IAS 40 Investment property IFRS 5 Non-current Assets Held for Sale and Discontinued Operations IAS 2 Inventories IAS

40 Investment property
Investment property is property (land or a building or part of a building or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both. Examples of investment property: land held for long-term capital appreciation land held for undetermined future use building leased out under an operating lease vacant building held to be leased out under an operating lease property that is being constructed or developed for future use as investment property The following are not investment property and, therefore, are outside the scope of IAS 40: property held for use in the production or supply of goods or services or for administrative purposes property held for sale in the ordinary course of business or in the process of construction of development for such sale (IAS 2 Inventories) property being constructed or developed on behalf of third parties (IAS 11 Construction Contracts) owner-occupied property (IAS 16 Property, Plant and Equipment), including property held for future use as owner-occupied property, property held for future development and subsequent use as owner-occupied property, property occupied by employees and owner-occupied property awaiting disposal property leased to another entity under a finance lease Other classification issues Partial own use. If the owner uses part of the property for its own use, and part to earn rentals or for capital appreciation, and the portions can be sold or leased out separately, they are accounted for separately. Therefore the part that is rented out is investment property. If the portions cannot be sold or leased out separately, the property is investment property only if the owner-occupied portion is insignificant. Ancillary services. If the entity provides ancillary services to the occupants of a property held by the entity, the appropriateness of classification as investment property is determined by the significance of the services provided. If those services are a relatively insignificant component of the arrangement as a whole (for instance, the building owner supplies security and maintenance services to the lessees), then the entity may treat the property as investment property. Where the services provided are more significant (such as in the case of an owner-managed hotel), the property should be classified as owner-occupied. Intracompany rentals. Property rented to a parent, subsidiary, or fellow subsidiary is not investment property in consolidated financial statements that include both the lessor and the lessee, because the property is owner-occupied from the perspective of the group. However, such property could qualify as investment property in the separate financial statements of the lessor, if the definition of investment property is otherwise met. Recognition Investment property should be recognised as an asset when it is probable that the future economic benefits that are associated with the property will flow to the entity, and the cost of the property can be reliably measured. Initial measurement Investment property is initially measured at cost, including transaction costs. Such cost should not include start-up costs, abnormal waste, or initial operating losses incurred before the investment property achieves the planned level of occupancy.

Measurement subsequent to initial recognition IAS 40 permits entities to choose between: a fair value model, and a cost model. One method must be adopted for all of an entity's investment property. Change is permitted only if this results in a more appropriate presentation. IAS 40 notes that this is highly unlikely for a change from a fair value model to a cost model. Fair value model Investment property is remeasured at fair value, which is the amount for which the property could be exchanged between knowledgeable, willing parties in an arm's length transaction. Gains or losses arising from changes in the fair value of investment property must be included in profit or loss for the period in which it arises. Cost model After initial recognition, investment property is accounted for in accordance with the cost model as set out in IAS 16 Property, Plant and Equipment cost less accumulated depreciation and less accumulated impairment losses. Transfers to or from investment property classification Transfers to, or from, investment property should only be made when there is a change in use, evidenced by one or more of the following: commencement of owner-occupation (transfer from investment property to owner-occupied property) commencement of development with a view to sale (transfer from investment property to inventories) end of owner-occupation (transfer from owner-occupied property to investment property) commencement of an operating lease to another party (transfer from inventories to investment property) end of construction or development (transfer from property in the course of construction/development to investment property The following rules apply for accounting for transfers between categories: for a transfer from investment property carried at fair value to owner-occupied property or inventories, the fair value at the change of use is the 'cost' of the property under its new classification for a transfer from owner-occupied property to investment property carried at fair value, IAS 16 should be applied up to the date of reclassification. Any difference arising between the carrying amount under IAS 16 at that date and the fair value is dealt with as a revaluation under IAS 16 for a transfer from inventories to investment property at fair value, any difference between the fair value at the date of transfer and it previous carrying amount should be recognised in profit or loss when an entity completes construction/development of an investment property that will be carried at fair value, any difference between the fair value at the date of transfer and the previous carrying amount should be recognised in profit or loss. Disposal An investment property should be derecognised on disposal or when the investment property is permanently withdrawn from use and no future economic benefits are expected from its disposal. The gain or loss on disposal should be calculated as the difference between the net disposal proceeds and the carrying amount of the asset and should be recognised as income or expense in the income statement. Compensation from third parties is recognised when it becomes receivable.

