relating to investment property from which income was received in the reporting period; Direct operating expenses relating to investment properties that did not generate rental income during the reporting period; The presence and size of restrictions on the possibility of selling investment property; Significant commitments: o under a contract for the acquisition, construction or renovation of investment property, or o to repair, maintain or improve an investment property. |
1.5 Transformation entries upon transition to IFRS
When transitioning to IFRS, Russian entities should pay special attention to the presence of objects that meet the criteria for recognition of investments in real estate in accordance with IAS 40 Investments in Real Estate. The use of the fair value model is one of the few tools to increase an organization's retained earnings (net profit of the reporting period) compared to similar indicators under RAP, since prices for real estate (land and buildings) tend to rise.
In the event of the transformation of Russian financial statements into financial statements prepared in accordance with IFRS, the following transformation entries related to the recognition of investment property are possible:
o reclassification entries:
Transfer of property, plant and equipment to investment property (IFRS 40),
Transfer of income-generating investments in tangible assets to property, plant and equipment (IFRS 16) or investment property (IFRS 40);
o records related to the adjustment of accounting methods and valuation of investment property to the fair value model or the cost model, including:
- "withdrawal" of the results of the Russian revaluation, if the objects of investment property were subject to revaluation in accordance with PBU 6/01;
Exclusion of accrued depreciation, inclusion of changes in fair value in the net profit (loss) of the reporting period (if the fair value model is applied);
Entries clarifying useful lives, depreciation methods, residual value estimates reflecting impairment losses under IAS 36 (if accounting policy accounting model is provided for at historical cost).
2. Comparative characteristics of the international financial reporting standard and its Russian analogues
The equivalent of IFRS 40 Investment Property in Russian legislation Not yet. The closest object of accounting in Russian practice is profitable investments in tangible assets accounted for on account 03 “Profitable investments in tangible assets”.
According to the Chart of Accounts accounting profitable investments in material values are investments of the organization in a part of property, buildings, premises, equipment and other values that have a material form, provided by the organization for a fee for temporary use (temporary possession and use) in order to generate income. Thus, there is a discrepancy between the concepts of investment property (IFRS 40) and profitable investments in tangible assets (see Fig. 1).
Accounting for profitable investments in tangible assets in Russian accounting is carried out in accordance with PBU 6/01 “Accounting for fixed assets”, and generally corresponds to the accounting model at historical cost provided for by IFRS 40. Moreover, if a Russian organization has exercised the right to revaluate profitable investments in tangible assets , then this option will not comply with the fair value model proposed by IFRS 40. It is important to note that, unlike the provisions of international standards, land plots are not subject to revaluation in accordance with Russian legislation (paragraph 43 Guidelines accounting for fixed assets).
|
Definition |
Russian counterparts |
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First application of the new accounting and financial reporting system |
IFRS includes a separate standard on how to apply IFRS for the first time. It provides certain exceptions, includes a number of requirements, including information disclosure. If a company decides to adopt IFRS as a reporting standard, then the first preparation of its IFRS financial statements requires retrospective application of the requirements of all IFRS in force at the reporting date, with some voluntary exceptions, mainly relating to property, plant and equipment and other assets, associations business and accounting pension plans, as well as with a limited number of mandatory exceptions. Comparative data for prior periods should be prepared and presented on the basis of IFRS. Substantially all adjustments arising from the first adjustment of financial data to IFRS need to be adjusted by attributing to retained earnings of the first reporting period presented in IFRS format. Some adjustments may be allocated to goodwill or equity. |
Specific rules for the transition to the preparation of financial statements in accordance with RAS or the preparation of such statements for the first time are not established by the regulations. |
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|
Similar to the rules established for fixed assets. |
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Definition of "investment property" |
Investment property (land and buildings) held to earn rental income and/or enhance the value of capital invested in investment property. The definition does not include property used by the company itself and property held for sale. |
There is no concept equivalent to the concept of "investment property". In RAS, a separate indicator “Profitable investments in material assets” is allocated, which include investments by the organization in part of the property, buildings, premises, equipment and other material assets provided by the organization for a fee for temporary use (temporary possession and use: rent, rental) with the aim of receiving income. |
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|
Initial assessment |
Investment property acquired and constructed by the company is accounted for at cost of acquisition. The cost of investment property acquired includes the purchase price and any direct costs such as professional legal fees, property transfer taxes and other transaction costs. Properties constructed by the company must be accounted for as property, plant and equipment until the completion of construction, at which time they are classified as investment property. Leased property under finance or operating leases may also be classified as investment property. |
Accounting is carried out in accordance with the rules established for property, plant and equipment (Similar to IFRS, except that hedge gains/losses cash flows are not included in the cost and the deduction of the amount of state assistance from the value of the asset is not allowed. There is no requirement to recognize a liability associated with the disposal of an asset, so the cost of disposal of an item of property, plant and equipment is not included in its cost.) |
|
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Follow-up evaluation |
The Company may use the fair value method and the residual value method for all types of investment property. When fair value is applied, the fair value gain or loss is recognized in the income statement and the carrying amount is not amortized. |
Estimated according to the rules established for fixed assets (Partly the same as IFRS. Costs for maintaining an item of fixed assets (technical inspection, maintenance), as well as for current and overhaul included in current expenses. The costs of modernization and reconstruction of an item of fixed assets may increase the initial cost of the item if, as a result of modernization and reconstruction, the originally accepted normative performance indicators (useful life, capacity, quality of use, etc.) of the item of fixed assets are improved (increased). If one object has several parts that have different useful lives and are accounted for separately, the replacement of each such part is accounted for as disposal and acquisition of an independent inventory item.) |
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|
For changes in the use of investment property, there is detailed guidance on how to subsequently classify it. Investment property held for sale is reclassified as inventory; investment property used by the company itself - in the category of "fixed assets". |
Not applicable. |
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Periodicity and rules for revaluation |
The fair value of investment property should reflect market conditions and circumstances at the balance sheet date. The standard does not require the involvement of an independent and qualified assessor, but it is encouraged. Revaluations should be carried out with sufficient regularity so that the carrying amount does not differ materially from fair value. |
Similar to IFRS |
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Conclusion
The discrepancies between the Russian accounting system and IFRS lead to significant differences between reporting prepared in the Russian Federation and in Western countries. At the same time, reporting prepared according to international standards allows you to get a more accurate picture of the state of affairs in the company. Therefore, investors and financial institutions(banks, stock exchanges, investment and leasing companies) are used to evaluate financial condition Russian organizations financial statements prepared in accordance with IFRS.
