Challenges with recognising investment property under IAS and Polish Accounting Act


Challenges with recognising investment property under IAS and Polish Accounting Act

March 2023

With the end of the financial year approaching, there is a range of additional tasks for the accounting teams to perform. Some of them are not that obvious and calculating the final value of some items as at the end of the financial year can present considerable difficulties. One example of an asset which accountants find particularly hard to set its value is investment property which — depending on the valuation method — is not straightforward to recognised.

In line with the definition given in International Accounting Standard (IAS) 40, investment property is property (land or a building or part of a building) held by the owner or by the lessee to earn rentals or for capital appreciation or both. Unlike IAS, Polish Accounting Act does not provide a definition of investment property and one must refer to investment which the Act defines as the assets held by the entity to generate economic benefits.

Examples of investment property include: shopping centres, logistic facilities and offices which taxpayers let to other entities.

Both IAS 40 and the Accounting Act provide the taxpayers with a choice between two valuation methods:

  • at historical cost or
  • at fair value.

If measured at historical cost, a property is stated at cost less depreciation and impairment, and increased by any additions.

The fair value is the amount for which an asset could be exchanged and a liability settled between knowledgeable, willing parties in an arm’s length transaction. In simple terms, it can be assumed that a fair value measurement is a market valuation. Such measurement is based on estimated amounts.

Note that the value of property measured at historical cost is depreciated over time, whereas if measured at fair value, the property is stated at its actual, market value. Depending on internal conditions and external circumstances, a given investment property can go up or down in value.

The method used to value investment property must result from the entity’s accounting policy. In practice, a vast majority of entities uses fair value measurement, in line with the income approach (the property brings or in future may bring income). The most common method in the income approach is the investment method where the basis for calculating income from the property is rental income and receipts from other titles to the property as well as non-rental income.

Accountants do not have sufficient knowledge or competence to calculate the fair value of investment property themselves. Property valuers base their valuations on a range of information and data provided directly by the entity, such as: necessary technical documentation, property location reports, copies of land and mortgage registers, ownership documents, lease contracts, planning documentation, financial statements, OPEX and CAPEX budgets. As accounting teams have no access to detailed valuation reports it can be very difficult and / or challenging for them to reflect the right values in the books. To determine the final difference between the historical cost and the fair value it is not enough to calculate the difference between those two values only. Accountants must remember that to reflect the fair value of the investment property correctly, they have to consider several other items:

  • all incentives to tenants (fit-out) — not only those recognised as an increase in the value of the property, but also those which the company, in line with its accounting policy, recognises over the lease term;
  • rent-free periods;
  • items classified to intangible assets, closely linked to the property and included in the final valuation prepared by the property valuer.

Extra care should be used so as to ensure that the fair value of the main assets is correctly stated in the company’s records.

Correct and complete recognition of the property valuation is not the only problem that a business must face, if it measures its investment property at fair value and follows IAS. Another is the recognition of revaluation, i.e. an upward or downward change in value stated in the accounting records. IAS 40 does not specify where in the income statement to recognise the effect of measurement. Since investment property is classified to the entity’s core business, all changes in its value should be included in operating revenue or expense. This way they affect the operating profit/loss. Any in-year valuation adjustments should decrease (increase) cost, if the value increases (decreases), or decrease (increase) revenue, if its value decreases (increases).
Unlike IAS, the Accounting Act specifies in detail the income statement items where both impairment (other operating expenses) and appreciation (other operating revenue) should be recognised.

Another important element are the operating expenses incurred by businesses in connection with their investment property. Generally, both under IAS 40 and the Accounting Act, the running costs of an investment property are charged to the profit/loss of the period in which they were incurred. Domestic regulations also specify that the running costs should be charged to other operating expenses (IAS 40 does provide such detailed guidance).

Under the Accounting Act, costs incurred to restore the property to its initial condition or replace material parts of the property, unless they increase the property’s value in use, should also be charged to other operating expenses. Under IAS 40, such restoration costs should be included in the initial measurement of the investment property. This rule also applies when the entity measures the investment property at fair value.

Expenditure to expand, redevelop or renovate a property increase — in line with IAS 40 — the investment property’s carrying amount, regardless of the valuation model used by the entity. The same approach is presented in the Accounting Act for entities which measure its property at cost: any expenditure to expand, redevelop or renovate a property are included in the initial measurement of such investment property. If the property is measured at fair value, the Act provides for two possible solutions:
o costs of improvement are charged to other operating expenses and any resulting increase in value is included in other operating revenue;
o costs to improve an investment property increase its value in the accounting records, and as at the property valuation date, depending on the type of change, measurement/revaluation is recognised as other operating revenue or expense.

With the Accounting Act being so general when it comes to investment property and IAS 40 providing such an in-depth overview of certain issues, in all matters that are not specified in the Accounting Act and in the absence of a domestic accounting standard that would regulate a given issue, entities may formulate their accounting policies in line with IAS/IFRS.

Wyzwania związane z ujęciem nieruchomości inwestycyjnych w księgach w aspekcie regulacji MSR i Ustawy o rachunkowości

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