040: How to account for investment gold under IFRS?
IFRS Question 040: Accounting for investment gold under IFRS
Hi Silvia, how should we account for the gold under IFRS, especially if it was acquired as a form of value storage?
Should we account for the gold under IFRS 9 and IAS 32 as a financial instrument, or should we account for it under IAS 40 Investment property?
IFRS Answer 040 – What standards do NOT apply here
Currently, there is no specific standard in IFRS that would really deal specifically with precious metals like gold, silver or platinum.
Let me clearly say that no, you should not account for gold as for a financial instrument under IFRS 9 and IAS 32, because gold does not meet the definition of a financial instrument.
Financial instrument arises from a contractual arrangement and there is no contractual arrangement when it comes to gold.
The same applies for the standard IAS 40 Investment property.
Gold does not meet the definition of the investment property, because under IAS 40, investment property is either land or building or their parts. No gold or other precious metals.
The truth is that the standard IAS 2 Inventories says something related to gold, in article 3:
Commodity brokers and dealers should measure their inventories at fair value less costs to sell and recognize the changes in fair value in profit or loss in the period of the change.
However, it applies only to commodity brokers and dealers, but not to other companies who might acquire gold just for the investment purposes, to store value.
What do to in this case?
Develop your own accounting policy
Well, as we have just found out, there is NO accounting policy prescribed by IFRS to deal with the gold or precious metals as value storage.
Thus we should develop our own accounting policy in line with IAS 8.
And, IAS 8 says that you should refer to certain resources when making your own policy.
Primarily, you should search for IFRS arranging the similar and related issues.
Only then you can look to the general concepts and criteria in the Conceptual Framework and then you can look to other publications of other standard-setting bodies.
What if the sources contradict?
In this case, you must take other IFRS about the similar issues first into account. They have priority.
Accounting policy for investment gold
What is the issue or transaction similar to the investment gold?
Let’s sum up the characteristics of the investment gold:
- It has indefinite useful life;
- Its fair value tends to increase over time (not always of course)
- The main purpose is to store value, get income from its capital appreciation
Summing this all up it seems to me that the fair value model applicable for investment property under IAS 40 would be very appropriate for the investment gold, too.
Moreover, if you look at financial assets like shares that you buy for capital appreciation, you can chose to measure these assets at fair value through profit or loss which is essentially the same as fair value model under IAS 40.
How should we apply fair value model to gold?
Initially, you would measure the acquisition of the investment gold at fair value plus transaction cost.
Subsequently, at the end of each reporting period, you need to remeasure the gold at fair value and account for any changes in profit or loss.
No depreciation, nothing at all.
When I did a little research on this topic on Internet I actually found a nice accounting guide for gold issued by World Gold Council.
It is very detailed and actually speaks about the accounting for monetary (investment) gold held by monetary authorities.
I would personally NOT take this guide into consideration when developing my own accounting policy under IFRS, because it requires accounting for changes in other comprehensive income and that is contradictory with IAS 40.
Remember, IAS 8 puts the IFRS standards dealing with similar issues first, and only then you can look elsewhere, so you should really apply similar accounting policy as fair value model under IAS 40.
Anyway, the Guidance by World Gold Council is still very interesting to read.
Any questions or comments? Please write them below, thank you!
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