Assets accounted for as investment property. Investment property in IFRS and Russian practice
IAS 40 Investment Property applies in connection with the recognition, valuation and disclosure of investment property that is held for rental income or for capital appreciation, or both.
What is investment property?
Investment property is property held by the owner or lessee under a finance lease to obtain rent payments, capital gains, or both, but not for:
- use in the production or supply of goods or services, or for administrative purposes;
- sales during ordinary activities.
Investment property is held to earn rental income or capital appreciation, or both. Therefore, the cash flows generated by investment property are generally unrelated to the other assets of a lending institution.
When classifying a tangible 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 the property does not allow it to be recognized as an investment property.
Example
The bank decided to purchase the building to rent it out. During the execution of all documents and state registration sales contracts non-residential premises A potential tenant could not be found. In this regard, this 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 item in accordance with IAS 16 Property, Plant and Equipment. After the building was rented out, this object in financial reporting may be recognized as investment property.
What properties can be classified as investment property?
- Land held to receive long-term capital gains and not to be sold in the short term in the ordinary course of business.
- Land, the further use of which is currently not determined. If credit organisation has not decided whether it will use the land as owner-occupied property or for short-term disposal in the ordinary course of business, the land is considered to be held for capital appreciation.
- A building owned by a credit institution or held by a credit 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.
What objects cannot be classified as investment property?
- Property held for sale in the ordinary course of business or under construction or development with a view to sale, such as property acquired solely for resale in the near future or for development and resale.
- Real estate under construction or development on behalf of third parties.
- Owner-occupied property occupied by employees of the entity, whether or not they pay market rent, and owner-occupied property held for disposal.
- Property under construction or development for the purpose of further use as investment property. A property transferred to another organization under a financial lease agreement.
- In some cases, part of the facility may be used for rent or capital appreciation, and the other part for the production or supply of goods or services, or for administrative purposes. If such parts of the object can be sold independently of each other (or independently from each other given for financial lease), the credit institution keeps separate records of them, that is, it accounts for these parts of the object separately. If parts of the property cannot be sold separately, the property is considered investment property only if only a minor part of the property is intended for the production or supply of goods or services, or for administrative purposes.
Example
The bank owns the building. 25% of the area of the building is occupied by an additional office of the bank, while the other part of the building (75%) is leased by the bank to third parties. In this case, in accordance with the professional judgment of a specialist of a credit institution, this building should be recognized as an object of investment property, since the share of the area used by a credit institution in its own activities, is insignificant. If the shares of the area of the building occupied by the bank and 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 a property is eligible for investment property status requires professional judgment. The credit institution independently develops criteria for the consistent use of such professional judgment. In accordance with the requirements of international standards on disclosure of information, a credit institution is obliged to disclose such criteria in cases where the classification of an object is difficult.
Sometimes a lending institution owns real estate that is leased and occupied by a parent institution or another subsidiary. Such property cannot be classified as an investment property in the financial statements because, from the perspective of the group, it is owner-occupied. 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 reports this property as part of 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 the building will be treated as an item of property, plant and equipment.
The most interesting thing is that the operating lease of a credit institution can also be recognized as an object of investment property. In practice, this situation often occurs. For example, in accordance with the lease agreement, the bank has the right to sublease the leased premises to third parties. So, the premises leased by the bank in the IFRS financial statements will be recognized as investment property.
When can investment property be recognized as an asset?
Investment property may only be recognized as an asset if:
- 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 can be reliably assessed.
In accordance with this recognition principle, an institution measures all of its investment property costs at the time they are incurred. These costs include both those initially incurred in connection with the acquisition of investment property and those incurred subsequently in connection with its addition, partial replacement or maintenance.
According to the recognition principle, a credit institution does not recognize in the carrying amount of an investment property the costs of day-to-day maintenance of such property. Instead, such costs are recognized in profit or loss as incurred. The cost of day-to-day maintenance consists primarily of labor and consumables, and may also include the cost of acquiring spare parts. Such expenses are recognized as expenses for the renovation of the property and recognized in the income statement as incurred.
