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

(1) Purchase of the land Translation 1st January, year 2 Balance sheet Country X Land Total assets Share Capital Retained earnings Total liabilities and equity 1,000 1,000 1,000 100 1,000

Adjustment investment property 100

IFRS 1,100 1,100 1,000 100 1,100

Accounting entries year 1 (T accounts) Country X Cash OB 0 Share Capital OB 1,000 Property, plant and equipment OB 1,000

There are no accounting entries in year 2 in Country X. Translation 31st December, year 2 Balance sheet Country X Adjustment investment property Land 1,000 300 Total assets 1,000 Share Capital Retained earnings Profit or loss for the period Total liabilities and equity Income statement for the year 2 Country X Revenue Expenses Gain from the revaluation of investment property Profit or loss for the period 0 0 200 0 Adjustment investment property IFRS 0 0 200 200 1,000 100 200 1,000

IFRS 1,300 1,300 1,000 100 200 1,300

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

Accumulated depreciation (2) 20

Administrative expenses (2) 20

(1) Purchase of the building (2) Depreciation

Country X Net book value = Cost 1,000 minus depreciation 20 = 980 Translation 1st January, year 2 Balance sheet Country X Building Total assets Share Capital Retained earnings Total liabilities and equity 980 980 1,000 (20) 980

Adjustment investment property 120

IFRS 1,100 1,100 1,000 100 1,100

120

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

Accumulated depreciation OB 20 (1) 20

(1)

Administrative expenses 20

OB

Retained earnings 20

Country X Net book value = Cost 1,000 minus 2 depreciation 20 = 960 Translation 31st December, year 2 Balance sheet Country X Adjustment investment property Building 960 340 Total assets 960 Share Capital Retained earnings Profit or loss for the period Total liabilities and equity 1,000 (20) (20) 960

IFRS 1,300 1,300 1,000 100 200 1,300

120 220

Income statement for the year 2 Country X Revenue Administrative expenses Gain from the revaluation of investment property Profit or loss for the period 0 (20) Adjustment investment property 20 200 (20) IFRS 0 0 200 200

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. Example An 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 1 Estimated fair value less cost to sell at the end of year 2 is 1,100. Scenario 2 Estimated 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 OB 1,000 (1) 1,000 Share Capital OB 1,000 Property, plant and equipment (1) 1,000

Accumulated depreciation (2) 50

(2)

Cost of goods sold 50

(1) Purchase of the production line (2) Depreciation Translation 1st January, year 2 Balance sheet Country X Machinery (line) Total assets Share Capital Retained earnings Total liabilities and equity 950 950 1,000 (50) 950

Adjustment no adjustment necessary

IFRS 950 950 1,000 (50) 950

Accounting entries year 2 (T accounts) Country X Cash OB 0 Share Capital OB 1,000 Property, plant and equipment OB 1,000

Accumulated depreciation OB 50 (1) 50

(1)

Cost of goods sold 50

OB

Retained earnings 50

(1) Depreciation of the production line Scenario 1 Estimated 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 sheet Country X Machinery (line) Total assets Share Capital Retained earnings Profit or loss for the period Total liabilities and equity Income statement for the year 2 Country X Revenue Cost of goods sold Profit or loss for the period 0 (50) (50) Adjustment removal of IFRS depreciation 50 IFRS 0 0 0 900 900 1,000 (50) (50) 900

Adjustment removal of IFRS depreciation 50

IFRS 950 950 1,000 (50) 0 950

50

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

Scenario 2 Estimated 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 sheet Country X

Machinery (line) Total assets Share Capital Retained earnings Profit or loss for the period Total liabilities and equity Income statement for the year 2

900 900 1,000 (50) (50) 900

Adjustment removal of IFRS depreciation and remeasurement to FV less cost to sell 20

IFRS

920 920 1,000 (50) (30) 920

20

Country X

Adjustment removal of IFRS depreciation and remeasurement to FV less cost to sell 50 (30)

IFRS

Revenue Cost of goods sold Loss from remeasurement Profit or loss for the period

0 (50)

0 0 (30) (30)

(50)

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 piece 2nd delivery 200 pcs for 12 a piece Year 1 Assume 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 (1) 1,000 (3a) 600 (2) 2,400 Trade payables (1) 1,000 (2) 2,400 Cash (3b) 1,000

COGS (3a) 600

Revenue (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) = 500 That means closing inventory is: LIFO (Country X): 2,800 FIFO (IFRS): 2,900

Translation 1st January, year 2 Opening Balance sheet

Country X Inventory Cash Total assets Profit or loss Trade payables Total equity and liabilities 2,800 1,000 3,800 400 3,400 3,800 Adjustment 100 IFRS 2,900 1,000 3,900 500 3,400 3,900

100

Year 2 During 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) = 1,600 FIFO (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 OB 2,800 (1a) 1,200 Trade payables OB 3,400 Cash OB 1,000 (1b) 2,000

COGS (1a) 1,200

Revenue (1b) 2,000

Retained earnings OB 400

(1) 100 pieces of merchandise sold. Translation 31st December, year 2 Balance sheet Country X Inventory 1,600 Cash 3,000 Total assets 4,600 Retained earnings Profit or loss Trade payables Total equity and liabilities Income statement for the year 2 Revenue Cost of goods sold Profit for the period Country X 2,000 (1,200) 800 Adjustment 100 IFRS 2,000 (1,100) 900 400 800 3,400 4,600

Adjustment 200

IFRS 1,800 3,000 4,800 500 900 3,400 4,800

100 100