Lucubrate Magazine, Issue 39, September 14th, 2018
Who says accountants can’t have fun!! Accounting for IAS 40 in 40 seconds Ready? Go! – Have fun
- Accounting Series – article No: 20
- Accounting Theory – Advanced Part 10
By Peter Welch, Georgia, CEO GlobalCfo.LLC.
The IASB, especially the Annotated Red Book provides a myriad of information that should be read when addressing IAS 16 PP&E application issues.
- depreciation methodologies
- depreciable amount and depreciation period
- Identification/explanation of all expenses that can be capitalized
- Subsequent expenses
- IAS 8 Policies and Procedures
- IAS 16 vs IAS 2 discussion
- compensation for impairments
- transitional provisions
- IFRIC updates
- IAS 38 intangible assets
- IFRS 16 leased assets
Documentation, Documentation, Documentation
Whether it is IAS 16 or any other IFRS standard, all standards, as indicated earlier, should be thoroughly reviewed and understood. As we cover IAS 40, Investment Properties, IAS 16 comes again into play as properties can be ‘deactivated’ as investment properties and become classified as ordinary PP&E. As you read IAS 40, you will note that there is a multitude of transaction types that need to be understood. From a comparability perspective, it makes sense to codify how to account for certain and probably one-off transactions.
Given the currency value of investment property, clearly these are not prepaid expenses, noncompliance with the standard could well result in significant material inaccuracies besides violating the framework and faithful representation. Note also, that depending upon the intention of management, IAS 2, inventories, may also come into play here. Clearly, there is no question that documentation, documentation (repeated deliberately) is absolutely critical here. Documentation, don’t forget, come into play any time and perhaps even daily throughout the course of the fiscal year. Meeting with the auditors is not the time to reconsider documenting the nature of the transaction or what management intended. As you’ll read here, IAS 16 and IAS 40 are very similar in accounting. Both require calculating and recognizing any gains or losses and both use a ‘deemed’ cost concept.
What is and What isn’t Investment Property
Relative to the IASB (definitions) para 8 and 9, what is and what isn’t Investment property:
- The following are examples of investment property:
a. land held for long-term capital appreciation rather than for short-term sale in the ordinary course of business. [Refer: paragraph 9(a)]
b. land held for a currently undetermined future use. (If an entity has not determined that it will use the land as owner-occupied property or for short-term sale in the ordinary course of business, [Refer: paragraph 9(a)] the land is regarded as held for capital appreciation.) [Refer: Basis for Conclusions paragraph B67(b)(ii)
c. a building owned by the entity (or a right-of-use asset relating to a building held by the entity) and leased out under one or more operating leases.
d. a building that is vacant but is held to be leased out under one or more .operating, leases.
e. property that is being constructed or developed for future use as investment property.
- The following are examples of items that are not investment property and are therefore outside the scope of this Standard:
a. property intended for sale in the ordinary course of business or in the process of construction or development for such sale (see IAS 2 Inventories), for example, property acquired exclusively with a view to subsequent disposal, in the near future or for development and resale.
b. owner-occupied property (see IAS 16 and IFRS 16), including (among other things) property held for future use as owner-occupied property, property held for future development and subsequent use as owner-occupied property, property occupied by employees (whether or not the employees pay rent at market rates) and owner-occupied property awaiting disposal.
c. property, that is leased to another entity under a finance lease.
Common Journal Entries Transactions
Ok, you now have a perspective of the difference between IAS 16 and IAS 40. However, from a reality perspective, PP&E under IAS 16 will in all likelihood be very common journal entries transactions. On the other hand, IAS 40, might and only might become transactions every now and then.
Now, who says accountants can’t have fun!! Accounting for IAS 40 in 40 seconds Ready? Go!
The accounting for IAS 40 Investment Property is identical to that of IAS 16 (Property, Plant and Equipment),
that IAS 40 revaluations (both positive and negative) go to the income statement (not revaluation reserve)
there is no depreciation if revaluations are carried out every year.
(courtesy of IFRSbox and Professor Robin Joyce )
Any remaining seconds should be spent on learning the classifications and rules of IAS 40 Investment Property.
Therefore, as you can see, the criterion for investment property must include (rental) income and or capital appreciation, neither present with PP&E.
Relative to the IASB (definitions) para 20-21 and 30, measurement at and after recognition:
Measurement at recognition
20 An owned investment property shall be measured initially at its cost.
Transaction costs shall be included in the initial measurement.
21 The cost of a purchased investment property comprises its purchase price and any directly attributable expenditure. Directly attributable expenditure includes, for example, professional fees for legal services, property transfer taxes and other transaction costs.
Measurement after recognition (Accounting policy)
30 With the exception noted in paragraph 32A, an entity shall choose as its accounting policy either the fair value model in paragraphs 33-55 or the cost model in paragraph 56 and shall apply that policy to all of its investment property.
Remember above (40 seconds): there is no depreciation if revaluations are carried out every year.
Courtesy of IFRSbox
Transfers from and to investment property
When we speak about transfers related to investment property, we mean the change of classification, for example, you classify a building previously held as property, plant and equipment under IAS 16 to investment property under IAS 40.
The transfers are possible, but only when there’s a change in use or asset’s purpose, for example (refer to IAS 40.57):
- You start renting out the property that you previously used as your headquarters (transfer to investment property from owner-occupied property under IAS 16)
- You stop renting out the building and start using it for yourself
To be continued (note that any references to ‘fair-value’ triggers IFRS 13 Fair value measurement, later)
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Lucubrate Magazine, Issue 39, September 14th, 2018
(Illustration on top: Pixaby)
(Categories: Accounting, Magazine)
Photo: Scott Webb