Assets recorded as investment property. Investment property in IFRS and Russian practice
The IAS 40 Standard “Investment Property” is applied in connection with the recognition, measurement and disclosure of information on investment property, which is intended to profit from leasing it or to increase the cost of capital, or for both reasons.
What is investment property?
Investment property - property held by the owner or tenant under a finance lease in order to receive rental payments, capital gains, or both, but not for:
- use in the production or supply of goods or services, or for administrative purposes;
- sales in the ordinary course of business.
Investment property designed to receive rent or capital gains, or both. Therefore, cash flows generated by investment property are generally not related to other assets of a credit institution.
When classifying a material object as investment property, it is necessary to determine the purpose of its use and the type of income received by the owner from the use of this property. True, there are exceptions when the temporary functional use of property does not allow it to be recognized as an investment property.
Example
The bank decided to purchase the building for lease. During the execution of all documents and state registration sales contract non-residential premises potential tenant could not be found. In this regard, the building is temporarily used by the bank as an office. Based on the functional use, the building acquired by the bank should be accounted for as a tangible asset in accordance with IAS 16 “Fixed Assets”. After the building is rented out, this object in financial statements may be recognized as an investment property.
What objects can be classified as investment property?
- Land held for long-term capital gains, and not for short-term realization in the ordinary course of business.
- Land, the further use of which is currently not defined. If the credit institution has not made a decision whether it will use the land as property owned by the owner, or for sale in the short term in the ordinary course of business, then it is considered that this land is intended for capital growth.
- A building owned by a credit institution or held by a credit institution under a finance lease and leased under one or more operating leases.
- A building that is not currently occupied, but intended to be rented out under one or more operating lease agreements.
What objects can not be attributed to investment property?
- Real estate intended for sale in the ordinary course of business or in the process of construction or development for the purpose of sale, for example, real estate acquired exclusively for subsequent sale in the near future or for development and resale.
- Real estate under construction or development on behalf of third parties.
- The property occupied by the owner occupied by employees of the organization, regardless of whether they pay rent at market rates or not, as well as property occupied by the owner and intended for disposal.
- Real estate under construction or development for the purpose of further use as investment property. A property transferred to another organization under a finance lease.
- In some cases, part of the object can be used to receive rent or increase the cost of capital, and the other part can be used to produce or supply goods or services, or for administrative purposes. If such parts of an object can be sold independently of each other (or leased out independently), the credit institution maintains their separate accounting, that is, it takes into account the indicated parts of the object separately. If parts of an object cannot be sold separately, an object is considered investment real estate only if only a small part of this object is intended for the production or delivery of goods or services, or for administrative purposes.
Example
The bank owns the building by right of ownership. 25% of the building’s area is occupied by an additional bank office, while the other part of the building (75%) is leased by the bank to third parties. In this case, this building, in accordance with the professional judgment of a credit institution specialist, should be recognized as an investment property, since the share of the area used by the credit institution in its own activityis negligible. If the shares of the building occupied by the bank and the tenants are comparable or equal, then the building is accounted for as an item of property, plant and equipment, investment property is not recognized in this case.
Determining whether the property corresponds to the status of investment property requires professional judgment. A credit institution independently develops criteria for the consistent use of such professional judgment. In accordance with the requirements of international disclosure standards, a credit institution is required to disclose such criteria in cases where the classification of an object is difficult.
Sometimes a credit institution owns real estate that is rented and occupied by the parent organization or another subsidiary. Such real estate cannot be classified in the financial statements as investment, since from the position of the group, it is occupied by the owner. However, from the point of view of the organization that owns this property, it is an investment property, therefore, in its financial statements, the lessor reflects the specified property as part of the investment property.
Example
The bank is part of a large construction holding. One of the buildings was leased by the bank to its parent company. In the financial statements of the bank, this building is reflected as an investment property, in the consolidated financial statements construction holding This building will be accounted for as an item of property, plant and equipment.
The most interesting thing is that the operating lease of a credit institution can be recognized as an investment property. In practice, this situation is not uncommon. For example, in accordance with a lease agreement, the bank has the right to sublet the leased premises to third parties. So, the premises leased by the bank in the IFRS financial statements will be recognized as investment property.
In what cases can investment property be recognized as an asset?
Investment property may only be recognized as an asset when:
- there is a possibility of an influx into the organization of future economic benefits associated with this investment property;
- the value of this investment property is reliable.
In accordance with this recognition principle, a credit institution evaluates all of its investment property costs at the time it is incurred. These costs include both those that were incurred initially in connection with the acquisition of investment property, and those that were subsequently incurred in connection with its increment, partial replacement or maintenance.
According to the recognition principle, a credit institution does not recognize in the carrying amount of an investment property an expense for the daily maintenance of such property. Instead, such costs are recognized in profit or loss as incurred. The costs of day-to-day servicing mainly consist of labor and consumables, and may also include the costs of acquiring components. Such expenses are recognized as expenses for the repair of the property and are recognized in the income statement as incurred.
Therefore, the specialist needs to distinguish costs associated with the investment property. Some of the costs, say, payment of consulting services for the acquisition of real estate, will be classified as “direct” transaction costs and taken into account in the cost of the investment property, and the costs associated with maintaining the property in good condition will be considered as the cost of maintaining the property and recognized in profit or loss.
