IAS 40 Investment property

Measurement after initial recognition – Cost model or Fair value model.

The entity must decide for one of the models for all investment property it holds. If Fair value model is applied, all changes in fair value are accounted for in Profit or loss for the period they arise. Under Fair value model, no depreciation is performed. If the fair value model is applied, the revaluation must be performed at each Balance sheet date.

If the entity decides for the Cost model, it measures all of its investment properties in accordance with IAS 16 Property, plant and equipment, i.e. no revaluation above the initial cost is performed and the entity normally depreciates the asset.

In many countries, no rules for investment property exist, which practically means that Fair value model is not allowed.

Example – Fair value model for Investment property in IFRS (land)An entity has 1,000 in cash and the same amount as the Share Capital in the Balance sheet. In the year 1, the entity acquired a piece of land as an investment. The cost of the land was 1,000 and it was paid in cash. In Country X, no rules for investment property exist.

In IFRS, the entity has decided to apply the Fair value model for all investment properties it holds.At the end of year 1, the fair value of the land was 1,100 and at the end of the year 2 the fair value of the land was 1,300.

Accounting entries year 1 (T accounts) – Country X

Cash Share Capital Property, plant and equipment OB 1,000 (1) 1,000 OB 1,000 (1) 1,000

(1) Purchase of the land

Translation 1st January, year 2 – Balance sheetCountry X Adjustment – investment

propertyIFRS

Land 1,000 100 1,100Total assets 1,000 1,100

Share Capital 1,000 1,000Retained earnings 100 100Total liabilities and equity 1,000 1,100

Accounting entries year 1 (T accounts) – Country X

Cash Share Capital Property, plant and equipment OB 0 OB 1,000 OB 1,000

There are no accounting entries in year 2 in Country X.

Translation 31st December, year 2 – Balance sheetCountry X Adjustment – investment

propertyIFRS

Land 1,000 300 1,300Total assets 1,000 1,300

Share Capital 1,000 1,000Retained earnings 100 100Profit or loss for the period 200 200Total liabilities and equity 1,000 1,300

Income statement for the year 2Country X Adjustment – investment

propertyIFRS

Revenue 0 0Expenses 0 0

Gain from the revaluation of investment property

200 200

Profit or loss for the period 0 200

Example – Fair value model for Investment property in IFRS (building)An entity has 1,000 in cash and the same amount as the Share Capital in the Balance sheet. In the year 1, the entity acquired a building as an investment. The cost of the building was 1,000 and it was paid in cash.In Country X, the entity estimated the useful life for 50 years and depreciated it using straight-line method (no residual value). The depreciation in Country X is a part of Administrative expenses in the Income statement. In Country X, no rules for investment property exist.

In IFRS, the entity has decided to apply the Fair value model for all investment properties it holds.At the end of year 1, the fair value of the building was 1,100 and at the end of the year 2 the fair value of the building was 1,300.

Accounting entries year 1 (T accounts) – Country X

Cash Share Capital Property, plant and equipment OB 1,000 (1) 1,000 OB 1,000 (1) 1,000

Accumulated depreciation Administrative expenses(2) 20 (2) 20

(1) Purchase of the building(2) Depreciation

Country XNet book value = Cost 1,000 minus depreciation 20 = 980

Translation 1st January, year 2 – Balance sheetCountry X Adjustment – investment

propertyIFRS

Building 980 120 1,100Total assets 980 1,100

Share Capital 1,000 1,000Retained earnings (20) 120 100Total liabilities and equity 980 1,100

Note: in the IFRS Balance sheet, the building must be recognised separately from Property, plant and equipment in the line item called Investment property.

Accounting entries year 2 (T accounts) – Country X

Cash Share Capital Property, plant and equipment OB 0 OB 1,000 OB 1,000

Accumulated depreciation Administrative expenses Retained earningsOB 20 (1) 20 OB 20(1) 20

Country XNet book value = Cost 1,000 minus 2 × depreciation 20 = 960

Translation 31st December, year 2 – Balance sheetCountry X Adjustment – investment

propertyIFRS

Building 960 340 1,300Total assets 960 1,300

Share Capital 1,000 1,000Retained earnings (20) 120 100Profit or loss for the period (20) 220 200Total liabilities and equity 960 1,300

Income statement for the year 2Country X Adjustment – investment

propertyIFRS

Revenue 0 0Administrative expenses (20) 20 0

Gain from the revaluation of investment property

200 200

Profit or loss for the period (20) 200

IFRS 5 Non-current assets held for sale and discontinued operations

IFRS 5 requires that long-term assets that are classified as held for sale (the intention of management is to sell them within one year) must be measured at the lower of their carrying amount and their fair value less cost to sell and the depreciation on such assets is ceased. Such assets are presented separately in the Balance sheet. In most countries, no rules for assets held for sale exist, what practically means that the assets are recognised together with property, plant and equipment and are depreciated up to the point of sale.

ExampleAn entity has 1,000 in cash and the same amount as the Share Capital in the Balance sheet. At the beginning of year 1 the entity acquired a production line for 1,000 paid in cash. The estimated useful life of the production line is 20 years, straight-line depreciation method; no residual value. The depreciation is included in Cost of goods sold in the Income statement. At the beginning of year 2, the management decided to sell the line within 12 months. Up to the end of year 2, the line was not sold, i.e. is still in the Balance sheet of the entity. Scenario 1Estimated fair value less cost to sell at the end of year 2 is 1,100.

Scenario 2Estimated fair value less cost to sell at the end of year 2 is 920.In Country X, no rules for Non-current assets held for sale exist.

Note: the example is based on assumption that all inventory produced on the production line were sold in the same accounting period.

