There is a difference in accounting treatment between International Financial Reporting Standards (IFRS) and Canadian GAAP with respect to “Investment Property. Investment Property is defined in IAS 40, as property (land and/or building or part of a building) held (by the owner or by the lessee under a finance lease) or being constructed or developed to earn rentals and/or for capital appreciation. It is not owner-occupied and is not used in the production or supply of goods or services or for administrative purposes, or sale in the ordinary course of business. A property interest held by a lessee under an operating lease may be classified and accounted for as investment property if, and only if, the property would otherwise meet the definition of an investment property and the lessee uses the fair value model set out in IAS 40 for the asset recognized.
IAS 40 permits an enterprise to choose either:
- Fair Value model set out in the Standard (i.e., annual valuation with changes in fair value recognized in profit or loss). Changes in fair value all go through the Income Statement, and do not depreciate.
- Cost model set out in IAS 16, “Property, Plant and Equipment” (i.e., at cost less any accumulated depreciation and any accumulated impairment losses). When the cost model is chosen, fair value is disclosed (or, when fair value cannot be reliably determined, the reason why this is not possible should be disclosed, along with a description of the investment property and, if possible, the range of estimates in which fair value is highly likely to lie).
The model chosen should be applied to all investment property.
Investment property under construction or development can be measured at cost until construction or development is completed, if fair value cannot be reliably measured.
You need to make sure that you understand the distinction between the Fair Value model and the Revaluation model – they are two very different models, with two very different accounting treatments. With the Fair Value model, the valuation must be done annually and any changes booked directly to the Income Statement. In comparison, the Revaluation model does not require annual valuation but with sufficient regularity, and any changes are booked either to Balance Sheet as Equity, or to the Income statement depending on whether there has been a reduction in fair value below net book value. The Revaluation Model is outlined elsewhere on the Edelkoort Smethurst Schein CPA’s LLP web-site.
It should also be noted that the Fair Value model is used in other areas in IFRS, for instance in the valuation of biological assets and some financial instruments.
I hope this helps. This is one of a series of blogs that is meant to convey information relating to Canada’s transition from Canadian GAAP to IFRS.
For further information, please refer to the ongoing series of IFRS blogs on the Edelkoort Smethurst Schein CPA’s LLP web-site and please remember to contact your CGA or other accounting professional for further guidance.
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