 |
| Corporate Practice bd |
Accounting treatment of investment property-With Examples:
Investment property refers to real estate that is held to earn rental income or for capital appreciation, rather than for use in operations or for sale in the ordinary course of business. The accounting treatment of investment property is primarily guided by International Accounting Standard (IAS) 40, which provides specific guidance on recognition, measurement, and disclosure.
1. Recognition:
An investment property should be recognized as an asset when:
It is probable that the future economic benefits associated with the property will flow to the entity.
The cost of the investment property can be measured reliably.
2. Initial Measurement:
Investment properties are initially measured at cost. This includes:
Purchase price.
Directly attributable costs (e.g., legal fees, property transfer taxes, and other transaction costs).
Any costs incurred in bringing the property to the condition necessary for it to be capable of operating in the manner intended by management.
3. Subsequent Measurement:
Entities can choose between two models for subsequent measurement of investment property:
a. Cost Model:
The investment property is carried at cost less accumulated depreciation and any accumulated impairment losses.
Depreciation is based on the useful life of the property, usually following the straight-line method.
b. Fair Value Model:
The investment property is carried at fair value, with changes in fair value recognized in profit or loss for the period.
Fair value is determined based on market conditions, comparable sales, or other valuation techniques.
4. Depreciation:
If using the cost model, investment properties (except land, which is not depreciated) are depreciated over their useful lives. The useful life should reflect the expected period the property will generate economic benefits.
5. Impairment:
Investment properties are subject to impairment reviews:
If there are indications that the property may be impaired, the carrying amount should be compared to its recoverable amount (the higher of fair value less costs to sell and value in use).
If the carrying amount exceeds the recoverable amount, an impairment loss is recognized.
6. Transfers to and from Investment Property:
Transfers are made when there is a change in use of the property:
From Investment Property to Owner-Occupied Property: The property is reclassified at fair value at the date of transfer.
From Owner-Occupied Property to Investment Property: The property is reclassified at fair value, and any difference between the carrying amount and fair value is recognized in equity.
7. Disposals:
Upon disposal of an investment property, the difference between the sale proceeds and the carrying amount of the property is recognized in profit or loss.
8. Disclosure Requirements:
Entities must disclose:
The measurement basis used (cost or fair value).
The methods and significant assumptions applied in determining fair value.
The extent of rental income recognized and any related expenses.
Any restrictions on the reliability of the investment property or the remittance of income and proceeds from disposal.
The existence of any commitments to purchase, construct, or develop investment property or for repairs, maintenance, or enhancements.
9. Additional Considerations:
Leases: If the property is leased, the accounting for leases under IFRS 16 may also impact how the investment property is recognized and measured.
Investment Property under Construction: Properties that are being constructed for future use as investment property are also recognized as investment property and measured at cost.
Conclusion:
The accounting treatment of investment property involves careful consideration of recognition, measurement, and ongoing management to ensure that the financial statements accurately reflect the entity's financial position and performance. It is essential for entities to follow the relevant standards and provide adequate disclosures to inform users of the financial statements.