I understand what investment property is and how it’s accounted for in a single entity’s accounts, but, in a group situation where a parent or subsidiary has investment property leased from another group member it is accounted for in the group accounts as owner-occupied. I understand why that is, but I’m not at all sure about what adjustments would be required on consolidation to reclassify.
Do you have any examples that illustrate that happening that might aid my understanding of this scenario?
I’ve never come across this in practice ( nor in an exam that I can remember )
Surely the individual company should not have classified it as investment property if it is leased to another company within the same group. Am I not right?
If company A and company B are in the same group and company A leases a property to company B, the property is an investment property in the books of company A (IAS 40).
As for the adjustments to be made on consolidation, the property is not an investment property for consolidation purposes and the property must be carried as per IAS 16, using either the revaluation model or the cost model.
So how to treat in accounts of the group?
- If the investment property in the company accounts were being carried under the cost model, then that is the easy bit, just recognise in the group accounts at historical cost less accumulated depreciation, unless the group uses the revaluation model. (generally all members of a group use the same treatment of individual accounts, but is is possible for one group member to use cost model and another to use revaluation model in individual accounts, however on consolidation, all members of a class of assets must be carried under the same model)
- If the investment property in the company accounts is being carried at fair value, in which case, gains or losses in the period would have been recognised in statement of comprehensive income, then the gains or losses would have to be eliminated on consolidation. The property in the consolidated statement would either be at cost or revaluation and the corresponding treatment of the property will need to be made.
Incidentally …. if per your question, “in a group situation where a parent or subsidiary has investment property leased from another group member” …if this is by way of FINANCE lease, then it is not to be classed as investment property
Brillaint! Thanks to you both. That clarifies things.
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