Accounting for transfer of an asset from the owner-occupied PPE to the 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 measured at fair value.
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?
The standard IAS 40 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.
Any difference between the carrying amount of the property under IAS 16 and its fair value is treated as the revaluation in line with IAS 16 (see IAS 40, par. 61).
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:
- 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
- Transfer of the building to the investment property:
Debit Investment property: CU 90 000
Credit PPE-Building: CU 90 000
Then you continue measuring the investment property at its fair value, if that’s your choice.
Now, what do to with the revaluation surplus?
Nothing. It stays where it is until the subsequent disposal of that asset. When you dispose the asset, you will transfer the revaluation surplus to retained earnings (but not via profit or loss; just as a direct transfer – please see IAS 40.62b ii).
Also, when you had previously recognized any impairment loss on that asset, and the fair value increased at the date of transfer, you need to credit profit or loss to the extent of reversal of that loss.
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