The purpose of reforming the accounting system is to bring the national accounting system in line with the requirements market economy and international financial reporting standards.
Reform objectives:
Form a system of accounting and reporting standards that ensure useful information users, primarily investors;
Ensure the linkage of the accounting reform in the Russian Federation with the main trends in the harmonization of standards at the international level;
Provide methodological assistance to organizations in understanding and implementing the reformed accounting model.
Thus, the state is interested in such a transition, since it is interested in the influx foreign investment, increasing the transparency of accounting for Russian companies and the compliance of accounting standards with the requirements of a market economy.
The transition of Russian companies to IFRS is important for investors, company management, and the state.
State interest. Enterprises of countries that apply IFRS have the opportunity to receive funds for more preferential terms and in shorter timeframes. Generally accepted financial reporting standards are necessary for countries interested in attracting foreign capital. It will help revive Russian economy and increase budget revenues.
Interest of investors and owners of companies. In the absence of a single financial statements international investors interested in preserving capital and reducing investment risks are forced to conduct additional analytical studies aimed at revealing the true financial situation of specific enterprises or companies, as a result of which capital becomes more expensive. The introduction of IFRS in the Russian Federation will reduce the cost of reporting transformation and thus reduce costs.
Interest of enterprise management. The management of an enterprise using IFRS receives reports that reflect reality as objectively as possible and on the basis of which it is possible to make informed management decisions.
Bibliography
1. tax code Russian Federation;
2. Paly V.F. International Accounting and Financial Reporting Standards: Textbook. - 3rd ed., Rev. and additional - M.: INFRA-M, 2008. - 512 p. - (Higher education);
3. Similarities and Differences - Comparison of International Financial Reporting Standards with US Generally Accepted Accounting Rules and Russian rules Accounting - May 2007
4. Umrikhin S.A. International Financial Reporting Standards: Russian practice applications / S. A. Umrikhin, Yu.V. Ilyin. - M.: GrossMedia: ROSBUKH, 2007. - 432 p. - (Library of the journal "Russian Accountant");
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Book value
The carrying amount is the value of the asset shown on the balance sheet.
actual cost is the amount paid Money(or cash equivalents) and the fair value of any other consideration given to acquire the asset at the time of its acquisition or creation. For share-based payments, see IFRS 2 guidance.
Fair value
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (IFRS 13).
investment property
Investment property is property represented by the following types of assets:
part of the building
land and buildings
The owner of the property (or lessee, under a finance lease) receives rent or capital appreciation, or both.
This includes:
Land held for long-term capital gains and not for short-term realiza- tion during ordinary activities.
Land, the further use of which is currently not determined. If an institution has not decided whether it will use the land as owner-occupied property or for short-term disposal in the ordinary course of business, then the land is considered to be held for capital appreciation.
Building owned credit institution or held by a financial institution under a finance lease and leased out under one or more operating leases.
A building that is not currently occupied but held for lease under one or more operating leases.
Property that is being built or developed for future use as investment property.
To investment property not applicable own, owned or tenant:
used by the owner or lessee in the production, supply of goods, services or for administrative purposes;
held for sale in the ordinary course of business.
Property objects used for own needs
Own-use property is property used by the owner (owner or lessee under a finance lease) for commercial purposes. They are subject to IAS 16 Property, Plant and Equipment.
|
Type of property - different types of property are subject to different IFRS accounting methods depending on their current and future use |
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Standard number |
Name of the standard |
Grade |
|
|
Property used for own needs |
IAS 16 |
fixed assets |
Acquisition cost or revalued cost |
|
Property acquired in exchange for assets |
IAS 16 |
fixed assets |
Fair value or carrying amount of transferred assets |
|
Investment property |
IFRS (IAS) 40 |
Investment property | |
|
Investment property being developed for the purpose of subsequent use as investment property |
IFRS (IAS) 40 |
Investment property |
Acquisition cost or fair value |
|
Investment property held for sale without redevelopment (other than under IFRS ( IFRS) 5 - see below). |
IFRS(IAS) 40 |
Investment property |
Acquisition cost or fair value |
|
Property held under an operating lease classified as investment property |
IFRS (IAS) 40 |
Investment property |
Fair value (accounted for as a finance lease in accordance with IFRS (IAS) 17). |
|
Real estate received under a finance lease |
IAS 17 |
Rent. Used for own needs - IAS 16, investment property - IAS 40. |
The lower of the fair value and present value of the minimum lease payments |
|
Real estate received under an operating lease - used for own needs |
IAS 17 |
Lease payments expensed |
|
|
Property transferred to another party under a finance lease |
IAS 17 |
Accounts receivable equal to net investment in lease |
|
|
Sale of real estate with a leaseback |
IAS 17 |
As an operating lease or a finance lease, as the case may be |
|
|
Retail property means property (including investment property) held for sale in the ordinary course of business or constructed and/or redeveloped for that purpose. |
IAS 2 |
Inventories (Property held for sale that meets the criteria in IFRS 5 must be accounted for in accordance with IFRS 5 – see below). |
Acquisition cost or net realizable value, whichever is less. |
|
Property held for sale or included in a disposal group |
IFRS 5 |
Long-term assets held for sale and discontinued operations |
The lower of carrying amount and fair value less costs to sell |
|
Assets received in repayment of loans (collected collateral) |
IFRS 5 IAS 16 |
Long-term assets held for sale and discontinued operations. Fixed assets (see above Property purchased in exchange for assets) |
Fair value less costs to sell or carrying amount of the loan, less any impairment at the date of exchange, whichever is lower (See HSBC (Limited Liability Companies) 2005 Annual Report, page 247) |
|
Future costs of dismantling, liquidation and restoration of the environment |
IAS 37 |
Reserves, contingent liabilities and contingent assets (see also IFRIC 1, IFRIC 5) |
Present value of expected expenses using a pre-tax discount rate |
|
Notes on the above table: Note 1: When valuing fixed assets at revalued value positive revaluation reflected in capital. When evaluating investment property at fair value, all changes in fair value are taken into account in income statement. A negative revaluation in both cases is recognized in the income statement (or as a reduction of a previously recognized positive revaluation in equity). Note 2: The carrying amount of property, plant and equipment carried at revalued amounts or at acquisition cost will be reduced by the amount of accumulated depreciation and impairment. (See IAS 36 – Study Guide). The above table shows the different treatment in IFRS reporting of different types of property, depending on their current and future use. Our website contains tutorials for each standard explaining the accounting methodology with examples. | |
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is owner occupied property |
|
A property interest held by a lessee under an operating lease may be classified and accounted for as investment property only if the property would meet the definition of investment property and the lessee measures it at fair value. The lease or lease should be accounted for as a finance lease in accordance with IAS 17.