Examples which IFRS would you follow in these situations?

(1) An entity owns a building that it rents out to independent third parties under operating leases in return for rental payments.

(2) An entity owns a building that it rents out to independent third parties under operating leases in return for rental payments. The entity provides cleaning, security and maintenance services for the lessees of the building.

(3) An entity acquired a tract of land to divide it into smaller plots to be sold in the ordinary course of business at an expected forty per cent profit margin. No rentals are expected to be generated from the land.

(4) An entity owns a building that it rents out to an independent third party (the lessee) under an operating lease in return for fixed rental payments. The lessee operates a hotel from the building including a range of services commonly provided by boutique hotels. The entity does not provide any services to hotel guests and its rental income is unaffected by the number of guests that occupy the hotel (ie the entity is a passive investor).

(5) An entity owns a building that it rents out to an independent third party under a finance lease in return for rental payments.

(6) An entity (parent) owns a building that it rents out to its subsidiary under an operating lease in return for rental payment. The subsidiary uses the building as a retail outlet for its products.

(7) An entity acquired a tract of land as a long-term investment because it expects its value to increase over time. No rentals are expected to be generated from the land in the foreseeable future.

(8) An entity holds land for an undetermined future use.

(9) An entity owns a building from which it operates a hotel (ie it rents out hotel rooms to independent third parties under an operating lease in return for rental payments). The entity provides hotel guest with a range of services commonly provided by boutique hotels. Some of the services are included in the room daily rate (eg breakfast and television); other services are charged for separately (eg other meals, room bar, gymnasium facilities and guided tours of the surrounding area).

(10) An entity owns a building that it rents out to independent third parties under operating leases in return for rental payments. However, the entitys building administration and maintenance staff occupy offices in the building that measure less than 1 per cent of the floor area of the building.

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations outlines how to account for non-current assets held for sale (or for distribution to owners). In general terms, assets (or disposal groups) held for sale are not depreciated, are measured at the lower of carrying amount and fair value less costs to sell, and are presented separately in the balance sheet. Specific disclosures are also required for discontinued operations and disposals of non-current assets. Held-for-sale classification. In general, the following conditions must be met for an asset (or 'disposal group') to be classified as held for sale: management is committed to a plan to sell the asset is available for immediate sale an active program to locate a buyer is initiated the sale is highly probable, within 12 months of classification as held for sale (subject to limited exceptions) the asset is being actively marketed for sale at a sales price reasonable in relation to its fair value actions required to complete the plan indicate that it is unlikely that plan will be significantly changed or withdrawn The assets need to be disposed of through sale. Therefore, operations that are expected to be wound down or abandoned would not meet the definition (but may be classified as discontinued once abandoned). Disposal group. A 'disposal group' is a group of assets, possibly with some associated liabilities, which an entity intends to dispose of in a single transaction. The measurement basis required for noncurrent assets classified as held for sale is applied to the group as a whole, and any resulting impairment loss reduces the carrying amount of the non-current assets in the disposal group in the order of allocation required by IAS 36. Measurement. The following principles apply: At the time of classification as held for sale. Immediately before the initial classification of the asset as held for sale, the carrying amount of the asset will be measured in accordance with applicable IFRSs. Resulting adjustments are also recognised in accordance with applicable IFRSs. After classification as held for sale. Non-current assets or disposal groups that are classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell. Impairment. Impairment must be considered both at the time of classification as held for sale and subsequently: o At the time of classification as held for sale. Immediately prior to classifying an asset or disposal group as held for sale, measure and recognise impairment in accordance with the applicable IFRSs (generally IAS 16, IAS 36, IAS 38, and IAS 39). o After classification as held for sale. Calculate any impairment loss based on the difference between the adjusted carrying amounts of the asset/disposal group and fair value less costs to sell. Any impairment loss that arises by using the measurement principles in IFRS 5 must be recognised in profit or loss. Non-depreciation. Non-current assets or disposal groups that are classified as held for sale shall not be depreciated. Balance sheet presentation. Assets classified as held for sale, and the assets and liabilities included within a disposal group classified as held for sale, must be presented separately on the face of the balance sheet (statement of financial position).