Therefore, the specialist needs to delimit the costs associated with an investment property. Some costs, such as consulting fees for the acquisition of real estate, will be classified as “direct” transaction costs and included in the cost of the investment property, while costs associated with maintaining the property in good condition will be treated as maintenance costs and recognized in profit or loss.
Some parts of the funds may be included in the value of investment property as a result of their replacement. For example, the interior walls of a building may be replaced. It should be noted that the difference between the cost of the new and the old structural part will be taken into account in the cost of the investment property.
At what cost is the initial appraisal of investment property made?
Investment property must be initially valued at its cost. Transaction costs must be included in the initial estimate.
The cost of investment property acquired 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 is not increased due to the following conditions:
- start-up costs (unless they are necessary to bring the property to a condition suitable for its use in accordance with the intentions of management);
- operating losses before reaching the planned level of rental of premises;
- excess 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 RUB 15 million. To bring the building into proper condition, the bank carried out 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 the building increases only after the reconstruction costs are actually incurred.
If the seller grants an installment payment for an investment property, then its value is recognized in the buyer's accounting at a price that does not include interest for the installment plan. The difference between the total amount paid and the agreed price is recognized over the installment period as interest expense.
The cost of a right in real estate transferred under a lease and classified as investment property must be recognized at the lower of the fair value of the property and the present value of the minimum lease payments. The amount equivalent to the established valuation of the object is to be recognized as a liability.
One or more investment properties 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 investment property is measured at fair value unless:
- the exchange operation has no commercial content;
- the fair value of both the asset received and the asset given up cannot be measured reliably. The acquired asset is measured in this manner, even if the entity cannot immediately derecognise the transferred asset. If the acquired asset is not measured at fair value, its cost is measured at the carrying amount of the asset given up.
How to value an investment property after its recognition?
The method of accounting must be determined by the credit institution independently and fixed in accounting policy.
A financial institution must choose either the fair value model or the cost model as its accounting policy and must apply that policy to all of its investment property.
Fair value is the amount for which an asset could be exchanged in a transaction between knowledgeable, willing and independent parties.
The definition of fair value involves the simultaneous transfer of the property at the sale and its payment by the buyer. When a property right held by a lessee under an operating lease is classified as investment property, the fair value model should be applied. Gains or losses on changes in the fair value of investment properties must be recognized in profit or loss in the period in which they arise. This accounting procedure is fundamentally different from the alternative accounting for fixed assets at a revalued amount (IFRS 16): according to IFRS 16, such differences are first recognized in the capital accounts of the “Revaluation Fund”, bypassing the income statement.
Example
The book value of the building is 10 million rubles. As a result of the revaluation of the building, which is an object of investment property, the value of the building increased by 6 million rubles. This transaction should be reflected in the financial statements as follows:
Dt"Investment Property"
ct"Other operating income»- 6 million rubles.
Fair value is not an estimated price that is too high or too low as a result of special conditions or circumstances, such as atypical financing arrangements, sale and leaseback transactions, concessional repayment terms or discounts offered by any party to the sale. The market price, determined by the principle "according to highest price, within a reasonable time”, should not take into account the condition of a particular owner, which could reduce the price of the transaction (for example, due to an urgent need for cash or due to legal and tax restrictions imposed on the owner). On the contrary, it is calculated for the 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 without taking into account the costs associated with its sale.
The fair value of investment property should reflect market conditions on the reporting date. As market conditions may change, the amount presented as fair value may not be accurate or incorrect when measured at a different date. In addition, the determination of fair value involves the exchange of assets and the settlement of the sale and purchase agreement at the same time without any change in price that could occur in a transaction between knowledgeable, willing to make such a transaction, independent of each other 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 that are located in the same area, are in the same condition and are subject to similar lease terms and other agreements. The objective of the organization is to identify any differences in the nature, location and condition of the property in question, as well as in the terms and conditions relating to its leases and other agreements.