Accounting entries year 1 (T accounts) – Country X

Cash Share Capital Property, plant and equipment OB 1,000 (1) 1,000 OB 1,000 (1) 1,000

Accumulated depreciation Cost of goods sold(2) 50 (2) 50

(1) Purchase of the production line(2) Depreciation

Translation 1st January, year 2 – Balance sheetCountry X Adjustment – no

adjustment necessaryIFRS

Machinery (line) 950 950Total assets 950 950

Share Capital 1,000 1,000Retained earnings (50) (50)Total liabilities and equity 950 950

Accounting entries year 2 (T accounts) – Country X

Cash Share Capital Property, plant and equipment OB 0 OB 1,000 OB 1,000

Accumulated depreciation Cost of goods sold Retained earningsOB 50 (1) 50 OB 50(1) 50

(1) Depreciation of the production line

Scenario 1Estimated fair value less cost to sell at the end of year 2 is 1,100 (what means that the production line will remain in IFRS Balance sheet in its carrying amount from previous year, i.e. cost 1,000 less depreciation just for year 1).

Translation 31st December, year 2 – Balance sheetCountry X Adjustment – removal of

IFRS depreciationIFRS

Machinery (line) 900 50 950Total assets 900 950

Share Capital 1,000 1,000Retained earnings (50) (50)Profit or loss for the period (50) 50 0Total liabilities and equity 900 950

Income statement for the year 2Country X Adjustment – removal of

IFRS depreciationIFRS

Revenue 0 0Cost of goods sold (50) 50 0

Profit or loss for the period (50) 0Note: In IFRS Balance sheet, production line must be recognised in the separate line called Assets held for sale in short-term assets.

Scenario 2Estimated fair value less cost to sell at the end of year 2 is 920.Accounting entries in Country X in years 1 and 2 are the same as in Scenario 1. Translation table for the Opening Balance sheet at 1st January year 2 is the same as in Scenario 1.

Translation 31st December, year 2 – Balance sheetCountry X Adjustment – removal of

IFRS depreciation and remeasurement to FV less

cost to sell

IFRS

Machinery (line) 900 20 920Total assets 900 920

Share Capital 1,000 1,000Retained earnings (50) (50)Profit or loss for the period (50) 20 (30)Total liabilities and equity 900 920

Income statement for the year 2Country X Adjustment – removal of

IFRS depreciation and remeasurement to FV less

cost to sell

IFRS

Revenue 0 0Cost of goods sold (50) 50 0

Loss from remeasurement (30) (30)Profit or loss for the period (50) (30)

Note: In IFRS Balance sheet, production line must be recognised in the separate line called Assets held for sale in short-term assets.

IAS 2 Inventory Cost formulas – Translation from LIFO to FIFO formula

Paragraph 25 of IAS 2 Inventories states:The cost of inventories shall be assigned by using the first-in, first-out (FIFO) or weighted average cost formula. An entity shall use the same cost formula for all inventories having a similar nature and use to the entity. For inventories with a different nature or use, different cost formulas may be justified.

The entity purchased merchandise of the same kind on credit in two deliveries: 1st delivery 100 pcs for 10 a piece2nd delivery 200 pcs for 12 a piece

Year 1Assume that in year 1 the entity sold 50 pieces for cash; 20 per a piece. In Country X, LIFO formula is allowed and the entity follows it. Thus, its expense (Cost of goods sold – COGS) is:LIFO: 50 × 12 (second delivery) = 600

Accounting entries year 1 (T accounts) – Country X

Inventory Trade payables Cash(1) 1,000 (3a) 600 (1) 1,000 (3b) 1,000(2) 2,400 (2) 2,400

COGS Revenue(3a) 600 (3b) 1,000

(1) Purchase of 1st delivery.(2) Purchase of 2nd delivery.(3) 50 pieces of merchandise sold.

In IFRS financial statements the entity uses FIFO formula; its Cost of goods sold is:FIFO: 50 × 10 (first delivery) = 500That means closing inventory is:LIFO (Country X): 2,800FIFO (IFRS): 2,900

Translation 1st January, year 2 – Opening Balance sheetCountry X Adjustment IFRS

Inventory 2,800 100 2,900Cash 1,000 1,000Total assets 3,800 3,900

Profit or loss 400 100 500Trade payables 3,400 3,400Total equity and liabilities 3,800 3,900

Year 2During year 2 the entity sold 100 pcs of merchandise for cash (20 per a piece).In Country X, the cost of goods sold (COGS) is: LIFO: 100 × 12 (second delivery) = 1,200

In IFRS, the cost of goods sold (COGS) is:FIFO: 50 × 10 (rest of first delivery) + 50 × 12(second delivery) = 1,100

Closing inventory is:LIFO (Country X) = 3,400 (amount purchased) less 600 COGS (year 1) less 1,200 COGS (year 2) = 1,600FIFO (IFRS) = 3,400 (amount purchased) less 500 COGS (year 1) less 1,100 COGS (year 2) = 1,800

Accounting entries year 2 (T accounts) – Country X

Inventory Trade payables CashOB 2,800 (1a) 1,200 OB 3,400 OB 1,000

(1b) 2,000

COGS Revenue Retained earnings(1a) 1,200 (1b) 2,000 OB 400

(1) 100 pieces of merchandise sold.

Translation 31st December, year 2 – Balance sheetCountry X Adjustment IFRS

Inventory 1,600 200 1,800Cash 3,000 3,000Total assets 4,600 4,800

Retained earnings 400 100 500Profit or loss 800 100 900Trade payables 3,400 3,400Total equity and liabilities 4,600 4,800

Income statement for the year 2Country X Adjustment IFRS

Revenue 2,000 2,000Cost of goods sold (1,200) 100 (1,100)

Profit for the period 800 900