ACCA Strategic Professional · Strategic Business Reporting (International) · Non-current assets
Brook Co occupies a property as its head office, carried under the IAS 16 cost model at a carrying amount of $2.0m. On 1 July it moves out and begins leasing it to a third party under an operating lease, and adopts the fair value model for investment property. Fair value at 1 July is $2.6m. What is the accounting treatment on transfer?
Brook recognises the $0.6m increase in other comprehensive income as a revaluation surplus. On transfer from owner-occupied use to fair-valued investment property, IAS 40 requires the difference between carrying amount and fair value to be treated as an IAS 16 revaluation up to the change in use.
- ARecognise $0.6m gain in profit or loss
- BRecognise $0.6m in other comprehensive income as a revaluation surplusCorrect
- CMake no adjustment until the property is sold
- DRestate prior periods to show the property at $2.6m
Explanation
On a transfer from owner-occupied to investment property carried at fair value, IAS 40 applies IAS 16 up to the date of change in use. Any difference between carrying amount ($2.0m) and fair value ($2.6m) is treated as a revaluation under IAS 16, so the $0.6m increase goes to OCI and revaluation surplus. Profit or loss would be wrong for an increase.
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