Investment property

[zxfmontreal]

@Tony_zhou

@Wojtek

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.

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?

I actually got the impression that following the initial tratement, the further loss would reduce the value in revauation surplus first…

gotta check up this part!

[Wojtek]

zxfmontreal, the treatment for inventory is different. You would never recognise anything via OCI in revaluation surplus.

With regard to the revaluation surplus getting reduced first, that would be the case if you had PPE (owner-occupied) measured in accordance with the revaluation model. With Investment property, it is different. Subsequent to initial recognition, the fair value model assumes that all changes in fair value go to P&L. The revaluation surplus (which may be there from the initial remeasurement to fair value upon transfer from owner-occupied PPE) is not touched until the investment property is disposed off.

[zxfmontreal]

@Wojtek

zxfmontreal, the treatment for inventory is different. You would never recognise anything via OCI in revaluation surplus.

With regard to the revaluation surplus getting reduced first, that would be the case if you had PPE (owner-occupied) measured in accordance with the revaluation model. With Investment property, it is different. Subsequent to initial recognition, the fair value model assumes that all changes in fair value go to P&L. The revaluation surplus (which may be there from the initial remeasurement to fair value upon transfer from owner-occupied PPE) is not touched until the investment property is disposed off.

Wojtek

So for inventory, the written-down loss will go to I/S as expense and the reversal in subsequent periods will be only limited to the amount previouslly written-down (only under IFRS, cuz under GAAP, no reversal is allowed I remembered), correct? Would it happen to inventory that the amount of reversal is greater than the original write-down? How are we gonna report that if this is the case?

Thx in advance!

[Wojtek]

zxfmontreal, I’m not sure if we are still talking about 1. transfers from inventory to investment property or 2. inventory as such

I’ll start with the latter: for inventory in general, write-down losses are taken to the income statement. Under IFRS you can only reverse what you previously wrote-down, i.e. the amount of reversal is limited to the previous write down. And yes, such reversals are not allowed under US GAAP.

Now, the first case, i.e. transfers from inventory to investment property. Please note that this is a rather specific situation and I very much doubt if you will ever need this for the CFA exam. For this to happen, you would need to be holding property within inventory, which is pretty much limited to property devlopment companies.

Imagine you have some property which was previously held within inventory and perhaps even had a write-down recorded in respect of it (via P&L). You now want to treat it as investment property using the fair value measurement model. Irrespective of how high or low the new fair value is, you take any difference between the current carrying amount and that new fair value to P&L. The rules applicable to inventory as such, which limit the amount of a reversal to what was previously written down no longer apply. So your P&L may be credited with a gain which significantly exceeds any previously recorded loss.

I hope that makes things more clear

[Tony_zhou]

Hi Wojtek, I am clear about the concept now. Thanks for your help:)

[alpha668]

Wojtek,

I have a much clear understanding regarding the treatments of investment property (PP&E) and inventory after reading your detailed explanations and my careful reviewing of the relevant portions in CFAI text. I think the key points are those “rules” (or “concepts”?). I have learned very much from you !

Thank you so much for your patience and enthusiam.

[Wojtek]

Tony and alpha668, I am glad to have been of help

good luck with you further studies!