Some parts of the funds may be included in the value of the investment property as a result of their replacement. For example, the building may be replaced by internal walls. It should be noted that in the composition of the value of the investment property will be taken into account the difference between the value of the new and old structural parts.
What is the cost of the initial assessment of investment property?
An initial assessment of investment property should be made at its cost. The initial valuation must include transaction costs.
The cost of acquired investment property includes the purchase price and any direct costs. Direct costs include, for example, the cost of professional legal services, taxes and other transaction costs.
The cost of investment property does not increase due to the following conditions:
- start-up costs (except when they are necessary to bring the property into a condition suitable for use in accordance with the intentions of management);
- operating losses before reaching the planned level of rental of premises;
- excessive costs of raw materials, labor or other resources incurred in the construction or development of the property.
Example
The bank purchased the building at a market price of 15 million rubles. To bring the building into proper condition, the bank made a reconstruction worth 4 million rubles. Thus, the fair value of the building will be 19 million rubles. Please note that the fair value of a building increases only after the reconstruction costs are actually incurred.
If the seller provides installment payment for an investment property, its value is recognized in the buyer's account at a price that does not include interest on installments. The difference between the total amount of payments and the agreed price is recognized during the installment plan as interest expense.
The initial value of a right in real estate transferred under a lease agreement and classified as investment property is recognized at the lower of two values: the fair value of the property and the present value of the minimum lease payments. The amount equivalent to the established assessment of the property is recognized as a liability.
One or more investment property may be acquired in exchange for a non-monetary asset or assets, or a combination of monetary and non-monetary assets. The cost of such an investment property is measured at fair value, unless:
- the exchange operation does not have commercial content;
- the fair value of both received and transferred assets is not measurable. The acquired asset is measured in this way, even if the entity cannot immediately derecognize the transferred asset. If the acquired asset is not measured at fair value, its cost is determined by the carrying amount of the transferred asset.
How to evaluate an investment property after its recognition?
The accounting method should be determined by the credit institution independently and fixed in accounting policies.
A credit institution must choose either a fair value model or a cost model as its accounting policy and must apply this policy to all of its investment property.
Fair value is the amount for which an asset can be exchanged in a transaction between knowledgeable, willing to complete such a transaction and independent parties.
The determination of fair value involves the simultaneous transfer of the property upon sale and its payment by the buyer. When the right to real estate held by a lessee under an operating lease is classified as investment property, the fair value model should be applied. Profit or loss from changes in the fair value of investment property shall be charged to profit or loss for the period in which they arise. This accounting procedure differs fundamentally from the alternative procedure for accounting for fixed assets at revalued amounts (IFRS 16): according to IFRS 16, such differences are initially attributed to capital accounts of the Fixed Assets Revaluation Fund, bypassing the profit and loss account.
Example
The book value of the building is 10 million rubles. As a result of the revaluation of the building, which is the object of investment property, the value of the building increased by 6 million rubles. In the financial statements, this transaction should be reflected as follows:
Dt "Investment Property"
Ct "Other operating income"- 6 million rubles.
Fair value is not the estimated price that is arrears or underestimated as a result of special conditions or circumstances, such as atypical financing schemes, sale and leaseback transactions, preferential terms for reimbursement or discounts offered by any party related to the sale. The market price, determined by the principle “at the highest price, within a reasonable time”, should not take into account the state of a particular owner, which could reduce the transaction price (for example, due to urgent need for cash or due to legal and tax restrictions imposed on the owner ) On the contrary, it is calculated for a seller who is interested in the maximum price, and not in the shortest terms of the transaction.
The fair value of an investment property is determined excluding the costs associated with its sale.
The fair value of investment property should reflect market conditions for reporting date. As market conditions may change, the amount presented as fair value may be inaccurate or incorrect when measured at a different date. In addition, the determination of fair value involves the exchange of assets and the execution of the contract of sale at the same time without any change in price that may occur during the transaction between knowledgeable, willing to complete such a transaction, independent of each other parties in the event when the exchange of assets and the execution of the contract occur at different times.
The best evidence of fair value is the current prices in an active market for similar properties located in the same territory, in the same condition and subject to similar rental conditions and other agreements. The organization’s task is to identify any differences in the nature, location and condition of the property, as well as in the conditions relating to its lease agreements and other agreements.
In the absence of current prices in an active market, a credit institution takes into account information from various sources, such as:
- current prices in the active market of other types of real estate, in a different state or in another territory (or real estate to which other terms of lease agreements or other agreements apply), adjusted for these differences;
- closest prices in less active markets, adjusted for any changes economic conditions after the date of conclusion of transactions at these prices;
- discounted forecasts cash flow based on reliable estimates of future cash flows, which are based on the terms of existing lease agreements and other contracts, as well as (when possible) data from external sources, such as current rental rates for similar real estate in the same territory. in this case, discount factors are used that reflect the degree of uncertainty estimated by the market regarding the size and timing of cash flows.
In some cases, different sources of information may give rise to different estimates of the fair value of investment property. The credit institution independently determines the reasons for these discrepancies in order to obtain the most reliable estimate of fair value.