Statement of Comprehensive Income presentation. The sum of the post-tax profit or loss of the discontinued operation and the post-tax gain or loss recognised on the measurement to fair value less cost to sell or fair value adjustments on the disposal of the assets (or disposal group) should be presented as a single amount on the face of the statement of comprehensive income. Detailed disclosure of revenue, expenses, pre-tax profit or loss and related income taxes is required either in the notes or in the statement of comprehensive income in a section distinct from continuing operations. Cash flow statement presentation. The net cash flows attributable to the operating, investing, and financing activities of a discontinued operation shall be separately presented on the face of the cash flow statement or disclosed in the notes.

IAS 2 Inventory
The objective of IAS 2 is to prescribe the accounting treatment for inventories. It provides guidance for determining the cost of inventories and for subsequently recognising an expense, including any write-down to net realisable value. It also provides guidance on the cost formulas that are used to assign costs to inventories. Scope Inventories include assets held for sale in the ordinary course of business (finished goods), assets in the production process for sale in the ordinary course of business (work in process), and materials and supplies that are consumed in production (raw materials). However, IAS 2 excludes certain inventories from its scope: work in process arising under construction contracts (see IAS 11 Construction Contracts) financial instruments (see IAS 39 Financial Instruments: Recognition and Measurement and IFRS 9 Financial Instruments) biological assets related to agricultural activity and agricultural produce at the point of harvest (see IAS 41 Agriculture). Also, while the following are within the scope of the standard, IAS 2 does not apply to the measurement of inventories held by: producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, to the extent that they are measured at net realisable value (above or below cost) in accordance with well-established practices in those industries. When such inventories are measured at net realisable value, changes in that value are recognised in profit or loss in the period of the change. commodity brokers and dealers who measure their inventories at fair value less costs to sell. When such inventories are measured at fair value less costs to sell, changes in fair value less costs to sell are recognised in profit or loss in the period of the change. Fundamental principle of IAS 2 Inventories are required to be stated at the lower of cost and net realisable value (NRV). Measurement of inventories Cost should include all: costs of purchase (including taxes, transport, and handling) net of trade discounts received costs of conversion (including fixed and variable manufacturing overheads) and other costs incurred in bringing the inventories to their present location and condition IAS 23 Borrowing Costs identifies some limited circumstances where borrowing costs (interest) can be included in cost of inventories that meet the definition of a qualifying asset. Inventory cost should not include: abnormal waste storage costs administrative overheads unrelated to production selling costs foreign exchange differences arising directly on the recent acquisition of inventories invoiced in a foreign currency interest cost when inventories are purchased with deferred settlement terms. Cost formulas For inventory items that are not interchangeable, specific costs are attributed to the specific individual items of inventory. For items that are interchangeable, IAS 2 allows the FIFO or weighted average cost formulas. The LIFO formula, which had been allowed prior to the 2003 revision of IAS 2, is no longer allowed.

The same cost formula should be used for all inventories with similar characteristics as to their nature and use to the entity. For groups of inventories that have different characteristics, different cost formulas may be justified. Write-down to net realisable value NRV is the estimated selling price in the ordinary course of business, less the estimated cost of completion and the estimated costs necessary to make the sale. Any write-down to NRV should be recognised as an expense in the period in which the write-down occurs. Any reversal should be recognised in the income statement in the period in which the reversal occurs. Expense recognition IAS 18 Revenue addresses revenue recognition for the sale of goods. When inventories are sold and revenue is recognised, the carrying amount of those inventories is recognised as an expense (often called cost-of-goods-sold). Any write-down to NRV and any inventory losses are also recognised as an expense when they occur.

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 Share Capital Property, plant and equipment

Cash

Accumulated depreciation

Administrative expenses

(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
Note: in the IFRS Balance sheet, the building must be recognised separately from Property, plant and equipment in the line item called Investment property.

Adjustment investment property

IFRS

Cash

Accounting entries year 2 (T accounts) Country X Share Capital Property, plant and equipment

Accumulated depreciation

Administrative expenses

Retained earnings

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

Income statement for the year 2

Country X Revenue Administrative expenses Gain from the revaluation of investment property Profit or loss for the period Adjustment investment property IFRS

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 Trade payables Cash

COGS

Revenue

(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 Adjustment IFRS

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 Trade payables Cash

COGS

Revenue

Retained earnings

(1) 100 pieces of merchandise sold. Translation 31st December, year 2 Balance sheet
Country X Inventory Cash Total assets Retained earnings Profit or loss Trade payables Total equity and liabilities Adjustment IFRS

Income statement for the year 2

Country X Revenue Cost of goods sold Profit for the period Adjustment IFRS