How to determine the value of an investment property in the balance sheet?
When analyzing the subject of property valuation in the balance sheet, it is first of all necessary to determine whether the property (land) constitutes a fixed asset or an investment in the entity. Moreover, it is possible that the fixed asset is transformed into an investment. In the context of these problems, we will consider how to determine the value of real estate in the balance sheet?
Property value as an investment
Pursuant to Art. 3 sec. 1 point 17 of the Accounting Act, investments are understood as assets held by an entity in order to achieve economic benefits resulting from the increase in the value of these assets, obtaining income in the form of interest, dividends (shares in profits) or other benefits, including from a commercial transaction , in particular financial assets and those real estate and intangible assets that are not used by the entity, but are held by it for the purpose of obtaining those benefits.
An example of an investment property is land that is held by the entity for long-term growth in value.
The methods of valuation of investment properties are set out in Art. 28 sec. 1 point 1a of the Accounting Act. It follows from this provision that, not less frequently than as at the balance sheet date, investment properties can be valued according to:
rules applicable to fixed assets or
market price or fair value otherwise determined.
The method of valuation of the investment property is selected by the management of the entity, which should be described in the entity's accounting policies. The valuation of investment properties can be carried out according to one of two methods. The entity should use a valuation method for all property owned.
Valuation according to the rules applicable to fixed assets
In the scope of this method, the valuation is made according to the purchase prices or production costs, or the revalued value (after the revaluation of fixed assets), less depreciation or amortization write-offs, as well as write-offs due to permanent loss of value.
In such a situation, the real estate is entered into the books of account at its initial value, which is then reduced by the current depreciation or amortization write-offs made in the period of the expected economic usefulness of the real estate and write-offs due to permanent loss of value, which are classified as other operating costs.
However, pursuant to Art. 28 sec. 7 of the Accounting Act, a permanent loss of value occurs when there is a high probability that the asset controlled by the entity will not bring about a significant part or all of the anticipated economic benefits in the future. This justifies making a write-down bringing the value of the asset shown in the accounting books to the net selling price, and in the absence of this - to the fair value determined otherwise.
Turning to the issue of presentation in the balance sheet, it should be noted that when drawing up the balance sheet according to Annex 1 to the Act, the value should be shown in item A.IV.1. "Long-term investments - real estate". Investments can be valued according to the rules for fixed assets.
How to determine the value of a property on the balance sheet at market price or fair value?
The second option for investment properties is measurement at market value or fair value otherwise determined.
This market price is called the selling price. As is clear from Art. 28 sec. 5 of the Accounting Act, the net selling price (value) of an asset is the selling price possible to be obtained as at the balance sheet date, excluding value added tax and excise duty, less rebates, discounts and other similar reductions as well as costs related to adaptation asset for sale and the sale, plus the due subsidy due. If it is not possible to determine the net selling price of a given asset, its fair value as at the balance sheet date should be determined in a different manner.
However, if the net selling price of an asset cannot be determined, its fair value should be determined differently. Pursuant to Art. 28 sec. 6 above of the Act, the fair value is the amount for which a given asset could be exchanged, and the liability settled on the terms of a market transaction between interested and well-informed, unrelated parties. The fair value of financial instruments traded on an active market is their market price, less transaction costs, if their amount was significant. The market price of financial assets held by the entity and financial liabilities that the entity intends to incur is the current bid reported on the market, while the market price of financial assets that the entity intends to acquire and incurred financial liabilities is the current offer to sell.
Changes in the market value / fair value of an investment property in the form of an increase or decrease are charged to other operating income or to other operating expenses, respectively.
Also in this case, when drawing up the balance sheet according to Annex 1 to the Act, the value should be shown in item A.IV.1. "Long-term investments - real estate". The second valuation model for real estate investments in an entity is based on market value or otherwise determined fair value.
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How to determine the value of the property in the balance sheet in the event of property reclassification?
As we indicated in the introduction, it is possible to reclassify real estate. If the purpose of ownership changes, for example real estate is to be used for business purposes as a fixed asset and not as a commercial commodity intended to bring an economic benefit from the sale, an appropriate reclassification must be made.
As for the rules for determining the initial value in the event of reclassification, please refer to the National Court Register No. 11. The initial value of such a fixed asset is:
its net book value as at the date of reclassification - if, in accordance with the adopted accounting principles (policy), the entity measures investment property according to the principles specified for fixed assets;
its net book value as at the date of reclassification, determined at fair value - if the property was initially recognized by the entity as investment property and measured at fair value;
its gross book value less accumulated amortization and write-downs, if at any time in the previous periods an asset was recognized as a fixed asset - if the entity, in accordance with the adopted accounting principles (policy), measures investment property at market price or otherwise determined fair value; with the proviso that if it is not possible to determine a historical initial value, the initial value of the asset at the date of reclassification is the selling price of the same or a similar item.
With regard to real estate valued at market price or otherwise determined fair value, the difference between the net book value of the reclassified real estate and its market value or otherwise determined fair value is recognized in other operating income or costs. Determining the value of a real estate reclassified from an investment into a fixed asset depends on the adopted valuation model. Therefore, going to the summary, we can indicate that the subject of determining the value of the property is primarily determined by the qualification of the property itself. This is because it can be considered either a fixed asset used for the needs of the business or an investment. In the latter case, two real estate valuation models are possible.