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Investment property – ACCA Financial Reporting (FR)

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  1. For the SOFP, at Y.e, IP is increased by 21,600 to account for the revaluation at FV. Is it appropriate to also say that Property is decreased by (19,500) [FV after 500 depreciation] and IP shows 21,000 as at 01/07/15 to account for the “reallocation” of the property from admin purposes to investment purposes.

    For example, there may be other properties under the ownership of the company but we only discussion to transfer of one property to IP, so In figure rather than ignoring property altogether in SOFP, it’s better to address it’s transfer to IP?

    • I agree with you. IAS 40 specifically gives examples of Investment Property and among others there’s specifically “property under construction for the future use as an investment property”.
      It also states how to measure Investment Property under construction. It refers to IAS 16 indeed though, in cases when entity can’t measure FV of IP under construction reliably. Maybe that’s what tutor wanted to say?

      That despite the fact it’s treated as IP it still will most probably be measured at cost under IAS 16 until it’s ready for use.

    • Investment properties should initially be recognised at cost. However, for subsequent measurement we have 2 options under IAS 40, one is cost cost model and the other being fair value model. Once a method has been chosen it should be applied consistently and to all investment properties.

      Now, in case of cost model, investment property would be depreciated normally like any other property, plant and equipment. No year end revaluations would be accounted for, unless it is downward, in which we would record an impairment loss(Dr SPL).

  8. Hello,

    The property will be depreciated for the first six-months – $0.5 million. Then
    Carrying value = $20 million – $0.5 million = $19.5 It’s OK. Then
    The property is revalued to its fair value of $21 million on 1 July 2015 = $21 million – $19.5 million = gain through other comprehensive income of $1.5 million (Rev. srpl) It’s OK too. Then The property is now classified as investment property and no longer depreciated. It’s OK too. Then It is revalued to a fair value of $21.6 million at the reporting date with the gain of $0.6 million going through profit or loss..

    Question. What will be happen with $1.5 million (Rev. srpl) for next years. For example if next year fair value will be a $19 million. Then can we use 21.6-19=2.6 million from $1.5 million (Rev. srpl) I mean Rev.surp will be 0 and the remaining amount 2.6-1.5 = 1.1 million go to profit or loss like loss. Is that right ?

    • No. IP is revalued at FV through PL. If we have something in OCI it doesn’t give us the right to use it for lowering our current year losses in PL, it would mislead our shareholders on FV losses.

      OCI is accumulating PPE revaluations while we own the asset, and only transfers to PL when we sell it. Otherwise we would be showing PL gains and losses while actually not having any, because our PPE is still on our balance sheet.

      Same for IP if it was previously a PPE. OCI can only be released to RE when sell IP (see paragraph 62 ii on transfer from PPE to IP of IAS 40):

      (ii) any remaining part of the increase is recognised in other comprehensive income and increases the revaluation surplus within equity. On subsequent disposal of the investment property, the revaluation surplus included in equity may be transferred to retained earnings. The transfer from revaluation surplus to retained earnings is not made through profit or loss.

    • Because of the nature of fair value. No one would buy a property from you for $100 if it’s depreciated to $80 let’s say. Instead, a potential buyer would buy it for $80. So instead of depreciation you account FV loss. Basically FV already includes any impairment or depreciation in it’s idea. IFRS 13 topic will give you more ideas on it.

      It’s a simple example that doesn’t include any positive fluctuations on price, but I think it gives an idea.

  10. Hi,

    With reference to the inventory transfer to IP – so we calculate the difference between cost/nrv (depending on what’s lower) and FV and this difference goes to SPL?

    Thanks,
    Anna

    • Yes. Once it’s in Inventories it should be accounted for at the lowest of Cost or NRV. One of them is considered a Carrying Value.

      IAS 40 says that we take the difference between CV and FV, and charge the difference to PL.

      Paragraph 63 and 64 of IAS 40:
      “For a transfer from inventories to investment property that will be carried at fair value, any difference between the fair value of the property at that date and its previous carrying amount shall be recognised in profit or loss.
      The treatment of transfers from inventories to investment property that will be carried at fair value is consistent with the treatment of sales of inventories.”

    • Hi,

      For a change in use from PPE to IP we revalue under IAS 16 before the transfer to IP, therefore the revalution will go through other comprehensive income (revaluation surplus).

      Thanks

      • Hello Chris,

        Thank you for the video.

        In relation to the 1,500 OCI surplus. Would you also have to add to the SOFP a Revaluation Surplus of 1,500 in equity? Because the journal is:

        Dr PPE (SOFP) 1,500
        Cr Revaluation Surplus (SOFP and OCI) 1,500

        And the journal to record the Gain on the Investment Property is:
        Dr PPE (SOFP) 600
        Cr Gain on Investment Property (SPLOCI) 600

        Is this correct?

      • It will definitely be added to SFP.

        But for revaluation entries are

        Dr PPE (SFP) 1,000
        Dr Acc depreciation (SFP) 500
        Cr Reval surplus (SFP + OCI) 1,500

  15. Thanks for the lecture, the only thing I want to ask is the following.

    As you said, if owner occupied property is transfering to IP then it is revalued under IAS 16 and then treated as IP.

    So, on 1st of July it was transferred to IP and its cost was 19.5k and NRV (fair value) was 21 mln. Why we dont take the lowest one which is 19.5?

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