Accounting for transfer of owner-occupied property under revaluation model to investment property
“We apply the revaluation model for accounting for our buildings in line with IAS 16 Property, plant and equipment.
Recently, we stopped using one of our buildings as our head office and we rented the building out to tenants.
Consequently, we transferred this building from owner-occupied property to the investment property.
However, we are not sure how to account for such a transfer when revaluation model was applied.
We revalued building to its fair value and recognized the difference in revaluation surplus within OCI (other comprehensive income).
What to do with this revaluation surplus? What are the journal entries?”
IFRS Answer 026
The standard IAS 40 Investment Property says that when you transfer an asset from owner-occupied property to the investment property, you need to apply IAS 16 until the date of transfer.
Here I assume that you want to use the fair value model for accounting for your investment property, not the cost model.
Well, it would not make much sense to apply revaluation model for your property, plant and equipment and then cost model for your investment property.
If you want to refresh your knowledge about different models for long-term assets (cost, fair value, revaluation), please check out this article.
So let’s stick to the transfer and accounting treatment from revaluation model under IAS 16 to fair value model under IAS 40.
So, let me now describe the process and give you some short illustration.
To make it clear – the date when your property becomes an investment property is a date of transfer.
Accounting before and at the date of transfer
Up to the date of transfer, you need to depreciate the property and recognize any impairment losses if applicable.
At the date of transfer, you need to treat any difference between the carrying amount of property under IAS 16 and its fair value – which is the new carrying amount under IAS 40 – as a revaluation in accordance with IAS 16.
Let me break this down:
- If the carrying amount of property decreases, then you should first remove any revaluation surplus from equity and the excessive decrease is recognized in profit or loss.
- If the carrying amount of property at the date of transfer increases, then you should first reverse any previous impairment loss via profit or loss, but careful here, because this reversal cannot exceed the amount needed to restore the carrying amount to the amount without any previous impairment loss recognized.
If the increase is greater than the reversal of previously recognized impairment loss, or if there hasn’t been any impairment loss recognized in profit or loss, then the increase is recognized in other comprehensive income as revaluation surplus.
Accounting after the date of transfer
What happens next?
You continue applying fair value model to this investment property, so subsequently, any change in fair value is recognized in profit or loss.
But, what about the revaluation surplus?
Nothing, it stays there until you derecognize the property.
When you derecognize the property, only then you will transfer the revaluation surplus to retained earnings.
Not via profit or loss – it is just the transfer within equity.
Illustration: Transfer from owner-occupied property to investment property
Let’s say you own a building and apply revaluation model to its accounting.
The building was revalued on 31 December 20X1 to its fair value of CU 100 000 and as a result of the revaluation, the revaluation surplus was recognized.
On 1 July 20X2, you transferred the building from owner-occupied property to the investment property. The information is as follows:
- Fair value at the date of transfer: CU 90 000
- Revaluation surplus at the date of transfer: CU 15 000
- Carrying amount at the date of transfer: CU 98 000 (we assume depreciation for 6 months was recognized)
The journal entry at the date of transfer is to bring the asset’s carrying amount down to its fair value:
- Debit Revaluation surplus in OCI 8 000
- Credit Building in PPE 8 000
Let’s say that at the end of 20X2, the fair value of the same property is CU 88 000.
You do NOT touch the revaluation surplus, but you recognize the further decrease in profit or loss in line with the fair value model:
- Debit Profit or loss – decrease in fair value of investment property: CU 2 000
- Credit Building (now investment property): CU 2 000
When you derecognize the investment property (at sale…), then you need to reclassify the remaining revaluation surplus:
- Debit Revaluation surplus: CU 7 000
- Credit Retained earnings in equity: CU 7 000
Any comments of questions? Please let me know below, thank you!
Tags In
JOIN OUR FREE NEWSLETTER AND GET
report "Top 7 IFRS Mistakes" + free IFRS mini-course
Please check your inbox to confirm your subscription.
20 Comments
Leave a Reply Cancel reply
Recent Comments
- Abdul Rehman on How to Account for Employee Loans (interest-free or below-market interest)
- Silvia on What are directly attributable costs?
- Oluwatobi Esan on Change in the reporting period and comparatives
- Developer on What are directly attributable costs?
- Silvia on IFRS Reporting in Hyperinflationary Economy (IAS 29)
Categories
- Accounting Policies and Estimates (14)
- Consolidation and Groups (24)
- Current Assets (21)
- Financial Instruments (55)
- Financial Statements (52)
- Foreign Currency (9)
- IFRS Videos (70)
- Insurance (3)
- Most popular (6)
- Non-current Assets (54)
- Other Topics (15)
- Provisions and Other Liabilities (44)
- Revenue Recognition (26)
- Uncategorized (1)
Hi, is it possible to transfer owner-occupied property measured at cost to investment property using cost model? IAS 40 B66 looks to be saying otherwise but maybe I am reading it incorrectly. Thanks
Hello,
An entity owns a building , and it is carried at cost. In the current year the entity leases out the property, therefore it is now to be classified to investment property. The cost of the building is 2000 and at the date of transfer its carrying amount is 1800. ( thus accumulated depreciation to date is 200).