However, IAS 40 does not insist on engaging an independent appraiser to determine fair value. It is encouraged, but not required, that the credit institution determines the fair value of investment property based on the valuation of an independent appraiser with recognized and relevant professional qualifications, as well as recent experience in valuing investment property of a similar category and located in the same territory.
We draw attention to the fact that “recognized and relevant professional qualifications” means the qualifications of internationally recognized valuation companies, whose reputation has been confirmed by many years of successful work in the market.
In determining the fair value of investment property, a credit institution does not remeasure assets or liabilities recognized as separate assets or liabilities.
Example
Equipment, such as elevators and air conditioning systems, often forms an integral part of a building, which is why it is usually included in the fair value of investment property and is not separately recognized in property, plant and equipment.
If a furnished office is leased, the fair value of the office usually includes the fair value of the furniture, as the rent is for the furnished office. When the cost of furniture is included in the fair value of investment property, an entity does not recognize furniture as a separate asset.
The fair value of investment property does not include any upcoming capital costs of the property with a view to updating or improving it, or future economic benefits from such costs.
There is an assumption that a credit institution can reliably measure the fair value of investment property on an ongoing basis. The exception is cases when, at the time of acquisition of an investment property, it becomes obvious that the credit institution will not be able to reliably determine the fair value of investment property. This only happens when comparable transactions in the market are infrequent and there are no alternative estimates of fair value. In such cases, the credit institution must evaluate this investment property using the cost model in accordance with IAS 16 “Fixed Assets”, and the credit institution must use the chosen accounting method throughout the life of the asset, even when the cost can be reliably determined. The valuation procedure for a particular asset is selected upon its first recognition and cannot be changed. Similarly, if an asset was initially measured at fair value, and subsequently its determination becomes impossible, the credit institution continues to use the fair value method.
In cases where a credit institution is forced to value an investment property at cost, it continues to reflect all other investment properties at fair value. Despite the fact that a credit institution can use the cost model for one investment property, all other properties must be accounted for using the fair value model.
Example
The credit institution owns a building that is evaluated in order to prepare financial statements of IFRS as an investment property. Accounting for investment property is carried at fair value. The Bank decided to purchase a new building with a view to its subsequent lease. The building acquired by the bank is located in Saratov region. At the time of acquisition of an active real estate market to determine the market price of the building - no. As a result, the bank decided to reflect the new investment property at cost. At the same time, accounting for another investment property remains the same.
If a credit institution previously reflected the object of investment property at fair value, it should continue to reflect this object at fair value until its disposal, even despite the reduction in the number of comparable transactions in the market and available information about market prices.
After initial recognition, a credit institution that has chosen a cost-accounting model should evaluate all of its investment property in accordance with the requirements of the international standard IFRS 16 to this model, that is, at cost less any accumulated depreciation and any accumulated impairment losses.
Is it possible to reclassify an object into an investment property category?
Reclassification of an object into the category of investment property or exclusion from this category is permitted only if the method of its use is changed, namely:
- the owner begins to occupy the property - the object is transferred from the category of investment property to the category of property occupied by the owner;
- development begins with a view to realization - the property is reclassified from investment property to the category of reserves;
- the period ends during which the owner occupies the property - the property is reclassified from the property occupied by the owner to the category of investment property;
- the property is leased to a third party under an operating lease - the property is transferred from inventory to investment property;
- the stage of construction or development of real estate is being completed - the object is being transferred from the category of real estate in the stage of construction or development to the category of investment real estate.
In accordance with IAS 40, a credit institution is allowed to reclassify an object from investment property to the category of reserves only when the method of its use changes, as evidenced by the beginning of the development of the object with a view to its implementation. If a credit institution decides to sell an investment property without developing it, it continues to reflect that property as part of investment property until it is derecognized (written off the balance sheet) and does not reflect it in inventories. Similarly, if a credit institution begins reconstruction of an existing investment property for further use as investment property, this property retains investment status and is not reclassified to property held by the owner during the new development stage.
When reclassifying an investment property, carried at fair value, to the category of property held by the owner or to the category of reserves, the fair value should be taken as the cost of this property for subsequent accounting as of the date the method of its use was changed.
Until the moment when the property occupied by the owner passes into the category of investment property carried at fair value, the credit institution depreciates this property and recognizes any loss from impairment. The Bank takes into account any difference between book value the property and its fair value, as well as revaluation in accordance with the international standard IAS 16.
Therefore, any decrease in the carrying amount of the property is included in profit or loss. The amount of the reduction within the increment in the value of this object from revaluation is debited to the account of the increase in the value of real estate from revaluation.
Any increase in the carrying amount of real estate is accounted for as follows:
- if the increase restores the previous loss from impairment of the property, this increase shall be recognized in profit or loss. The amount of the increase recognized in profit or loss for the period should not exceed the amount necessary to restore the carrying amount to a value that would have been determined (net of depreciation) if the impairment loss of this property had not been recognized;
- the remainder of the increase in the carrying amount is credited directly to the capital account as an increase in the value of real estate from revaluation. Upon the subsequent disposal of the investment property, the increase in the value of the property from revaluation included in the capital may be transferred to the retained earnings account. The transfer of value added from revaluation to retained earnings is not recognized in profit or loss.
