Reclassification of Investment Property to PPE

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Tsola

30 Points Posted on 17 December 2009

Good day,

I need to get a good understanding of the journals to be posted on movement of asset from investment property to PPE. For example, I have my building split 50-50 between investment property and PPE initially. I decide to carry my building at cost less accumulated depreciation, say ( $1m over 20 years resulting in amortization of $50,000 per annum). The investment property on the other hand, I decide to carry at fair value. Say $1m in year one.

After 5 years, the NBV of my building becomes $750,000 ($1m - (50,000 x 5)) and the fair value of my investment property becomes $3,000,000.

At this point I establish that my PPE element has moved up from 50% to 67% and my investment property has gone down to 33%.

I do know that I need to transfer to PPE, even though I am using the cost model, the fair value portion of the investment property.

Who can help me with the journals as I find this so confusing?

Replies (11)

Hitesh Padliya

82 Points Posted on 17 December 2009

In IAS 40 there is a guidance available for transfer from Investment property (carried at fair value) to PPE.

Tsola

30 Points Posted on 18 December 2009

I understand that. It sounds so simple but that's the reason why I provided the numbers, then we can actually track the journals.

C.A Rohit Gambhir

C.A

275 Points Posted on 19 December 2009

Dear Tsola,

The calculation and journal entries are given in the sheet attached herewith for your reference. Pls rvert back in case of any query.

Thanks

Tsola

30 Points Posted on 19 December 2009

Thank you so much for the journals, they really make sense.

There is a journal though, during the transfer from investment property, where the debit went the revaluation reserve. I think that journal should have been :

Dr. Retained Earnings Cr. Revaluation Reserve.

I believe this is because we originally recognised mvmtnts in fair value of investment property in the income statement. Now, we need to account for the bit that is being transferred now from investment property to PPE

Overall, thank you

C.A Rohit Gambhir

C.A

275 Points Posted on 20 December 2009

No, This entry pertains to the reversal of revaluation reserve created in earlier years and related to the portion of investment property which is now being trfd to ppe and because PPE is being carried at cost hence no revaluation is there and therefore this reversal entry. How ever for the depreciation portion on revaluation amount this entry need to be passed.

C.A Rohit Gambhir

C.A

275 Points Posted on 20 December 2009

You cannot recognised movements in fair value in the income statement until asset is disposed off or written out of the books in the absence of future econmic benefits. Any upward movement in the value of asset must go to revaluation reserve only and any future downfall must be adjusted from there only.

Tsola

30 Points Posted on 22 December 2009

Noted, thank you

C.A Rohit Gambhir

C.A

275 Points Posted on 22 December 2009

Would like to respond more queries on IFRS. You can also post your queries at kumar.rohit.g @ gmail.com

Hitesh Padliya

82 Points Posted on 27 December 2009

Hitesh Padliya

82 Points Posted on 27 December 2009

Originally posted by : Hitesh Padliya

Para 35 of IAS40 states, a gain or loss arising from a change in the fair value of investment property shall be recognised in profit or loss for the period in which it arises.

Para 60 of IAS 40 states, For a transfer from investment property carried at fair value to owner-occupied property or inventories, the property's deemed cost for subsequent accounting in accordance with IAS 16 or IAS 2 shall be its fair value at the date of change in use.

Hence the change in the fair value will be recognised in income statement. Further if there is any change in use and the investment property is required to be transferred to PPE then the fair value of the date of transfer shall be the deemed cost for the subsequent period.

Example

XYZ is having an investment property (IP) for Rs 1,00,000 and the Company has adopted the fair value model.

FV of IP at the end of Year 1 is Rs 125000

FV of IP on the date of transfer is Rs 135000

Initial recognition (Begining of year 1)

Investment property Dr 100000

To Bank 100000

Subsequent recognition (at the end of year 1)

Investment property Dr 25000

To Bank 25000

Transfer of IP to PPE in year 2

PPE Dr 10000

To Investment property 10000

Further there will be no adjustment required to recognise the revaluation reserves as the fair value gain has been recognised to income statement in earlier years. Further fair value on the date of transfer shall be the deemed cost for the PPE and shall be depreciated as per IAS 16.

I case of any doubt please reply.