The fair value model is discussed in detail below.
If the lessee decides to apply the above method of accounting, all leased items (under operating leases) must be accounted for in the same way, i.e. be recognized as investment property and measured at fair value and accounted for as a finance lease in accordance with IAS 17.
An investment property is held to earn a rental income, or to increase the value of capital, or both.
The following are examples of investment properties:
(1) land held for long-term capital appreciation and not for sale in the normal course of business of the company;
(2) land held for possible future commercial use. Land is treated as property intended to increase the value of the company's capital;
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EXAMPLE: How should land be accounted for, the future purpose of which is not currently determined? Question: Investment property refers to land and structures (in whole or in part) held by the owner or lessee under a financial lease for the purpose of generating income and/or increasing capital. How should land be accounted for, the future purpose of which is not currently determined? Additional Information Bank A is engaged in real estate construction. Bank A buys a piece of land in Moscow through a purchase option purchased several years ago. The purchase price was 10 million and the fair value of the land, according to an independent appraiser, is 23.7 million. Bank A has not yet decided whether it will build on the site for subsequent leasing to a third party or resale, a decision it will make in a subsequent accounting period. Bank A's accounting policy requires investment property to be carried at fair value. Solution The land will be classified as "Reserves". Although the Bank has not yet determined the future use of the site, in any case the property is held either for sale or for construction and resale in the ordinary course of business. Property must be carried at either cost or fair (market) value, whichever is lower. If the Bank had chosen to hold this building on its balance sheet for the purposes of long-term capitalization rather than short-term disposal in the ordinary course of business, then the property would have been classified as Investment Property. |
A building owned by the Bank (including on the basis of a financial lease agreement) and leased out through an operating lease.
An unoccupied building intended for operating lease.
Examples of properties that are not investment property and outside the scope of IFRS (IAS) 40 (see table on pages 8 - 9) are given below:
Funds held for sale in the ordinary course of business (including properties under construction or renovation). These funds are accounted for in accordance with IAS 2 Inventories or IFRS 5
Facilities that are built or reconstructed to order for a third party. Accounting is carried out in accordance with IAS 11 Contracts for work.
Funds used for own needs are accounted for in accordance with IAS 16.
Similarly, owner-occupied property includes funds intended for reconstruction and subsequent use for own use, such as housing for company employees (whether employees pay market rent or not), and leased funds subject to write-off or disposal for other reasons. These types of property are accounted for under IAS 16, not IAS 40.
For properties that were previously recognized as investment property but are in the process of being redeveloped, IAS 40 applies.
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EXAMPLES investment property You are the owner of the following funds: The plot of land on which you plan to build an office building for rent -. (-. The office building is being refurbished to increase the rent. The office has been leased and will continue to be leased after the refurbishment is completed. During the conversion works, the property will be treated as an investment property. Property under construction for future use as an investment property. Question whether property under construction, which is being built for the purpose of further use for investment purposes, can be accounted for as such on construction phase? How should accounting be changed if management is currently in the process of converting an existing investment property? Additional Information The bank has recently acquired land plot for the construction of office buildings. The land and building will be leased to a third party under an operating lease upon completion of construction. Solution This property cannot be accounted for as investment property. IAS 40 intends to exclude property under construction that is subsequently planned for investment purposes. - Management may continue to recognize the property as an investment property during the construction phase. The conversion of investment property for the purpose of further use as investment property is governed by IAS 40. This type of property continues to be recognized as investment property and, depending on the accounting policy adopted by the bank, may be accounted for both at cost and at fair value. |
property leased out to another bank under a financial lease.
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EXAMPLE Investment property is land and buildings (in whole or in part) held by an owner or lessee under a finance lease to generate income and/or raise capital. How should property held for the indefinite purpose of its further use be classified? Additional Information Company B is an industrial paint supplier in Germany. In 20x3, Company B buys land in a suburb of Frankfurt that has low-value houses and very limited public transport. The government is planning plans to develop this region over a five year period with the aim of creating an industrial park in the area, so the land will increase in value if the government's plans are implemented. Company B's management has not yet made a decision as to the purpose for which the property will be used. Solution Management should classify this property as investment property. Although the decision on the use of the property after the construction of the industrial park has not yet been made, in the medium term the land is held for the purpose of increasing the value. Under IFRS, such land will be treated as held for the purpose of possible appreciation if the owner has not yet determined whether to use this land for personal use or sell it in the near term in the normal course of business. To recognize investment property, management must choose a valuation model between cost and fair value. |
Funds owned by the company may be intended simultaneously for:
obtaining rental income or for the purpose of increasing the value of capital,
production of goods, products, works, services, or for administrative purposes.
If objects used for different purposes can be sold or leased separately under a financial lease agreement, then they are kept separately. In addition, this can be done if, by law, this property is divisible for the purpose of sale.
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Example Property held for the purpose of earning rental income. Question Property, plant and equipment (fixed assets) are tangible assets that the bank: uses for the production or provision of services, rents to other companies or uses for administrative purposes; And plans to use for more than one period. Certain types of property include partly property used to earn rental income or capital appreciation, and partly used for business, goods and services, or administrative purposes. If these shares can be sold separately (and if this does not contradict the law) or can be leased out under a financial lease agreement, then in this case the bank recognizes these shares of property in different ways. Property will be treated solely as investment property if only a minor proportion of the property is used for business, goods and services, or administrative purposes. How should the condition regarding the divisibility of interests for the purposes of a stand-alone sale or finance lease be interpreted in order to determine whether it is appropriate to account for these interests separately? Additional Information The bank owns an office building. The bank occupies nine of the ten floors for the needs of its head office, while the tenth floor is leased to a third party under an operating lease. Management proposes to account for this property as 'Fixed Assets', as 10% of the total area is leased to third parties on the basis of an operating lease. Solution Management should recognize nine floors as 'Fixed Assets', but the last floor as an investment property. The separate sale and lease clauses under finance leases relate solely to management's discretion and not to the terms of any existing leases. A prerequisite for classifying property as finance leased is a guarantee that the definition of “investment property” given in IAS 40 is not violated. The size of the leased property at 10% is more than an insignificant part of this property. The requirement to separately account for property as "Property" and "investment property" may be applied if the 10th floor can be sold or leased out under finance lease. |
If parts of one property cannot be sold separately, such property is recognized as investment property, provided that the part of the property used for own needs is immaterial for the purposes of sale, supply of goods, services or for administrative purposes.