In order to reclassify an object from the inventory category to the investment property category, which will be carried at fair value, any difference between the fair value of the property as of the indicated date and the previous value of its carrying value must be attributed to profit or loss.
The procedure for accounting for the reclassification of an object from the category of reserves to the category of investment property, which will be carried at fair value, corresponds to the procedure for accounting for the sale of reserves.
In what cases does derecognition of an investment property occur?
Recognition of an investment property is subject to termination (that is, the object is to be deducted from the balance sheet) upon retirement or final decommissioning, when it is no longer expected to receive the related economic benefits. The disposal of an investment property can be carried out through its sale or transfer to a financial lease.
Gains or losses arising from the elimination or disposal of the investment property shall be determined as the difference between the net proceeds from the disposal and the carrying amount of the asset and shall be recognized in profit or loss in the period in which such elimination or disposal occurs.
Reimbursement on disposal of an investment property is initially recognized at fair value. In the case of deferred payment for an investment property, the consideration received is initially recognized at the property price in equivalent money. The difference between the nominal consideration and the cash equivalent is recognized as percentage revenue in accordance with IAS 18 using the method effective bid percent.
Compensation provided by third parties in connection with the impairment, loss or transfer of investment property is recognized in profit or loss when it is receivable. Impairment or loss of investment property, related claims for compensation or payment of compensation by third parties, as well as any subsequent acquisition or construction of replacement assets are separate economic events and must be accounted for separately.
IAS 40 prescribes the basic requirements for the disclosure of information on investment property in international reporting. According to the standard, a credit institution must disclose:
- what accounting method does it use - at fair value or at actual cost;
- if it uses the fair value accounting method, it classifies and takes into account the property interest related to operating leases as investment property, and if so, under what conditions;
- if the classification is difficult, what criteria does the company use to distinguish between investment property and funds used for its own needs, as well as investment property and funds intended for sale in the ordinary course of business;
- the methods and assumptions used to determine fair value, including information on whether fair value was determined based on confirmed market information or other factors determined by the nature of the property or the absence of comparable market information;
- whether the fair value of investment property was determined as a result of the valuation by an independent appraiser with appropriate professional classification and fresh experience in valuing investment property. If such an assessment has not been carried out, this fact is also subject to disclosure;
- amounts recognized in the income statement.
S.B. Tinkelman
CJSC “ACG“ RBS ””, Deputy Director of the Department of Audit Services
on financial institutions
E.S. Kazakevich
CJSC “ACG“ RBS ””, Senior Auditor of the Audit Department of Credit Organizations
Department of Audit Services
In modern Russian accounting and reporting, the role of International Financial Reporting Standards (IFRS) is increasing. Rapprochement Strategy for Russian Standards accounting (RAS) with IFRS held by the Government Russian Federation for many years now.
Despite the strategy of convergence with IFRS, the principles set forth in Russian accounting standards cannot be called fully compliant with IFRS, and currently there are still a significant number of differences in the definitions and approaches to the assessment and reflection of articles of financial (accounting) statements.
Here we compare the basic requirements for recording transactions with investment property in accordance with IFRS and RAS and possible adjustments that may be required when transforming statements in relation to the investment property of the company.
Definition of investment property
Investment property - this is real estateowned by the organization (as an owner or lessee under a finance lease) for the purpose of renting or increasing its value, and not for the purpose of use in the production process and for administrative purposes, as well as for sale.
Accounting for investment property is dealt with in IAS 40, Investment Property. Investment property is real estate that must meet all four of the following criteria:
1) types of real estate: land or building; either part of the building; either one or the other; 2) the property is in the possession of: the owner; or a lessee under a finance lease (leasing agreement); 3) goals of real estate ownership: receiving rental payments; or capital gains; or both; 4) the goals of ownership are not: use in the production or supply of goods, the provision of services, for administrative purposes; sale in the ordinary course economic activity.
IN IAS 40 Examples of investment property are presented:
- land owned, to receive benefits from the increase in its value, but not for sale in the short term;
- land, the further use of which is currently not defined;
- a building owned by the enterprise (owner or lessee under a leasing agreement) and provided for operating leases (but not financial leases) in whole or in part;
- a building not currently occupied, but intended to be rented out in whole or in part, and not for sale;
- real estate that is under construction or development (but not on behalf of third parties), for the purpose of further use as investment property, and not for sale;
- real estate owned by the lessee under an operating lease agreement may be classified and recorded as investment property only provided that such property otherwise meets the definition of investment property.
There is no analogue of IFRS 40 “Investment Property” in Russian law yet. The closest object of accounting in Russian practice are profitable investments in material values
accounted for on account 03 “Profitable investments in tangible assets”.
In accordance with the chart of accounts profitable investment in material values are the organization’s investments in a part of property, buildings, premises, equipment and other valuables having a material form provided by the organization for temporary use (temporary possession and use) in order to generate income. Thus, there is a discrepancy between the concepts of investment property (IAS 40) and profitable investments in tangible assets (see Fig. 1).