In the absence of valid prices in an active market, a financial institution considers information from various sources, such as:
- current prices in an active market for other types of real estate, in a different condition or in a different territory (or real estate that is subject to different terms of leases or other agreements), adjusted for these differences;
- the most recent prices in less active markets, adjusted for any changes economic conditions after the date of conclusion of transactions at these prices;
- discounted cash flows based on reliable estimates of future cash flows based on conditions existing agreements leases and other contracts, as well as (when possible) data from external sources, such as current rental rates for similar properties in the same area. discount factors are used that reflect the degree of uncertainty assessed by the market regarding the amount and timing of cash flows.
In some cases, different sources of information may lead 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.
At the same time, IAS 40 does not insist on the involvement of an independent appraiser to determine the fair value. A lender is encouraged, but not required, to determine the fair value of investment property based on the valuation of an independent appraiser who has a recognized and relevant professional qualification and recent experience in valuing investment property of a similar category and located in the same area.
Please note that “recognised and relevant professional qualifications” refers to the qualifications of internationally recognized appraisal companies, whose reputation has been confirmed by many years of successful work in the market.
In determining the fair value of investment property, an institution does not recount assets or liabilities recognized as separate assets or liabilities.
Example
Equipment, such as elevators and air conditioning systems, often form an integral part of the building and are therefore generally included in the fair value of investment properties and are not separately recognized as property, plant and equipment.
If a furnished office is rented out, the fair value of the office would normally include the fair value of the furniture as the rent is taken for the furnished office. When the cost of furniture is included in the fair value of investment property, an entity does not recognize the furniture as a separate asset.
The fair value of investment property does not reflect future capital expenditure on property to renovate or improve it, nor the future economic benefits from such investment.
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 where, at the time of acquisition of the investment property, it becomes clear that the credit institution will not be able to reliably determine the fair value of the investment property. This occurs only when comparable market transactions occur infrequently and alternative fair value measurements are not available. In such cases, the institution must value the investment property using the cost model in accordance with IAS 16 Property, Plant and Equipment, and the institution must apply the chosen method of accounting over the life of the asset, even when the cost can be measured reliably. The procedure for valuation of a specific asset is chosen at its first recognition and cannot be changed. Similarly, if an asset was initially measured at fair value and subsequently it becomes impossible to determine the fair value, then the institution continues to apply the fair value method.
Where a credit institution is forced to measure investment property at cost, it continues to measure all other investment property at fair value. Although an institution may 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 assessed as an investment property for the purposes of preparing IFRS financial statements. Investment property is accounted for at fair value. The Bank decided to purchase a new building with a view to its subsequent lease. The building being 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. However, the accounting for the other investment property remains the same.
If an institution previously carried an investment property at fair value, it must continue to carry that property at fair value until disposal, even if there is a reduction in the number of comparable transactions in the market and available market price information.
After initial recognition, an institution that chooses the cost model must measure all of its investment property in accordance with the requirements of the international standard IFRS 16 for this model, that is, at cost less any accumulated depreciation and any accumulated impairment losses.
Is it possible to reclassify an object into the category of investment property?
Reclassification of an object into the category of investment property or exclusion from this category is permitted only when 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 owner-occupied property;
- development for sale begins - the property is reclassified from investment property to reserves;
- the period during which the owner occupies the property ends - the property is reclassified from owner-occupied property to 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 ends - the object is transferred from the category of real estate under construction or development to the category of investment property.
In accordance with IAS 40, a financial institution is only allowed to reclassify an item from investment property to inventory if there is a change in its use, as evidenced by the beginning of the development of the item for the purpose of selling it. If a credit institution decides to sell an investment property without developing it, it continues to record this property as investment property until it is derecognised (written off the balance sheet) and does not include it in inventories. Similarly, if a financial institution begins refurbishment of an existing investment property for further use as investment property, that property retains the status of investment property and is not reclassified to owner-occupied property during the new development stage.
When an investment property carried at fair value is reclassified to owner-occupied property or inventories, the cost of the property for subsequent accounting shall be taken to be its fair value at the date of the change in use.
Until the time when owner-occupied property qualifies as investment property carried at fair value, the credit institution depreciates the property and recognizes any impairment loss. The Bank takes into account any difference arising on that date between book value property and its fair value, as well as revaluation in accordance with the international standard IFRS 16.