In some cases, the bank may provide additional services to tenants. At the same time, the bank considers leased objects as investment property if the cost of services is insignificant compared to the amount of the rent.
In other cases, the services provided are essential.
In practice, it may be difficult to determine whether ancillary services are significant enough to warrant recognition of property as own use. For example, a hotel owner may outsource all or some of the management of the hotel to a third party, making it difficult to determine materiality.
The determination of property as investment property is based on professional judgment.
The Bank may develop criteria to ensure a prudent approach to the recognition of investment property funds.
There may be a case when the bank is the owner of the property leased to the parent or subsidiary company.
In this case, the property cannot be classified as investment property in the consolidated financial statements as it is not leased out to the Group.
However, for the owning bank, such property is recognized as investment property if it meets the established criteria.
Therefore, in its separate financial statements, the owner accounts for the property as investment property (but not in the consolidated financial statements).
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EXAMPLE Property occupied by a subsidiary Question The bank owns property which it leases and which is occupied by its parent or subsidiary. This property will not be classified as investment property in the consolidated financial statements of both entities, as it is considered owner-occupied from the point of view of the group as a whole. However, from the point of view of the individual bank that owns the property, it will be classified as investment property, subject to this definition. The lessor therefore accounts for the property as investment property in its individual financial statements (IAS 40). Should a bank-owned hotel that was leased to a related company be classified as investment property in the consolidated financial statements? Additional Information Bank A owns the hotel. Company B, which is a subsidiary of Bank A, operates a chain of hotels and receives management fees for these hotels, except for a hotel owned by Bank A. Hotel, owned by the Bank"A", is leased under a financial lease agreement for 2 million units of currency per month for a period of five years. The profit or loss from the operation of the hotel remains with the company "B". The estimated life of this hotel is 40 years. Solution The hotel should be classified as 'property, plant and equipment' in the consolidated financial statements. The hotel is owned and operated by the same group in terms of consolidation, and thus should be recognized as owner-occupied property and used for the purpose of providing goods and services. Bank A recognizes property (subject to operating lease) as investment property in its financial statements. Entity B recognizes the transaction in its financial statements as an operating lease and charges the lease payments to income in the corresponding period. |
In addition to IAS 16, there are several other standards for accounting for long-term assets and IAS 40 Investment Property is one of them. Consider the basic rules for classifying and accounting for investment property.
Many accountants mistakenly believe that there is only one standard that applies to long-term tangible assets: IAS 16 Property, Plant and Equipment.
While it is true that you need to apply IAS 16 to account for most of your long-term tangible assets, it is not the only standard for accounting for this category of assets.
Consider the main provisions of the standard IAS 40 Investment Property defining what investment property is, its initial and subsequent accounting, fair value model and other issues.
What is IAS 40?
Accounting for IAS 40 Investment Property is identical to accounting for IAS 16 Property, Plant and Equipment except that:
- revaluation results under IAS 40, both positive and negative, are included in profit and loss (and not in the revaluation reserve), and
- there is no depreciation if the revaluation is carried out every year.
What is the purpose of IAS 40?
IAS 40 Investment Property prescribes the accounting and disclosure of information in relation to investment property.
But what is investment property?
Investment property is land, building (or part of it), or both designed for the following specific purposes:
- Receipt rent;
- Cost increase capital; or
- Both. (see paragraph IAS 40.5)
Here it is of great importance purpose of holding the asset . If you hold a building or land for any of the following purposes, then that asset cannot be classified as investment property:
- Production or sale of goods or services,
- administrative purposes or
- Sale within operating activities.
If you use your building or land for the first two purposes, you should apply IAS 16; and IAS 2 Reserves is appropriate when you use a building or land for sale in the course of operations.
Examples of investment properties.
What exactly can be attributed to investment property?
- Land held for resale in the long term at a higher price (as a result of appreciation) or for future uncertain use (i.e. you do not yet know what you will use it for).
However, if you are buying land and intend to build a production facility on it for your main business some time later, then this land is NOT an investment property. - A building owned by an entity that is leased out under one or more operating leases. This includes a building that is currently vacant but you plan to rent it out.
- Any property that you actually build for future use as an investment property.
Be careful here because if you are building a building for any third party, it is NOT investment property and you must apply IAS 11 Construction Contracts or IFRS 15 Revenue from Contracts with buyers".
When to recognize investment property in accounting?
The recognition rules for investment property are basically the same as in IAS 16 for property, plant and equipment, i.e. you recognize investment property as an asset only if two conditions are met:
- It is probable that the future economic benefits associated with this asset will be transferred to the company; and
- The value of an asset can be estimated reliably.
How is the initial appraisal of investment property carried out?
Investment property is initially valued at cost, including transaction costs (acquisition costs).
The cost of investment property includes:
- acquisition cost and
- Any costs directly related to the acquisition, such as legal fees or consulting fees, property taxes, etc.
In cost price cannot be included:
- Any startup costs.
However, if these start-up costs are directly related to the operation of the investment property, you may want to include them. But DO NOT turn on general expenses to launch. - Operating losses incurred by the company before the property reached its intended level of use, and
- Excess consumption material, labor or other resources that arise during the construction of a property.
If payment for an investment property is delayed, you will need to discount the amount of that payment to present (current) value to establish a current cash value equivalent.
It should also be mentioned that you can actually classify an asset under a finance lease as an investment property, in which case the cost is calculated in accordance with IFRS 16 Leases.
How is the subsequent valuation of investment property carried out?
After initial recognition, you have 2 options for valuing your investment property (IAS paragraph 40.30 et seq.).
