Many audit firms in Dubai believe a single standard addresses long-term tangible assets: IAS 16 Property, Plant, and Equipment. Even though audit firms in Dubai & UAE can apply IAS 16 for most long-term tangible assets, one rules over the others.
Other standards deal with long-term assets other than IAS 16. One of them is the IAS 40 Investment Property. In this article, Dubai & UAE audit professionals will learn the following:
There are many similarities between IAS 40 Investment Property and IAS 16. However, there are notable differences. For instance, the IAS 40 revaluations are recognized in the income statement and not revaluation reserves. Moreover, there is no depreciation if revaluations are conducted every year.
IAS 40 Investment Property describes accounting treatment and disclosures based on an investment property.
The investment property is a building, land, or both held for the following reasons:
Suppose an individual or company in Dubai & UAE holds land or buildings for the above reasons. In that case, company audit teams may not be recognized as an investment property:
Suppose a land or building is used for the first two reasons. In that case, internal auditors of a company should implement IAS 16. The standard IAS 2 Inventories is ideal when used for sale in business.
Read also: IAS 24 Related Party Disclosures For Dubai And UAE
Land held for longer-term capital appreciation. But, if an individual or entity in Dubai & UAE purchases lands intending to develop some production hall for future purposes, then it is not recognized as an investment property.
A building that the Dubai business owns and leases out on various leases, including a property that is still vacant, but can be scheduled for lease. Any property developed or constructed for the future as an investment property.
Note, however, if an entity is developing a building for a third party. It is not recorded as an investment property. Still, the audit services should apply IFRS 15 Revenue from Contracts with clients and IAS 11 Construction contracts.
The guidelines for recognizing investment property are exactly IAS 16 for property, plant, and equipment. In other words, Dubai auditors recognize an investment property as an asset if the following conditions are fulfilled:
The future economic benefits related to the item will likely come to the entity, and the product's cost can easily be measured.
How Financial Audit Experts Measure Investment Property Initially
Auditors shall initially measure investment property at cost, including the transaction amount. The cost of investment property are:
The purchase price and any expenditure directly attributable, such as professional fees, legal fees, or property taxes.
Auditors should not include the following:
Startup costs whatsoever. But, if these startup costs are directly associated with the item of investment property, then they can be included. Any general startup costs will not be included.
Operating losses incurred before the planned occupancy level is accomplished and waste of labor, material, and other resources expensed at construction. If payment for investment property is postponed, auditors should discount it to the present value to set the cash price equivalent.
We would also like to note that auditors can recognize assets held under finance lease as investment property in this context. The initial cost is determined based on IAS 17.
After the initial recognition, audit services have two options for measuring investment property. Once a choice has been made, it must adhere to all the investment properties measured using the same model. But there are several exceptions to the rule.
Fair Value Model
Under the fair value model, investment properties are carried at fair value at the reporting date.
IFRS 13 Fair Value Measurement standard is used to determine the fair value.
Gains or losses resulting from revaluation shall be recognized in profit or loss.
It is impossible to measure fair value after initial recognition in some cases reliably. There are scarce circumstances in which this may happen (e.g., an active mark ceases to exist), and in such an instance, IAS 40 prescribes:
If you are constructing your investment property and have not yet completed it, you should calculate it at cost. To measure the investment property through a cost model if completed.
As a second option, a cost model can measure investment property. In IAS 40, the standard does not provide any details but rather refers to IAS 16 Property, Plant, and Equipment. As with IAS 16, you should utilize the same methodology.
The cost model can be switched to the fair value model or vice versa and vice versa.
However, it only applies if the change leads to more accurate and reliable financial statements regarding the company's financial position, results, and other events.
Looking for more information or help with IAS 40? Get in touch with AFD for assistance.
Theshani is a Senior auditor and has experience of 4+ years in providing audit assurance and advisory services to a wide range of industry clients. She continues to stay on top of ever-changing industry dynamics by continuously learning and developing expertise.