Therefore, any decrease in the carrying amount of a property is charged to profit or loss. The amount of reduction within the limits of the increase in the value of this object from the revaluation is written off to the account of the increase in the value of real estate from the revaluation.
Any increase in the carrying amount of the property is accounted for as follows:
- if the increase reverses a previous impairment loss on that property, the increase is taken to profit or loss. The amount of the increase charged to profit or loss for the period shall not exceed the amount necessary to restore the carrying amount to the amount that would have been determined (net of depreciation) if no impairment loss had been recognized for the item;
- the remainder of the increase in book value is credited directly to the equity account as a revaluation surplus. Upon subsequent disposal of an investment property, any revaluation surplus included in equity may be transferred to retained earnings. The transfer of any revaluation surplus to retained earnings is not recognized in profit or loss.
To reclassify an item from inventory to investment property to be carried at fair value, any difference between the item's fair value at that date and its previous carrying amount must be recognized in profit or loss.
The accounting treatment for reclassifying an item from inventory to investment property, which will be carried at fair value, follows the accounting treatment for the sale of inventories.
When does investment property get derecognised?
An investment property is derecognised (i.e., derecognised) on disposal or final decommissioning when the associated economic benefits are no longer expected. Investment property may be disposed of by selling it or transferring it to a finance lease.
Gains or losses arising from the disposal or disposal of an investment property shall be determined as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized in profit or loss in the period in which such disposal or disposal occurs.
The consideration receivable on disposal of investment property is initially recognized at fair value. Where payment for an investment property is deferred, the consideration received is initially recognized at the property's price equivalent to Money. The difference between the nominal amount of the consideration and the monetary equivalent of the price is recognized as interest revenue in accordance with the international standard IFRS 18, using the method effective rate 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 or compensation from third parties, and any subsequent acquisition or construction of replacement assets are separate economic events and should be accounted for separately.
IAS 40 prescribes the main requirements for disclosure of information about investment property in international reporting. According to the standard, a credit institution must disclose:
- what method of accounting it uses - at fair value or at actual cost;
- if it uses the fair value model, whether it classifies and accounts for an operating lease property interest as investment property, and if so, under what conditions;
- if classification is difficult, what criteria does the entity use to distinguish between investment property and funds held for own use and investment property and funds held for sale in the ordinary course of business;
- the methods and assumptions used to determine fair value, including information about whether fair value was determined based on confirmed market information or taking into account other factors determined by the nature of ownership or the absence of comparable market information;
- whether the fair value of the investment property was determined as a result of a valuation by an independent appraiser with an appropriate professional classification and fresh experience in valuing investment property. If no such assessment has been made, this fact shall also be disclosed;
- amounts recognized in the income statement.
S.B. Tinkelman
CJSC ACG RBS, Deputy Director of the Audit Services Department
on Financial Institutions
E.S. Kazakevich
CJSC ACG RBS, Senior Auditor of the Audit Department of Credit Institutions
Department of audit services
In modern Russian accounting and reporting, the role of International Financial Reporting Standards (IFRS) is increasing. Strategy for convergence of Russian standards accounting(RAS) with IFRS is carried out by the Government Russian Federation already for many years.
Despite the strategy of convergence with IFRS, the principles set out in Russian accounting standards cannot be called fully compliant with IFRS, and at present there are still a significant number of differences in definitions and approaches to the assessment and reflection of items in financial (accounting) statements.
Here we compare the main requirements for the accounting and reporting of transactions with investment property in accordance with IFRS and RAS and possible adjustments that may be required when transforming reporting in relation to investment property companies.
Definition of investment property
investment property- this 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.
IAS 40 Investment Property is devoted to accounting for investment property. Investment property is property that must meet all of the following four criteria:
1) types of real estate: land or building; or part of a building; or both; 2) the real estate is in the possession of: the owner; or a lessee under a financial lease agreement (leasing agreement); 3) purposes of owning real estate: receiving rental payments; or capital appreciation; or both; 4) the purposes of possession are not: use in the production or supply of goods, provision of services, for administrative purposes; sale during normal economic activity.