Once you have made your choice, you should stick to it and value all your investment properties using the same model (there are actually exceptions to this rule).
Option 1: Measurement using the fair value model.
In accordance with fair value model investment property is measured at fair value at the reporting date. (See IAS paragraph 40.33).
Fair value measurement is defined in IFRS 13 Fair Value Measurement .
The fair value gain or loss is recognized in profit or loss.
Sometimes fair value cannot be measured reliably after initial recognition. It's possible in extremely rare cases , in which case IAS 40 prescribes (see paragraph 53):
- Measure investment property at cost if it is not yet completed and is under construction; or
- Valuate the investment property using the initial cost model, if completed.
Option 2: Estimate by upfront cost model.
The second option for the subsequent valuation of investment property is initial cost model.
This valuation model IAS 40 does not describe it in detail, but refers to IAS 16 Fixed Assets. This means that you need to apply the same methodology as in IAS 16.
How to switch to another investment property appraisal model?
Can you actually move from a cost model to a fair value model or vice versa from a fair value model to a cost model?
The answer is "YES", but only if this change results in financial statements companies will have more reliable information about financial position and results.
What does this mean in practice?
Moving from a cost model to a fair value model is likely to meet this condition and therefore you may do so if you are confident that you can measure fair value regularly and that the fair value model is a better fit.
However, the opposite change (from a fair value model to an initial cost model) is unlikely to result in a more reliable presentation of assets. Therefore, you should not do this, but if you do, it is rare and for good reasons.
How to transfer assets from and to investment property?
When we talk about transfers ( transfers from category to category) associated with investment property, we mean reclassification. For example, you reclassify a building previously accounted for as property, plant and equipment under IAS 16 to investment property under IAS 40.
A transfer is possible, but only if there is a change in the use of the asset or the purpose of holding the asset, for example (see paragraph IAS 40.57):
- You start leasing property that was previously used as an office building (conversion of previously owner-occupied property to investment property under IAS 16).
- You stop renting out the building and start using it yourself.
- You owned the land for no particular purpose and recently decided to build a residential building on it to sell apartments (transfer from investment property to stocks).
How is the transfer of real estate from category to category reflected in accounting?
This depends on the type of transfer and the chosen accounting policy for the investment property.
If you choose to account for your investment property under the upfront cost model, then there is no problem with transfers, you simply continue to record as you did before.
However, if you chose the fair value model, things are a bit more complicated:
- When you transfer an asset to investment property, then the assessed value of the asset will be its fair value at the date of the transfer. The difference between the asset's carrying amount and fair value is treated and accounted for in the same way as a revaluation under IAS 16.
- When you transfer an asset from an investment property, the value of the asset will also be its fair value at the date of the transfer.
How to derecognise investment property?
The rules for derecognition (i.e. when you can liquidate investment property and derecognise it) in IAS 40 are the same as those in IAS 16.
Disclosure of information on investment property.
IAS 40 Investment Property prescribes a variety of disclosures that must be presented in financial statements, including:
- description of the chosen model,
- how the fair value was measured,
- investment property classification criteria,
- transfers of investment property from category to category during the reporting period.
For more information on disclosures, see paragraphs
Key Issues in Accounting for Investment Property
- reference Information
Standards governing the accounting and reporting of investment property
- IAS 40 Investment Property;
- MCOO (IAS)17 Lease.
IAS 40 applies to the recognition, measurement and disclosure of assets that are classified as investment property.
Since the concept of investment property (discussed in more detail below) can include leased assets or assets that can be leased, the standard (IFRS 40.3) defines the scope this standard and the standard governing the accounting treatment of leases (IAS 17).
IAS 40 applies:
- to the valuation of the share of investment property held by the company under a finance lease in the lessee's financial statements;
- to the valuation of investment property that is provided to a lessee under an operating lease in the lessor's financial statements.
- to the classification of leases into financial and operating leases;
- to the recognition of rental income from investment property;
- to the valuation of the share of property held by the company under an operating lease in the lessee's financial statements;
- to the assessment net investment leased (financial lease) in the financial statements of the lessor;
- accounting for sale and leaseback transactions;
- to financial and operating lease disclosures in the financial statements.
The concept of investment property
The definition of investment property is provided in paragraphs 5-6 of IAS 40.
Investment property is property (land or buildings, or part of a building, or both) that is held (by the owner or lessee under a finance lease) to earn rental income or to increase capital appreciation, or both. , not for:
- use in the process of production or provision of goods or services, or for administrative purposes;
- sales in the ordinary course of business.
- the property is otherwise defined as investment property;
- the fair value model is used for this investment property.
It has been determined that a property interest under an operating lease from a lessee may be classified as investment property if a number of conditions are met.
Transitional Provisions: Entities that have previously applied IAS 40 (Rev. 2000) and elect for the first time to classify or account for some or all of the permitted ownership interest under an operating lease as investment property should recognize the effect of that choice as an adjustment to the opening balance. retained earnings in the period in which the choice was first made. Where the fair value of such property has not previously been publicly disclosed, comparative information is not restated and that fact is disclosed.
Schematically, the definition of investment property is presented in fig. 10.1.
Figure 10.1. Classification of assets as investments
Investment property:
- Earth
- Building
- part of the building
- Land and buildings
Increasing capital valuation and generating rental income
Magnifications
capital
estimates
Occurs as a result
\/
Rent on terms \
operating lease /
Earning income from operating leases
Receive income from financial lease
/\
Under certain conditions
Note that investment property as an asset that generates independent cash flows is separated
from:
- owner-occupied property - property that the owner or lessee owns under a financial lease for use in the production or provision of goods or services, or for administrative purposes (essentially, we are talking about fixed assets);
- property held for sale in the ordinary course of business (essentially inventory).
- land held for the purpose of long-term capital appreciation and not for short-term sale during the normal course of business;
- land held for the purpose of uncertain future use;
- a building owned by the owner (or leased by the owner under a finance lease) and leased out under an operating lease;
- a vacant building held for the purpose of operating lease.
In some cases, property rental companies provide tenants with certain ancillary services associated with the use of the property. Such property may be treated as investment property only when the services represent a minor part of the arrangement as a whole (IFRS 40.11). For example, the owner of a leased office building provides tenants with security services.
Professional judgment is often required in determining investment property.
