In the note, it says when the property transfers from owner occupied to investment property, it treats as revaluation: recognize gain only if it reverses previously recognized loss.
But if it does not reverse previously recognized loss and fair value is greater than the carrying amount, does the value of fair value less carrying amount still goes into Income Statment? What account does it go to other than ‘gain’?
Hi there,
no, it does not go to the income statement. You treat it, like you would treat a revaluation of owner-occupied property, so the other side is a direct increase to revaluation surplus in equity (via Other Comprehensive Income). Subsequent to that, any further increases (and decreases) in value are recorded within income.
Hi Wojtek,
No. I checked the IAS 16: for PP&E, “If a revaluation results in an increase in value, it should be credited to other comprehensive income and accumulated in equity under the heading “revaluation surplus” unless it represents the reversal of a revaluation decrease of the same asset previously recognised as an expense, in which case it should be recognised as income. [IAS 16.39]”
Hi Tony,
yes, which is exactly what I wrote. I don’t get your ‘no’ at the start of the first sentence? When you switch from owner-occupied to investment property, you treat the initial revaluation in accordance with IAS 16 (as quoted by you) and subsequent to that, any further changes to fair value go through the income statement.
Hi Wojtek,
I have a different understanding of IAS 16 from you. Let’s look an example:
First year: Balance Sheet PP&E 100M (fair value)
Second year: Balance Sheet PP&E 80M (fair value) -> 20M loss goes to Income Statement as ‘Loss’
Third year: Balance Sheet PP&E 90M (fair value) -> 10M gain goes to Income Statement as ‘Gain’
Fourth year: Balance Sheet PP&E 110M (fair value) -> 10M gain goes to Income Statement as ‘Gain’, the remaining 10M gain goes to Revaluation Surplus in Equity
Is this the correct booking of revaluation?
Yes, this is correct … and I can assure you that we have the same understanding of revaluation under IAS16.
Look, in my first post I was merely replying directly to the question which you posed in the original post:
But if it does not reverse previously recognized loss and fair value is greater than the carrying amount, does the value of fair value less carrying amount still goes into Income Statment?
The answer to that is “No, it does not go to the income statement” … but it would of course go to the income statement if it was reversing a previously recognised loss. Your question was about a scenario where there had been no previous loss to reverse.
Hope that is clear now. Take care
Hi Wojtek,
Thanks for your reply and confirm. Sorry my bad English.
My actual question is to ask the difference of the treatment of the investment property transferred from owner occupied and that transferred from inventory.
From the note, for the investment property transferred from owner occurpied, it treats as “revalution: recognize gain only if it reverses previously recognized loss”; for the investment property transferred from inventory, it “recognize gain or loss if fair value is different from carrying amount”.
If the value of fair value less carrying amount all flows to the Income Statement, there is no difference of these two treatment. Confuse about that.
Tony,
so, if you are moving from inventory to investment property (fair value model), you will recognise any diiference between the fair value and the previous carrying amount in P&L.
And, yes, you are correct. If the fair value is less than the previous carrying amount (as inventory or PPE), you will take the loss to P&L, so there is indeed no difference between the two scenarios.
Is it that the entire increase (110M-90M=20M) in 4th year from the 3rd yrar shall be recognized as a loss on I/S (P&L) under “fair value model” ?
My further question :
In case of transferring from owner occupied (not from inventory) to investment property, in the year of transferring, what scenario will result in a “previously recognized loss” ?
Before the transferring, the property is one of the PP&E and its carrying value shall be the historical (purchasing) cost minus accumulated depreciation. Why is there a “previously recognized loss” ?
I am confused !
Using revaluation modle, 10M of total 20M increase is value reversing previously recognized loss (I think it is booked as gain in the Income Statement), and the remaining 10M flows to Revaluation Surplus in Other Comprehensive Income (or in Equity).
“Why is there a “previously recognized loss” ?” Impairment previously recoginized in cost model
“Why is there a “previously recognized loss” ?” Impairment previously recoginized in cost model.
I am also confused about the difference of the treatment in two cases.
For investment property, two alternatives (cost model & fair value model) are applicable,. I can not find any indication in CFAI text that revaluation model shall be applied when the property is transferred from owner to investment (only for the year of transferring ?), albeit, it is stated in study note !
In your example raised, therefore, I think the 20M in 4th year (after the transferring) shall be recognized as gain on I/S if fair value model is applied. Please correct me !
Alpha668, I think you are mixing two things up here.
Tony Zhou’s brief but perfectly correct example, as far as I understood it, does not at all suggest that there is a transfer from owner-occupied property to investment property. As such, it just shows how you would account for a revaluation of e.g. land held in PPE (I am suggesting land, as we ignored depreciation).
No, another thing is what happens when a property switches from being owner-occpied PPE to investment property. The CFAI book (Vol 3 pg. 438), following the revelant IFRS, states:
If a company’s chosen model for investment property is the fair value model and it transfers a property from owner-occupied to investment property, the change in measurement of the property from depreciated cost to fair value is treated like a revaluation.
This, means that, if you have an increase in carrying amount, you take it to revaluation surplus withing equity (via OCI), or possibly to P&L if it reverses a previously recognised loss. Following this initial treatemnt, any further changes in fair value are recognised in P&L. This is assuming the company has chosen the fair value model to account for its investment property.
Wojtek,
Thank you for your resonse. Bu very sorry, I am really confused. Pplease look at Tony’s original post.
He actuually said “when the property transfers from owner occupied to investment property”. And I think “revaluation” is required only for the year of transerring. After the year of transferring, cost or fair value model shall be chosen for the years thereafter.
I am sorry if I am wrong. Maybe I shall read those statements on (Vol 3 pg. 438) carefully again.
yes, the original post was about transfers … but Tony’s later example is purely about PPE (owner-occupied) and the revaluation that happens when the company chooses to adopt the revaluation model for some of its PPE (usually property). This is a completely separate issue from investment property.
Revaluation is required when you transfer from owner-occupied PPE to investment property and you choose to adopt the fair value model for you investment property. It is a one-time exercise. After the transfer you perform fair value adjustments via the income statement.
Please, try to read this stuff again. If you are still confused, I will create a video on this, which will probably work better than these posts 
Hi Wojtek,
Revalution above historical cost is recognized as gain in the Income Statement. But for the initial treatment, the exess value flows to revaluation surplus in the Other Comprehensive Income? If so, does the further loss reduce the value in revaluation surplus first?
Is the valuation method the same for both PPE and Inventory?
Like for inventory, is it correct to recognize gain in I/S if it reserves previous written-down; and recognize in OCS if the fair value is higher than the carrying amount?
Hi Tony,
once the asset is already classified as investment property (and assuming the company elects to follow the fair value model), any subsequent changes in fair value both up and down go directly to income (even if there is a revaluation surplus arising from the transfer).