IN IAS 40 examples of investment properties are presented:
- land held for capital appreciation, but not for sale in the short term;
- land, the further use of which is currently not determined;
- a building owned by an enterprise (owner or lessee under a leasing agreement) and provided for operating lease (but not for financial lease) in whole or in part;
- a building not currently occupied, but intended to be rented in whole or in part, and not for sale;
- real estate under construction or development (but not on behalf of third parties), for the purpose of further use as investment property, and not for sale;
- Property held by a lessee under an operating lease may only be classified and accounted for as investment property if such property otherwise meets the definition of investment property.
There is no analogue of IFRS 40 "Investment property" in Russian legislation yet. The closest object of accounting in Russian practice are profitable investment in material values
accounted for on account 03 "Profitable investments in material assets".
In accordance with the Chart of Accounts profitable investments in material assets are the investments of the organization in part of the property, buildings, premises, equipment and other valuables 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).
Rice. 1 The ratio of investment property (IFRS 40) and profitable investments in tangible assets (account 03 Chart of accounts)
Region A- these are investment properties in accordance with IAS 40, but not income-generating investments in tangible assets in accordance with Russian legislation property (land or a building, or part of a building, or both) held (by the owner or lessee under a finance lease) for the purpose of capital gains. Such objects are accounted for under Russian law on account 01 "Fixed assets".
Region B- these are objects that are both investment property in accordance with IFRS 40 and profitable investments in tangible assets according to Russian accounting: land and buildings held by the organization in order to receive rental payments, i.e. provided for operating lease. These real estate objects under the Russian legislation are reflected on account 03 "Profitable investments in material values".
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 items of property, plant and equipment, apart from buildings and land plots
, as well as other values that have a material form provided by the organization for temporary use in order to generate income. The considered material assets in accordance with the Chart of Accounts are accounted for on account 03 “Profitable investments in material assets”.
Accounting for profitable investments in material assets in Russian accounting is carried out in accordance with PBU 6/01 "Accounting for fixed assets", and generally corresponds to the accounting model for original cost provided by IFRS 40. At the same time, if a Russian organization has exercised the right to revaluate income investments in tangible assets, then this option will not comply with the fair value model proposed by IFRS 40. It is important to note, in contrast to the provisions of international standards land in accordance with Russian legislation are not subject to revaluation (clause 43 of the Guidelines for accounting of fixed assets).
IFRS distinguishes between property acquired for investment activity, and investment property. A common situation: in the cash flow statement, expenses appear as part of investing activities, and in the balance sheet they form the cost of a conventional fixed asset.
In addition, Russian accounting uses such a term as " long term investment"in the field of accounting for construction and investment activities. In accordance with the Regulations on accounting for long-term investments, approved by the Letter of the Ministry of Finance of Russia dated 12/30/1993 N 160 (hereinafter - Regulation N 160), long-term investments are understood as the costs of creating, increasing the size, as well as acquisition of non-current non-current assets (more than one year) not held for sale, except for long-term financial investments to state securities, securities and authorized capitals other enterprises.
In accordance with Regulation N 160, long-term investments are associated with the implementation capital construction in the form of new construction, as well as reconstruction, expansion and technical re-equipment of existing enterprises and non-production facilities; acquisition of buildings, structures, equipment, Vehicle and other separate objects (or parts thereof) of fixed assets; acquisition of land plots and nature management facilities; acquisition and creation of intangible assets.
As you can see, only objects that are in the process of being manufactured or acquired fall under the definition of long-term investments in accordance with Regulation N 160.
As follows from the presented definitions, the concept of investment property under 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" under IAS 40 and "long-term investments" under Regulation N 160 can be formulated as follows:
- long-term investments are only objects that are in the process of being manufactured or acquired, while objects ready for operation 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, provision of services, or for administrative purposes.
In turn, there are significant differences between the definitions of "investment property" under IFRS and "profitable investments in material assets" under RAS:
- profitable investments in material assets can be any fixed assets, while only real estate objects are investment property;
- PBU 6/01, in contrast to IAS 40, does not specify such a purpose of owning property as an increase in the value of capital for profitable investments in material assets.
