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IFRS Question 026: How to account for transfers from owner-occupied property under revaluation model to investment property under fair value model?

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:

  1. 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.
  2. 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.

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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!