Recognition of investment property
Investment property is subject to the same recognition criteria as other company assets.
Investment property recognition criterion (IFRS 40.16)
Investment property is recognized as an asset only when both conditions are met:
- it is probable that future economic benefits associated with the investment property will flow to the entity;
- the value of investment property can be measured reliably.
Costs of day-to-day maintenance of investment property are not recognized in the carrying amount of investment property but are recognized as an expense in the period in which they are incurred. These costs usually include the cost of wages maintenance personnel, consumables, small spare parts, etc., and their main purpose is often interpreted as the cost of minor repairs and maintenance.
Costs to replace large portions of investment property generally qualify for recognition and are accordingly included in the carrying amount of investment property at the time the costs are incurred, such as costs to replace the interior walls of a building. The carrying amounts of those parts that are replaced are derecognised in accordance with the derecognition rules set out in the standard.
Note. Changes from IAS 40 2000 edition
The new edition applies a single recognition criterion to initial costs and to subsequent costs of investment property (see also Chapter 7 Property, Plant and Equipment).
Valuation of investment property at initial recognition
The general approach to measuring investment property at initial recognition set out in IAS 40 is as follows (IFRS 40.20).
Initially, investment property must be valued at historical cost (the actual acquisition cost) (cost). The transaction costs are included in the initial estimate.
Estimating the cost of acquisition of investment property under various options
- Purchased investment property.
purchase price (purchase price);
any costs directly related to the acquisition: payment of professional fees for legal services, taxes on the transfer of property, and other costs of the operation.
- Self built investment property.
The cost of investment property does not include:
organizational costs associated with the start of operation (except when they are necessary to bring the property to a state ready for use);
operating losses until the planned load is reached;
abnormally large amounts of materials, human or other resources spent in the process of construction or development.
- Investment property acquired with payment deferred for a period beyond normal credit conditions(terms of conventional trade credit).
- Investment property acquired as a result of a lease.
If an interest in property held by an entity under a lease is classified as investment property, then the fair value item is that interest and not the entire property.
- Investment property acquired in exchange for non-monetary assets or a combination of non-monetary and monetary assets.
Note. Practical recommendation
The rules for determining the cost of investment property are similar to the rules for determining the cost of property, plant and equipment. Their changes in the new version of IAS 40 (compared to the old version of this standard) are generally similar to the changes made in IAS 16 (for more information about the changes in IAS 16 regarding the measurement of property, plant and equipment acquired in exchange for non-monetary assets, see Chapter 7 "Fixed assets").
Transitional Provisions: Requirements for the initial valuation of investment property acquired through an exchange for other assets should be applied prospectively.
Valuation of investment property after initial recognition
An entity must choose an accounting policy that specifies one of the investment property accounting models (IFRS 40.30):
- fair value model;
- actual cost model.
The rule for measuring all investment property under either the fair value model or the cost model has the following exception (paragraph 32A of IAS 40):
- an entity may choose either the fair value model or the cost model for all investment property accompanied by liabilities for which the consideration paid is directly related to the fair value of specific assets or the consideration from those specific assets that include that investment property;
- an entity can choose either the fair value model or the cost model for all other investment property, regardless of the choice in the previous case.
Note. Practical recommendation
When choosing an accounting model for the subsequent valuation of investment property, it is necessary to take into account the way in which the asset was created:
- if investment property is acquired for ownership, either the fair value model or the cost model may be used;
- if the investment property is leased under a finance lease, either the fair value model or the cost model may be used;
- if the investment property is leased under an operating lease, only the fair value model can be used.
In general, IAS 40 requires entities to determine the fair value of investment property and:
- or use it to evaluate such property (when choosing a fair value model) (paragraph 33 of IFRS
- or disclose in the notes (when choosing the cost model) (clause 79 of IAS 40).
Fair value model
Under the fair value model, after initial recognition, all investment property must be carried at fair value (paragraph 33 of IAS 40).
Gains (losses) arising from changes in the fair value of investment property should be recognized as profit or loss in the period in which they arise and presented in the income statement (paragraph 35 of IAS 40).
By definition, the fair value of an investment property is the price at which the property could be exchanged in a transaction between independent, knowledgeable and willing parties. In determining fair value, the possible costs of disposal should not be taken into account.
Fair value should reflect market conditions at the balance sheet date (paragraph 38 of IAS 40).
IAS 40 focuses on approaches to determining the fair value of investment property. The following approaches can be distinguished (from the highest priority to the least priority):
- The best evidence of fair value is the current price in an active market for a similar property in a similar location and condition or subject to similar leases or other arrangements; In the absence of information about current prices in an active market for such property, the company may consider other sources of information, including:
recent prices in transactions with similar properties in a less active market, adjusted to reflect any changes in economic conditions since the date of such transactions;
- discounted estimated cash flows that are based on reliable estimates of future cash flows supported by the terms of any existing lease or other contracts or, where possible, other external evidence, using a discount rate that reflects current market estimates of the uncertainties associated with the magnitude or timing of those cash flows.
In some cases, a fair value measurement may result in several different options. In these cases, an entity must analyze the reasons for the differences in order to arrive at a single, most reliable estimate of fair value from a set of options.
Note. Possible application of requirements of other standards
IAS 8.11 requires that professional judgment considers (among other things) the valuation concepts defined by the Framework. One of the principles laid down in the IFRS Concept is the principle of prudence, according to which, in conditions of uncertainty, a decision should be made that does not lead to an overestimation of assets (clause 37 of the IFRS Concept).
Choice from alternatives fair value measurement requires professional judgment. Given the same degree of reliability of various estimates of fair value, the application of the prudence principle involves choosing the smallest possible value.
In exceptional cases, at the time of the initial acquisition of investment property, there is clear evidence that the range of reasonable fair value estimates will be so wide and the likelihood of different outcomes so difficult to determine that the usefulness of a single fair value measurement is nullified. This situation may indicate that fair value will not be measured reliably on an ongoing basis and the rule prescribed by IAS 40 for situations where fair value cannot be measured reliably should apply.