- IAS 40 requires the use of professional judgment to determine whether a property is an investment property. The enterprise develops criteria for determining investment property in accordance with the standard, which is especially important when the classification of an object is difficult. In RAS, in general, all definitions provide clearer criteria that do not involve the use of professional judgment.
Investment Property Accounting
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.
Under IAS 40, investment property must initially be measured at cost, including transaction costs. The actual cost of acquiring investment property includes the purchase price and all direct costs. Direct costs include, for example, professional legal fees, real estate transfer taxes and other transaction costs.
In general, the measurement of the initial cost of investment property under IFRS does not differ from the principles of measurement under RAS, however, there are some differences, the most significant of which are the following:
- when paying for investment property is deferred, the actual costs are determined as discounted value, the difference between this sum and the total amount payments are recognized as interest expense over the grace period;
- the cost of a share of real estate held by an enterprise under a lease and classified as investment property is determined in the same way as for a finance 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 by exchange, with some exceptions provided in IAS 40, its value is measured as fair value;
- as already mentioned, the initial cost under IFRS of investment objects received on lease does not always coincide with the initial cost under RAS due to differences in its definitions;
- when applying IFRS for the first time in accordance with IFRS 1 "First-time Adoption of International Financial Reporting Standards", an entity has the right to measure an investment property at fair value if it has chosen the cost accounting model.
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 measured at cost less accumulated depreciation and accumulated impairment losses.
In the course of doing business under IFRS, investment property may need to be reclassified. 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:
1) the beginning of the use of an object in production activities - the transfer of an object from investment property to fixed assets;
2) the beginning of preparation for sale - the transfer of an object from investment property to reserves;
3) the end of use in production activities - the transfer of an object from fixed assets to investment property;
4) commencement of operating lease - transfer of an object from reserves to investment property;
5) 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.
In RBU there is no practice of transferring fixed assets or objects long-term investments into tangible assets into assets held for sale (stocks), if the company decides to sell these objects. These objects will continue to be listed on Russian accounting accounts 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 to know the company's plans to sell those or other real estate objects.
Transformational Adjustments
Transformation entries upon transition to IFRS:
Upon transition to IFRS Russian organizations special attention should be paid 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. Application fair value models one of the few tools to increase retained earnings (net profit of the reporting period) of an organization compared to similar indicators under RAP, since prices for real estate (land and buildings) tend to rise.
In the case of the transformation of Russian financial statements into financial statements prepared in accordance with IFRS, the following are possible: transformation records related to the recognition of investment property:
Reclassification entries:
- transfer of property, plant and equipment to investment property (IFRS 40),
- transfer of income-generating investments in tangible assets to fixed assets (IFRS 16) or investment property (IFRS 40);
records related to the adjustment of methods of accounting 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);
records specifying dates beneficial use, depreciation methods, estimated residual value reflecting impairment losses under IAS 36 (if accounting policy accounting model is provided for at historical cost).
Possible adjustments that may be required in the transformation of reporting in relation to the company's investment property:
- Reclassification of investment property in accordance with IFRS from income-generating investments in tangible assets / fixed assets in accordance with RAS
- Reclassification of the cost of investment property under IFRS from inventory under RAS
- IFRS recognition of investment property held under a finance lease that meets the definition of investment property
- Reclassification of a property under construction to investment property
- Recognition of investment property held under an operating lease that meets the definition of investment property
- Transfer of investment property to property, plant and equipment
- Recalculation of the cost of investment property upon acquisition
- Bringing the cost of the investment property to its fair value upon receipt of the investment property by exchange
- Formation of the initial cost of investment property received under an operating or finance lease
- Recalculation of the value of investment property due to its overhaul
- Accrual of impairment loss on investment property when using the cost method
- Reversal of accrued depreciation on investment property measured at fair value
- Adjustment of accrued depreciation on investment property
- Adjustment in the value of investment property obtained through the transfer of property, plant and equipment to investment property
- Revaluation of investment property transferred from income-generating investments in tangible assets or property, plant and equipment (the result of the revaluation is attributed to Equity)
- Transfer of inventories to investment property
- Revaluation of investment property at fair value (result of revaluation is charged to profit/loss)
- Adjustment in the value of investment property received through transfer from non-current assets held for sale
- Reversal of transactions for the sale of investment property due to the fact that the risks and rewards of the asset being sold have not been transferred to the buyer
- Write-off of investment property transferred under a finance lease
- Write-off of investment property depreciated under IFRS (or vice versa).