Fig. 1 The ratio of investment property (IAS 40) and profitable investments in tangible assets (account 03 Chart of accounts)
Area A - these are investment property in accordance with IAS 40, but non-profitable investments in material assets in accordance with Russian law: real estate (land or building, or part of the building, or both), at the disposal of (the owner or tenant of finance lease) for the purpose of income from capital gains. Such objects are accounted for under Russian law on account 01 “Fixed assets”.
Region B - these are objects that are at the same time investment property in accordance with IFRS 40 and profitable investments in material assets according to Russian accounting: land and buildingsavailable to the organization for the purpose of receiving rental payments, i.e. provided in operating leases. These real estate objects according to Russian law are reflected in account 03 “Profitable investments in tangible assets”.
Region B - these are objects that are profitable investments in tangible assets, but are not investment property in the understanding of IFRS: equipment and other fixed assets, except buildings and land plots
, as well as other valuables in material form provided by the organization for temporary use in order to generate income. The material values \u200b\u200bunder consideration in accordance with the Chart of Accounts are accounted for on account 03 “Profitable investments in material values”.
The accounting of profitable investments in material assets in Russian accounting is carried out in accordance with PBU 6/01 "Accounting for fixed assets", and generally consistent with the accounting model for historical coststipulated by IFRS 40. Moreover, if a Russian organization used the right to revaluate income-bearing investments in tangible assets, then this option will not correspond to the fair value model proposed by IFRS 40. It is important to note, unlike the provisions of international standards land in accordance with Russian law are not subject to revaluation (paragraph 43 of the Methodological guidelines for the accounting of fixed assets).
In IFRS, you need to distinguish between property acquired for investment activities and investment property. A common situation: in the statement of cash flows, expenses are included in investment activities, and in the balance sheet they form the cost of ordinary fixed assets.
In addition, the term “ long term investments"in the field of construction and investment activity accounting. In accordance with the Regulation on the accounting of long-term investments, approved by the Letter of the Ministry of Finance of Russia dated 30.12.1993 N 160 (hereinafter - the Regulation N 160), long-term investments are understood as the costs of creation, increase in size, as well as the acquisition of non-current non-current assets (over one year) not intended for sale, except for long-term financial investments to state securities, securities and authorized capital other enterprises.
In accordance with Regulation No. 160, long-term investments are related to the implementation of capital construction in the form of new construction, as well as reconstruction, expansion and technical re-equipment of existing enterprises and non-production facilities; the acquisition of buildings, structures, equipment, vehicle and other individual objects (or parts thereof) of fixed assets; the acquisition of land and natural resources; acquisition and creation of intangible assets.
As you can see, the definition of long-term investments in accordance with Regulation No. 160 covers only objects that are under construction or acquisition.
As follows from the definitions presented, the concept of investment property in accordance with IFRS does not fully coincide with the definitions of long-term investments and profitable investments in tangible assets under RAS.
The main differences between the concepts of "investment property" according to IAS 40 and "long-term investment" under Regulation N 160 can be formulated as follows:
- long-term investments are only objects that are under construction or acquisition, while ready-to-use objects also fall under the concept of investment property;
- investment property can only be real estate, while long-term investment is a broader concept, and this includes any fixed assets and intangible assets;
- investment property, unlike long-term investments, cannot be intended for use in the production or supply of goods, the provision of services, for administrative purposes.
In turn, there are significant differences in the definitions of "investment property" according to IFRS and "profitable investments in tangible assets" according to RAS:
- any fixed assets can be profitable investments in material assets, while investment property is only real estate objects;
- PBU 6/01, unlike IAS 40, does not specify such a purpose of property ownership as an increase in the cost of capital for profitable investments in tangible assets.
- In IAS 40, professional judgment is required to determine whether an asset is in compliance with investment property status. The company develops criteria for determining investment property in accordance with the standard, which is especially important when the classification of the object is difficult. In RAS, basically all definitions provide clearer criteria that do not require the use of professional judgment.
Investment Property Accounting
Investment property is recognized as an asset only when it is probable that it will bring economic benefits in the future and that the value of investment property can be measured reliably.
In accordance with IAS 40, investment property should initially be measured at actual cost, including transaction costs. The actual costs of acquiring investment property include the purchase price and all direct costs. Direct costs include, for example, the cost of professional legal services, taxes on the transfer of real estate and other transaction costs.
In general, the measurement of the initial cost of investment property in accordance with IFRS does not differ from the measurement principles in accordance with RAS, however, there are some differences, the most significant of which will be the following:
- when deferring payment for investment property, actual costs are determined as present value, the difference between this amount and total amount Payment is recognized as interest expense over the deferral period;
- the initial value of the share of real estate owned by the enterprise under a lease agreement and classified as investment property is determined in the same way as for a financial lease, i.e. the asset should be recognized at the lower of the fair value of the property and the present value of the minimum lease payments, and the equivalent amount should be recognized as a liability;
- when acquiring investment property through exchange, with some exceptions presented in IAS 40, its value is measured as fair value;
- as already mentioned, the initial cost in accordance with IFRS of investment objects received in leasing does not always coincide with the initial cost in accordance with RAS due to differences in its definitions;
- when applying IFRS for the first time in accordance with IFRS 1 “First application of international financial reporting standards”, an enterprise has the right to evaluate an investment property at fair value if it has chosen a model for accounting for actual costs.