This rule has next view(clause 53 of IAS 40):
There is a rebuttable presumption that the entity can reliably determine the fair value of the investment property on an ongoing basis. However, in exceptionally rare circumstances, at the time of the initial acquisition of investment property (or when an existing property is first recognized as investment property after construction or development has been completed or as a result of a change in use), there is clear evidence that fair value cannot be measured reliably on an ongoing basis. Such situations arise only when comparable market transactions occur infrequently and alternative reliable estimates of fair value (eg based on discounting estimated cash flows) cannot be made. In these cases, an entity must measure the investment property using the cost model in accordance with IAS 16. The residual value of such investment property must be assumed to be zero. IAS 16 shall apply until the said investment property is disposed of.
It is possible that the company as a whole chooses to use the fair value model, but an exception is made for this property, which is accounted for in accordance with the cost model.
Note that this exception general rule measurement at fair value is possible only at the time of initial recognition of investment property. There may be situations where an entity has used the fair value model to account for investment property for some time, but then market transactions for a similar type of property become less frequent or market prices are less available, and therefore the fair value of the investment property is more difficult to determine. In these cases (IFRS 40.55), the entity must continue to measure the investment property at fair value until disposal (or reclassification).
Example 10.1. Using the fair value model to account for and measure investment property
Entity A acquires one of the five identical buildings in the business complex for $3 million to lease on January 1, 2005. The building is classified as investment property and the entity chooses the fair value model as its accounting policy for investment property.
As of December 31, 2005 (the reporting date for Company A), it is known that another building in this complex was sold in December for $3.5 million. Accordingly, the fair value of Entity A's investment property can be considered to be $3.5 million. An accounting entry should be made to reflect the increase (3.5 - 3 = $0.5 million) of the building's valuation to fair value, and a gain on such an increase in the income statement (debit to the investment property account and credit the increase in fair value).
Actual cost model
Under the cost model (IFRS 40.56), after initial recognition, investment property must be valued in the same way as property, plant and equipment (primary recommendation) in accordance with
IAS 16 i.e. at historical cost less accumulated depreciation and related accumulated impairment loss.
Exception from this rule constitutes investment property that meets the criteria for classifying assets held for sale (or that is included in a group of assets that is classified as held for sale). This investment property must be valued in accordance with IFRS 5 (for more information on the valuation of non-current assets classified as "held for sale", see Chapter 11 "Non-current assets held for sale and discontinued operations").
Transfer (reclassification) of assets to and from the category of investment property
Reclassification (transfer) of property to or from investment property is possible only in cases where there has been a change in use supported by certain circumstances (IFRS 40.57). These circumstances may include only the following:
- start of use for own needs, for transfer from the category of investment property to the category of owner-occupied property (fixed assets);
- start of development for the purpose of sale - for transfer from the category of investment property to the category of reserves;
- end of own use - for transfer from the category of owner-occupied property to the category of investment property;
- commencement of an operating lease to a third party - for transfer from the category of reserves to the category of investment property;
- completion of construction or development - to transfer from the category of property under construction or development (regulated by IAS 16) to the category of investment property.
Example 10.2. Property classification
Entity A owns a building that is leased to third parties. This building is classified as an investment property.
If the company intends to sell the building, but this requires its repair and redevelopment, which it begins to do, then from the moment the repair and redevelopment begins, the building goes into the inventory category.
If the company intends to sell the building, but this does not require any changes to it, then the building is classified as investment property until the date of disposal.
If the company intends to renovate and redevelop the building, but will continue to rent it out, then the reclassification of the building also does not occur.
If the cost model is used to account for investment property, transfers between investment property, owner-occupied property and inventories are made at carrying amount (IFRS 40.39).
When the fair value model is used to account for investment property, the following rules apply:
- When investment property that was carried at fair value is transferred to owner-occupied property (used for own use - property, plant and equipment) or inventories, the estimated cost for subsequent accounting in accordance with the standards governing the accounting for property, plant and equipment (IAS ) 16) and inventories (IAS 2) is the fair value at the date of change in use, i.e. the transfer is made at fair value at the transfer date (IFRS 40.60).
Company A owns a building that is rented out. This building is treated as an investment
property and is accounted for in accordance with the fair value model. As of the previous reporting date (December 31, 2004), the fair value of the building was estimated at $5 million. On April 1, 2005, the company decides to change the way the building is used and locate its own management. Accordingly, the building must be transferred from investment property to property, plant and equipment by that date. The fair value of the building as of April 1, 2005 is $5.5 million. The investment property is being revalued to fair value (a gain of $0.5 million ($5.5 million - $5 million) is recognised), investment property is converted to property, plant and equipment (debiting property, plant and equipment and crediting US$5.5 million investment property) and the cost of property, plant and equipment is US$5.5 million, which is depreciated in accordance with the company's accounting policy in relation to fixed assets.
- When owner-occupied property is converted to investment property, which will be carried at fair value until the change in use, IAS 16 applies. The difference between the carrying amount in accordance with IAS 16 and the fair value of that property on that property
Example 10.4. Reclassification to investment property
Company A owns a building that is used for administrative purposes. The book value of the building is $4 million. The company decides to change the way the building is used and start renting it out. In doing so, the fair value model will be used to measure investment property. At the time of the change in use, the fair value of the building is $4.8 million. At the date of the change in use, the asset, the building, is revalued (increasing the book value of the building by $0.8 million ($4.8 million - $4 million) and a revaluation reserve arises by this amount), and then conversion to investment property is in progress (investment property is debited and property, plant and equipment is credited for $4.8 million).
- When inventory is transferred to investment property to be carried at fair value, the difference between the property's fair value at that date and its previous carrying amount is recognized as profit (loss) for the period (IFRS 40.63).
- When an entity completes construction of an investment property that will be measured at fair value, the difference between that date's fair value and the previous carrying amount is recognized as profit (loss) for the period (IFRS 40.65).
Investment property must derecognise (derecognise) at the time of disposal, or when the investment property is permanently retired and no future economic benefits are expected from its disposal (IFRS 40.66).
The disposal of investment property may result from the sale or leasing of investment property under a finance lease. In the first case, the criteria for recognition of revenue from the sale of goods in accordance with IAS 18 are used to determine the date of disposal. In the second case, the provisions of IAS 17 governing the accounting for leases are applied. IAS 17 also applies if the disposal of investment property is a sale and leaseback.
Gains (losses) on the disposal or discontinuation of investment property are defined as the difference between the net disposal proceeds and the carrying amount of the asset (IFRS 40.69). These gains (losses) are recognized as gains (losses) in the income statement in the period in which the disposal or discontinuation of use occurs, unless the disposal is a sale and leaseback (in which case the provisions of IAS 17 on accounting for these transactions).