Problems of transformation
Errors in reports prepared according to international standards are divided into three groups. Firstly, these are the shortcomings that were made in the preparation of reports on Russian standards. Secondly, during its transformation. And, finally, thirdly, errors that occur during the preparation of financial statements in accordance with IFRS. Errors that belong to the first and second groups can only appear if the company prepares IFRS statements by transformation. In the course of this process, statements prepared in accordance with Russian standards are adjusted in accordance with the requirements of IFRS. It is clear that if there are errors in the first one, most of them will “migrate” to reports compiled according to international standards. For the same companies that keep records in parallel according to IFRS and RAS, there will be no errors of this kind.
Errors in reporting prepared in accordance with IFRS, which are classified in the first group, can be corrected in two ways. The first is to change the initial data. It's about on indicators of reporting, which is compiled according to Russian standards. The second is to make additional adjustments that relate to the mistakes made. Choosing one or another method, firms primarily proceed from the number of detected shortcomings.
If there are, say, more than a hundred errors, then it is easier to form new reporting 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 IFRS reporting, which was prepared by the transformation method, auditors will compare the data of the transformation tables with the balance sheet and income 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 in the transformation process, then no one will require additional explanations.
During the transformation of reporting, the probability 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 complex of them is the reclassification of income, expenses, assets and liabilities. The fact is that there is a big risk that any assets or costs will not be reclassified. Or, even worse, they will be excluded from the group in which they were listed under RAS, and not included in the group where they should be in accordance with IFRS. Let's take an example.
Let's say a company has a building on its balance sheet that it rents out as an operating lease. According to the requirements of RAS, it must be considered as a fixed asset. And according to IFRS, it is an investment property. This means that when compiling IFRS statements, this property must be transferred from the Fixed Assets group to the Investment Property group each time. If a company does this without special computer programs, it is quite possible that errors will appear.
For example, accountants:
a) they forgot to transfer an object from the Fixed Assets group to the Investment Property group;
b) they removed it from the Fixed Assets group, but did not place it in the Investment Property group;
c) incorrectly reflected the value of the object in the Investment Property group, etc.
In order to reduce the number of errors both during the reclassification and at the entire transformation stage, 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 entered into them. It is also necessary to clearly spell out 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. Found deficiencies need to be corrected.
Conclusion
In Russian accounting and reporting, the role of IFRS is increasing.
When developing an accounting policy for 2012, it should be remembered that the difference in accounting models under IFRS and Russian rules will entail additional adjustments during the transformation, in particular in relation to the book value of the object, accumulated depreciation. In addition, adjustments may be related to the refinement of useful lives and the determination of impairment losses.
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Recognition, evaluation and disclosure of information about investment property governed by IAS 40 Investment Property. Investment property is property, such as land and buildings (may be part of a building), or both, held by a company to earn rental income and/or capital appreciation.
If part of the property is used to receive rent, and the other for the production of goods (works, services), then the company must account for them separately. However, if only a minor part is used for production, then the standard allows the item to be classified as investment property. Property leased by a parent or subsidiary is not investment property, as for a group of companies, it is owner-occupied property.
Investment property is recognized when it is probable that future economic benefits will flow and its cost can be measured reliably.
Initially, investment property is valued at actual purchase costs, which consists of the cost of the property and direct purchase costs. Subsequently, an entity must determine in its accounting policy whether it chooses to account for investment property at fair value or at cost. In this case, the selected accounting method should be applied to all investment properties.
The fair value of an item is the amount for which the item could be exchanged in a transaction between knowledgeable, willing and independent parties. Changes in fair value are recognized in profit or loss in the period in which they occur.