The subsequent assessment of the investment property is carried out in one of the ways:
Fair value accounting - after the initial recognition of objects in the amount of the costs of 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 of their occurrence.
Acquisition of actual acquisition costs - investment property is measured at cost, less accumulated depreciation and any accumulated impairment losses.
In the process of financial and economic activities under IFRS, reclassification of investment property may be required. The transfer of an object into investment property or withdrawal from its composition is carried out only if the method of its operation is changed, confirmed by the following events:
1) the beginning of the use of the facility in production activities - the transfer of the facility from investment property to fixed assets;
2) start of preparation for sale - transfer of an object from investment property to stocks;
3) end of use in production activities - transfer of an object from fixed assets to investment property;
4) start of operating lease - transfer of an object from stocks to investment property;
5) completion of construction or reconstruction - transfer of an object from property under construction or reconstruction (fixed assets) to investment property.
When a property, measured at fair value, is transferred from investment property to other types of assets, the property begins to be accounted for in new quality at fair value.
In RBU there is no practice of transferring fixed assets or objects long-term investments to tangible assets to assets held for sale (stocks), if the company decided to sell these objects. These objects will continue to be listed on the accounts of Russian accounting corresponding to their original purpose, such as, for example, accounts 01 or 03. Therefore, for the purposes of reporting under IFRS, it will be necessary to use not only accounting data, but also know the company's plans for the sale of those other real estate.
Transformational Adjustments
Transformational records during the transition to IFRS:
When switching to IFRS, Russian organizations should pay particular attention to the availability of objects that meet the criteria for recognition of real estate investments in accordance with IAS 40 “Real Estate Investments”. Application fair value models one of the few instruments to increase retained earnings (net profit of the reporting period) of an organization compared to similar indicators in Russian GAAP, since prices for real estate (land and buildings) tend to rise.
In case of transformation russian reporting The following statements are possible in financial statements prepared in accordance with IFRS transformational recordsrelated to the recognition of investment property:
Reclassification Records:
- transfer of fixed assets to investment property (IAS 40),
- transfer of objects of profitable investments in tangible assets to fixed assets (IFRS 16) or in investment property (IFRS 40);
records related to the reduction of methods of accounting and valuation of investment property to the fair value model or the historical cost model, including:
“Removal” of the results of the Russian revaluation, if revaluation was carried out in accordance with RAS 6/01 for investment property;
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 used);
time record beneficial use, depreciation methods, liquidation value measurement, reflecting impairment losses in accordance with IAS 36 (if accounting policies a cost accounting model is provided).
Possible adjustments that may be required during the transformation of statements regarding the company's investment property:
- Reclassification of property, which is investment property in accordance with IFRS, from the composition of profitable investments in tangible assets / fixed assets in accordance with RAS
- Reclassification of the value of property, which is investment property in accordance with IFRS, from stocks in accordance with RAS
- Recognition in IFRS of investment property obtained under a finance lease that meets the definition of investment property
- Reclassification of an object under construction as an investment property
- Recognition of investment property obtained under an operating lease that meets the definition of investment property
- Transfer of investment property to fixed assets
- Recalculation of the initial cost of investment property upon its acquisition
- Bringing the initial value of investment property to its fair value upon receipt of investment property by exchange
- Formation of the initial cost of investment property received under an operating or financial lease
- Recalculation of the value of investment property due to its overhaul
- Accrual of impairment loss on investment property when using the historical cost method
- Significantly accrued depreciation on investment property measured at fair value
- Adjustment of accrued depreciation for investment property
- Adjustment of the value of investment property obtained by transferring fixed assets to investment property
- Revaluation of investment property transferred from profitable investments to tangible assets or fixed assets (the result of the revaluation relates to “Capital”)
- Transfer of stocks to investment property
- Revaluation of investment property measured at fair value (revaluation result relates to profit / loss)
- Adjustment of the value of investment property obtained by transferring from non-current assets held for sale
- The operation for the sale of investment property is canceled due to the fact that the risks and benefits of the asset sold have not passed to the buyer
- Write-off of investment property transferred under a finance lease
- Write-off of investment property depreciated under IFRS (or vice versa).
Transformation problems
Errors in reporting compiled according to international standards are divided into three groups. Firstly, these are the shortcomings that were made in the preparation of reports according to Russian standards. Secondly, during its transformation. And finally, thirdly, errors that occur during the preparation of financial statements in accordance with IFRS. Errors that relate to the first and second groups may appear only if the company prepares IFRS financial statements by transformation. During this process, statements prepared in accordance with Russian standards are adjusted in accordance with IFRS. It is clear that if there are errors in the first, most of them will “migrate” to reports drawn up according to international standards. Those same companies that keep records in accordance with IFRS and RAS will not have errors of this kind.
Errors in financial statements prepared in accordance with IFRS, which are referred to the first group, can be corrected in two ways. The first is to change the initial data. It goes Reporting indicators compiled according to Russian standards. The second is to make additional adjustments that relate to the mistakes made. When choosing one or another method, firms primarily proceed from the number of discovered shortcomings.