What are the entries to be passed to transfer the asset and what will happen to accumulated depreciation
Regarding this question, how are the treatments in statement of financial position and profit or loss? Does the treatments will be based on the journal entries stated above only?
In case of such transfer do we change the comparative figure as well? Like we do in change in accounting policy.
No. By changing the character of an asset, you are not changing an accounting policy.
Hi Silvia
Please assist on how the transfers from either inventory or PPE to investment properties are disclosed on Cashflow statement. We had a line item for increase/decrease in inventory, so meaning the non-cash decrease in inventory due to a transfer outwards to investment property will need to be eliminated against a transfer inwards gain added to investment property. How are those transfers treated on CF all in all? Should there be separate disclosures on CF?
Hi Silvia
A few months ago we purchased a old Building Including land.
how could we treatment these assets?
Too little info. What do you plan to do with the old building?
Hi Silvia,
A company with a fiscal year January 1 to December 31 chose to measure investment property at cost model for a number of years. However, during the current fiscal year, management decided to change the accounting policy on October 31 to the Fair value model. The company did conduct a Fair Valuation exercise on this date resulting in a surplus which should be recorded in Revaluation reserve after considerations for depreciation and impairment to date. However, management did not conduct a fair valuation exercise on Dec 31, as they did not believe there would be any significant changes in fair value of the property between October 31 and December 31 in the current fiscal year.
Question: In accordance with IAS 40, would management be able to adopt the new policy without a comparative fair Value as at Dec 31 in the current year under the assumption of management that there were no significant changes?
And, if yes, does this mean that the fair value recognized at December 31 can remain the same as that of October 31 with no entry being made to profit or loss?
I wongly put the land and building as PPE instead of IP in previous years. So, to put as IP in current year, do i need to apply it retrospectively? Note that i never depreciate those land and building before this when it is treated as PPE. So basically it is just between BS items.
Dear Hamza,
Based on the limited information you have shared it’s hard to just whether there is indeed a mistake. Besides it depends also on the subsequent measurement of your IAS 16 owned property and your IAS 40 IP. Some companies measure both at cost. In that case you can do just a reclass and disclose in a note the mistake and give explanation for the reclass. If you measure the IAS 40 at Fair value and your IAS 16 PPE at cost than I would argue that this is a misapplication of accounting policies as there is a difference in accounting treatment.
Prior Period Errors must be corrected Retrospectively in the financial statements.
Retrospective application means that the correction affects only prior period comparative figures.Therefore, comparative amounts of each prior period presented which contain errors are restated. If however, an error relates to a reporting period that is before the earliest prior period presented, then the opening balances of assets, liabilities and equity of the earliest prior period presented must be restated.
For more information see IAS 8
OCI because you have to applie IAS 16 upto the date of change in use.
What if the transfers from owner-occupied property under Cost model to investment property under the fair value model? wher to recognize the differences between carrying value and fair value on transition date?
RE Or OCI ?
OCI becouse the asset was a ppe when the fairvalue change is occured, so we have to applie ias 16 upto the date of change in use (ias 40)
IF the Company continues to use a property that has been revalued, it depreciates the property based on its sound value which comprise of the depreciation at cost and the depreciation of the revaluation surplus. The portion of the depreciation pertaining to the revaluation surplus shall be transferred to the retained earnings to offset the depreciation on the revaluation.
Yes.
Hey! Mam you are doing a great job. God bless you
Hi Silvia,
I have a question that need further clarification. This is with regards to para 41 of IAS 16:
Any revaluation surplus of PPE may be transferred directly to retained earnings when the asset is derecognised. This may involve transferring the whole of the surplus when the asset is retired or disposed. Alternatively, company may transfer the surplus (i.e. the difference between depreciation based on the revalued carrying amount of the asset and depreciation based on the asset’s original cost)
as the asset is used by an entity.
1)Assume the revaluation surplus is CU15,000 and the remaining useful life of the Property is 2 years, Does that mean that we may reclassify the revaluation surplus of CU7,500 to retained earnings between 2 financial year-end or the whole amount of CU15,00o when the assets is derecognised at the end of Year 2?
2)Following from your example, can we transfer revaluation surplus as the assets is used?Or we can only transfer the whole revaluation surplus when the asset is derecognised?
Thanks!
Being anoynomous:
The answer to your question is transfer at each year end CU 7500 from revaluation surplus to retained earning if you are holding the asset till the end of two years.
However, if during the period of two years, if you dispose of the stated asset, then whole
or remaining (the case maybe) revaluation surplus shall be transferred to retained earning without waiting for the year end.
I have a slightly different opinion. You can not transfer all the revaluation surplus to retained earnings evenly, you only transfer a portion by which the depreciation of the revalued amount exceeds the original depreciation before revaluation, such that your depreciation expense would be indifferent before and after the revaluation.