The cost accounting model assumes that investment property is accounted for at its acquisition cost less accumulated depreciation and accumulated impairment losses (if any), which is consistent with accounting for property, plant and equipment.
Termination of lease agreements and transfer of property to owner-occupied property;
The beginning of reconstruction for the purpose of sale, when transferred to stocks;
Commencement of an operating lease under a contract.
Investment property should be derecognised when no economic benefits are expected from the property. The disposal of an investment property occurs when it is sold or transferred to a financial lease.
Mandatory disclosures are: investment property accounting model, criteria for classifying investment property, the degree of valuation performed by an independent appraiser, the amount of rental income from investment property, direct operating expenses and cumulative change in fair value.
At present, the activities of companies associated with the acquisition or creation of real estate objects with a view to their subsequent transfer to operating leases have become widespread. At the same time, it is necessary to consider the issues of reflecting the said property in the financial statements, which are regulated by IAS 40 “Investment Property”.
Consider the following concepts applied in the course of IFRS implementation.
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 ownership or a financial lease (leasing) agreement and which is intended solely for the intended use by leasing and (or) receiving income from the increase in the cost of capital (increase in the value of property).
Owner-occupied property is property in the form of land plots and (or) buildings (parts of buildings - premises), which the organization disposes of on the basis of ownership or a financial lease (leasing) agreement and which is intended solely for the intended use in the production process and ( or) supply of products or for administrative purposes. This property must be reported in accordance with IFRS 16 Property, Plant and Equipment.
Fair value is the price of an asset in a transaction between knowledgeable parties who have the intention to enter into the specified transaction and are independent of each other.
Residual (book) value - the cost at which an asset is recognized in the financial statements ( balance sheet) less accumulated depreciation and impairment losses.
The conditions listed must be in place at the time the asset is initially recognized. However, an entity can obtain future economic benefits from ownership of investment property only when all the risks and rewards associated with ownership of this asset are transferred to it.
The value of a property is usually fairly easy to assess. It can be determined, for example, on the basis of the terms of the contract of sale.
Investment property is initially accounted for in IFRS under actual cost, which includes the acquisition cost itself, as well as other direct costs associated with the acquisition of the asset.
For the subsequent measurement of investment property in IFRS, an entity, in accordance with its accounting policy, chooses one of two possible accounting models:
- accounting at the initial acquisition cost (cost accounting model);
- fair value accounting (fair value model).
When such property is carried at fair value after reclassification, the value of inventories or property, plant and equipment (owner-occupied property) will be the fair value of the investment property at the date of change in use.
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 according to various grounds. Each type of this property has its own characteristics associated with its reflection in the financial statements of the organization. In order to be able to accurately reflect property transactions in IFRS, it is necessary:
- availability of reliable criteria for classifying the property of the organization;
- know and successfully apply the features of reporting operations with each type of property in the reporting.
The fundamental difference lies in the fact that when accounting for fixed assets at a revalued cost, the excess of the book value of an asset over the actual cost is an increase in the value of the property at revaluation and is not included in financial results(not reflected in the income statement). Under fair value accounting, all changes in fair value are recognized in the income statement. However, for investment property accounted for at fair value, the provisions of IAS 36 Impairment of Assets do not apply.
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 policy of the organization. An entity is required to apply the chosen accounting treatment to all of its investment property. A change in the chosen accounting method must be convincingly justified. Its change is possible only if it leads to more economically justified reporting.
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 indicators of subsidiaries and parent companies must 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.
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 investments in subsidiaries may be considered:
1. at actual cost;
2. by 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.
The share of investors in the profit (loss) of the associate is adjusted taking into account the assessment net assets associate at the acquisition date at fair value, with the investor's share of unrealized gains (losses) 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 stop using the method equity participation from the date of loss of 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, supply of goods, provision of services, or for administrative purposes.
Criteria for recognizing 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 additional expenses should be treated as an increase in the carrying amount of an investment property if it increases its yield. 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 should 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 reporting period
Investment property is disposed of by sale or financial lease.