If there are more than a hundred errors, let’s say, then it’s easier to generate new reports according to Russian standards. And if there are only two or three of them, of course, it is better to make additional adjustments. If you find errors in Russian accounting before submitting a report to tax office, it is better to use the first method. Let’s explain why. During the audit of the IFRS financial statements, which was prepared by the transformation method, the auditors will compare the data of the transformation tables with the balance sheet and the profit and loss statement submitted to the tax office. If they find discrepancies, then you will have to explain their reason. If the errors were corrected by adjustments during the transformation process, then no one will require additional explanations.
During the transformation of reporting, the likelihood of errors is very high. After all, this process includes several stages. Often it is carried out without special software, only with excel help. The most difficult of them is the reclassification of income, expenses, assets and liabilities. The fact is that there is a big risk that any assets or expenses will not be reclassified. Or, even worse, they will be excluded from the group in which they were listed in accordance with RAS, and not included in the group where they should be in accordance with IFRS. We give an example.
Suppose a company has a building on its balance sheet that it leases out on an operating lease. According to the requirements of RAS, it must be taken into account as a fixed asset. And according to IFRS it is an investment property. So, compiling financial statements in accordance with IFRS, each real estate object needs to be transferred each time from the Fixed Assets group to the Investment Property group. If the company does this without special computer programs, it is quite possible that errors will appear.
For example, accountants:
a) forgot to transfer the object from the group “Fixed assets” to the group “Investment property”;
b) removed him from the group “Fixed assets”, but did not place him in the group “Investment property”;
c) incorrectly reflected the value of the object in the group "Investment property", etc.
In order to reduce the number of errors both during reclassification and at the whole stage of transformation, it is necessary to minimize the influence of the “human factor”. To do this, it is enough to develop high-quality transformation tables and control the correctness of the information introduced into them. It is also necessary to clearly state all the necessary procedures for the transformation process for each of the types of assets, liabilities, income and expenses, and possibly for individual operations. For each company, these procedures will be different. They depend on the type of activity, organizational structure, business procedures used, the amount of information processed and many other criteria.
It is even better if the company uses special computer programs for the transformation of reporting. For example, transformation procedures can be set up in the same program in which the company keeps records according to Russian standards.
However, even despite all the measures taken to prevent errors, they cannot be completely avoided. Defects found need to be fixed.
Conclusion
In Russian accounting and reporting, the role of IFRS is increasing.
When developing the accounting policy for 2012, it should be remembered that the difference in accounting models in accordance with IFRS and Russian rules will entail additional adjustments during transformation, in particular with respect to the book value of the property and accumulated depreciation. In addition, adjustments may be made to clarify the useful lives and determination of impairment losses.
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Recognition, measurement and disclosure of information about investment property regulated by IAS 40 Investment Property. Investment property is property, such as land and buildings (may be part of the building), or both elements held together by the company in order to obtain rental income and / or income from an increase in their value.
If part of the property is used to obtain rent, and the other for the production of goods (works, services), then the company must account for them separately. However, if only a small part is used for production, then the standard allows the classification of an object as investment property. The property leased by the parent or subsidiary is not an investment property, because for a group of companies it is the property occupied by the owner.
Investment property is recognized when it is probable that future economic benefits will flow and its value can be reliably determined.
Initially, investment property is measured at actual purchase costs, which consist of the value of the property and direct purchase costs. Subsequently, the company must determine in the accounting policy the chosen method of accounting for investment property: either at fair value or at actual cost. In this case, the selected accounting method must be applied to all investment property.
The fair value of an asset is the amount for which the asset can be exchanged in a transaction between knowledgeable, interested and independent parties. Changes in fair value are recognized in the profit or loss account in the period in which they arise.
The model for accounting for actual costs involves accounting for investment property at its acquisition cost less accumulated depreciation and accumulated impairment losses (if any), which corresponds to accounting for fixed assets.
Termination of lease agreements and transfer of property to real estate held by the owner;
The beginning of reconstruction for the purpose of sale, when transferring to stocks;
Start of operating lease under the contract.
Recognition of investment property should be terminated when economic benefits are not expected from the property. The disposal of the investment property occurs when it is sold or transferred to a finance lease.
Mandatory disclosure of information is: an investment property accounting model, criteria for classifying investment property, the degree of valuation made by an independent appraiser, the amount of rental income from investment property, direct operating expenses and accumulated changes in fair value.
Currently, the widespread activity of companies related to the acquisition or creation of real estate with a view to their subsequent transfer to operating leases. In this case, it is necessary to consider the issues of reflection in the financial statements of the specified property, which are regulated by IAS 40 “Investment Property”.
Consider following conceptsapplied during the implementation of IFRS.
Investment property is property in the form of land plots and (or) buildings (part of buildings - premises), which the organization disposes of on the basis of a property right or a financial lease (leasing) agreement and which is intended exclusively for its intended use by transferring it to rent and (or) income from capital appreciation (increase in property value).