Compensation from third parties for investment property that is impaired, lost or transferred is recognized in the Profit and Loss account and when the compensation is probable to be received (IFRS 40.72).
Note. Changes from IAS 40 2000 edition
This provision was included in new edition IAS 40 as amended by IAS 16, revised edition.
Disclosure of Investment Property in Financial Statements
Since the concept of investment property is closely related to leases, the disclosures required by IAS 40 should be in addition to the related disclosures required by IAS 17.
The disclosure requirements of IAS 40 can be broken down into three parts:
- General requirements;
- special requirements when using the fair value model;
- special requirements when using the cost model.
An entity shall disclose the following information (IFRS 40.75):
- which model it uses: fair value model or cost model;
- if it uses the fair value model, when and under what circumstances an ownership interest under an operating lease is classified and accounted for as investment property;
- where it is difficult to classify assets as investment property, the criteria that have been used to distinguish between investment property and owner-occupied property and property held for sale in the ordinary course of business;
- the methods and significant assumptions used to determine the fair value of the investment property, including whether the fair value determination was supported by market evidence or based to a greater extent on other factors (to be disclosed) due to the specific nature of the property or a lack of comparative market evidence. data;
- the extent to which the fair value measurement of the investment property is based on the valuation of an independent appraiser who holds a recognized and relevant qualification and has recent experience in valuing investment property of a similar location and category to the subject property; if no such assessment has been made, this fact must be disclosed;
- amounts recognized in the income statement for:
direct operating expenses (including repair and maintenance costs) arising from investment property that generated rental income in the reporting period;
direct operating expenses (including repair and maintenance costs) arising from investment property that did not generate rental income in the reporting period; and some others;
- the existence and extent of restrictions on the marketability of investment property or the transfer of income and disposal proceeds;
- contractual obligations to acquire, build or develop investment property, or to repair, maintain or improve it.
In addition to the general requirements above, an entity using the fair value model must disclose a reconciliation of the carrying amount of investment property at the beginning and end of the reporting period that reflects (IFRS 40.76):
- proceeds from an acquisition through a business combination;
- net profit or losses from fair value adjustments;
- other changes.
In exceptional situations where the fair value of some investment property cannot be measured reliably and the cost model in accordance with IAS 16 is used for it, the reconciliation required in paragraph 76 of IAS 40 shall separately reflect amounts associated with that investment property. property (IFRS 40.78). In addition to this, it should disclose:
- a description of such investment property;
- an explanation why fair value cannot be measured reliably;
- if possible, the range of estimates within which the fair value is likely to lie;
- on disposal of such investment property, the fact of disposal of investment property not carried at fair value, the carrying amount at the time of sale, the amount of recognized profit (loss) should be disclosed.
In addition to the general requirements above, an entity using the cost model must disclose the following information (IFRS 40.79):
- depreciation methods used;
- useful lives or depreciation rates;
- gross carrying amount and accumulated amortization (together with accumulated impairment losses) at the beginning and end of the period;
- a reconciliation of the carrying amount of investment property at the beginning and end of the period, reflecting:
proceeds from acquisitions through business combinations;
assets classified as held for sale or included in disposal groups classified as held for sale in accordance with IFRS 5 and other disposals;
depreciation;
the amount of impairment losses recognized and reversed during the period in accordance with IAS
36;
net exchange differences arising on translation into another presentation currency;
reclassifications (transfers) from and into the category of owner-occupied property and reserves;
other changes;
- fair value of investment property.
Investments in subsidiaries and associates.
Subsidiaries are defined as being under the control of another company called the parent company. Control is such a set of circumstances that creates the ability of the parent company to determine the financial and operating policies of a subsidiary company in order to obtain benefits from its activities.
Joint control is the contractual distribution of control over economic activity companies.
An associate is an entity in which the investor can exercise significant influence and which, by definition, is neither a subsidiary nor an interest in a joint venture.
All reporting figures of subsidiaries and parent companies must be included and displayed in the group consolidated reporting groups characterizing the results of the activities of the entire group for the reporting period.
A subsidiary is not included in the group's financial statements if:
1. a subsidiary is acquired for the purpose of selling in the near future;
2. the subsidiary is in an environment that significantly and permanently limits its ability to transfer funds to the parent company.
In the financial statements of the parent company as an independent organization on the rights legal entity investment in affiliated companies may be taken into account:
1. by actual cost;
2. at market value;
3. by the method of participation.
The method of accounting for investments by equity is that investments accepted for accounting at the investor's actual costs are adjusted at the end of each reporting period for changes in the investor's share in the net assets of the company that is the object of investment.
Investors' share of the associate's profit (loss) is adjusted to reflect the assessment of the associate's net assets at the acquisition date at fair value, with the investor's share of unrealized profit (loss) on mutual transactions excluded. However, mutual transactions and settlement balances are not subject to exclusion, since the associate is not a member of the group.
The investor must cease using the equity method when it ceases to have significant influence over the associate.
Investment property is property held by the owner under a finance lease to earn rentals or for capital appreciation or both, but is not held for use in the production, supply of goods, services or administrative purposes, and is not for sale in the ordinary course of business.
Owner-occupied property is owner-owned property intended for use in manufacturing, the supply of goods, the provision of services, or for administrative purposes.
Criteria for recognition of ownership as an asset:
1. the likelihood of future economic benefits;
2. the possibility of valuation of investment property.
Investment property is initially recognized at cost. Subsequent incremental expenses should be treated as an increase in the carrying amount of investment property if they increase its profitability. Other subsequent expenses are not capitalized, but must be expensed in the period in which they are incurred.
Subsequent appraisals of the value of investment properties can be presented in the form of two approaches:
1. investment property, after initial recognition, must be measured at fair value, with changes in fair value recognized in profit or loss;
2. at historical cost, at which investment property is carried on the balance sheet less accumulated depreciation and impairment losses.
Investment property may be excluded from investment property, or vice versa, some property may be included. Reclassification assessment is carried out:
1. either at the original cost;
2. either at fair value.
The difference between the fair value at the date of the transfer and its previous carrying amount should be recognized in profit or loss in the reporting period
Investment property is disposed of by sale or financial lease.