The property occupied by the owner is property in the form of land plots and (or) buildings (part of buildings - premises), which the organization disposes of on the basis of the right of ownership or contract of financial lease (leasing) and which is intended exclusively for its intended use in the production process and ( or) supply of products or for administrative purposes. This property shall be accounted for in accordance with IAS 16 Property, Plant and Equipment.
Fair value is the value of an asset as stated in a transaction between knowledgeable parties that intend to complete the transaction and are independent of each other.
Residual (book) value - the value at which the asset is recognized in the financial statements ( balance sheet) reduced by the amount of accumulated depreciation and impairment losses.
These conditions must exist at the time the asset is initially recognized. At the same time, an organization can receive future economic benefits from ownership of investment property only when all the risks and advantages associated with owning this asset are transferred to it.
The cost of property is usually fairly easy to estimate. It can be determined, for example, based on the terms of the contract of sale.
Investment property is initially recognized in IFRS. actual cost, which includes directly the acquisition cost, as well as other direct costs associated with the acquisition of the asset.
For the subsequent assessment of investment property in IFRS, the organization, in accordance with the accounting policy, chooses one of two possible accounting models:
- accounting at the initial cost of acquisition (cost model of accounting);
- fair value accounting (fair value model).
When accounting for the said property at fair value after its reclassification, the fair value of the investment property as of the date of changing the way it is used will act as the value of stocks or fixed assets (property held by the owner).
Organizations in the process of carrying out economic activities independently create, acquire from third parties or alienate in favor of third parties a variety of property that can be classified by various grounds. Each type of property indicated has its own characteristics associated with its reflection in the financial statements of the organization. In order to be able to reliably reflect property transactions in IFRS, it is necessary:
- availability of reliable criteria for the classification of property of the organization;
- know and successfully apply the features of reflection in reporting transactions with each type of property.
The fundamental difference is that when accounting for fixed assets at revalued amounts, excess of the asset's book value over actual value is an increase in the value of property under revaluation and does not apply to financial results (not reflected in the statement of profit and loss). According to the fair value method, all changes in fair value are reflected in the statement of profit or loss. At the same time, the provisions of IAS 36 “Impairment of Assets” do not apply to investment property, which is recorded at fair value.
The choice of accounting method (at residual or fair value) is carried out by the organization independently and on a voluntary basis. This decision should be reflected in the accounting policies of the organization. The organization is obliged to apply the chosen accounting method in relation to all objects of investment property that it has. Changing the chosen accounting method should be convincingly justified. Its change is possible only if it leads to a more economically sound reporting.
Investments in subsidiaries and associates.
Subsidiaries are defined as being controlled by another company called the parent. Control is such a combination of circumstances that creates the possibility of the parent company to determine the financial and economic policies of the subsidiary in order to obtain benefits from its activities.
Joint control - contractual distribution of control over economic activity company.
An associate is a company whose activities the investor can have a significant impact on and which, by definition, is not a subsidiary, nor a share in a joint venture.
All reporting indicators of subsidiaries and parent companies should be included and displayed in the group consolidated financial statements of the group, characterizing the results of the activities of the entire group for the reporting period.
The performance of a subsidiary is not included in the financial statements of the group if:
1. a subsidiary is acquired for the purpose of sale in the near future;
2. The subsidiary is in conditions that significantly and permanently limit its ability to transfer funds to the parent company.
In the financial statements of the parent company as an independent organization on legal entity Investments in subsidiaries may be accounted for:
1. at actual cost;
2. at market value;
3. by the method of participation.
The method of accounting for investments in equity participation consists in the fact that investments accepted for accounting at the actual costs of the investor, at the end of each reporting period, are adjusted for changes in the investor's share in the net assets of the company that is the object of investment.
The share of investors in the profit (loss) of the associate is adjusted based on the assessment net assets associate at the date of purchase at fair value, while the share of investors in unrealized profit (loss) on mutual operations is excluded. However, mutual operations and balances for calculations are not subject to exclusion, because The associate is not a member of the group.
The investor must cease to use the equity method from the moment of losing significant influence on the associate.
Investment property is real estate owned by the owner under a finance lease for the purpose of receiving rental payments or increasing the cost of capital or both together, but not intended for use in the production, supply of goods, provision of services or for administrative purposes, as well as not for sale in the ordinary course of business.
Property occupied by the owner - property owned by the owner, intended for use in production, delivery of goods, provision of services or for administrative purposes.
Asset recognition criteria:
1. the likelihood of future economic benefits;
2. The ability to assess investment property.
Initial recognition of investment property is carried at cost. Subsequent additional expenses should relate to an increase in the carrying amount of investment property if they increase its profitability. Other subsequent expenses are not capitalized, but should be written off to expenses of the period in which they arose.
Subsequent estimates of the value of investment property can be presented in the form of two approaches:
1. investment property after initial recognition should be measured at fair value, and its changes should be recognized in profit or loss;
2. at the initial acquisition cost at which investment property is recognized in the balance sheet net of accumulated depreciation and impairment losses.
Investment property may be excluded from investment property, or vice versa, some property may be included. Reclassification is carried out:
1. either at cost;
2. either at fair value.
The difference between the fair value at the date of transfer and its previous carrying amount should be recognized in profit or loss in reporting period
The disposal of investment property occurs through their sale or lease.