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| Sunday, 30 January 2005 |
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ICASL adopts new investment property standard The Institute of Chartered Accountants of Sri Lanka (ICASL) has published the Sri Lanka Accounting Standard, SLAS 40 - Investment Property. The Standard was published in the Gazette of the Democratic Socialist Republic of Sri Lanka - Extraordinary - No. 1342/7 of 25th May 2004, in accordance with Sections 2(1) and 2(2) of the Sri Lanka Accounting and Auditing Standards Act No. 15 of 1995, in all three languages. The Standard is based on the corresponding International Accounting Standard, IAS 40 - Investment Property and becomes operative for annual financial statements covering periods beginning on or after 01st April 2004. Earlier application is encouraged. This Standard prescribes the accounting treatment for Investment Property and related disclosure requirements. It replaces the paragraphs relating to Investment Property in SLAS 22 - Accounting for Investments. Under SLAS 22, an enterprise was permitted to choose from among a variety of accounting treatments for Investment Property (depreciated cost under the benchmark treatment in SLAS 18 - Property, Plant & Equipment), revaluation, with depreciation under the allowed alternate treatment in SLAS 18, cost less impairment under SLAS 22 or revaluation under SLAS 22). The relevant paragraphs in SLAS 22 are withdrawn when this Standard comes to effect. Investment Property is defined as property (land or building - or part of a building - or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for: (a) use in the production or supply of goods or services or for administrative purpose; or (b) sale in the ordinary course of business The Standard does not deal with: (a) owner-occupied property (that is, property held for use in the production or supply of goods or services or for administrative purposes) - carried under SLAS 18 - Property, Plant & Equipment at either depreciated cost or re-valued amount less subsequent depreciation; (b) property held for sale in the ordinary course of business - carried at the lower of cost and net realisable value under SLAS 5 - Inventories; (c) property being constructed or developed for future use as investment property - SLAS 18 - Property, Plant & Equipment, applies to such property until the construction or development is complete, at which time the property becomes investment property and this Standard applies. However, this Standard does apply to existing investment property that is being redeveloped for continued future use as investment property; (d) an interest held by a lessee under an operating lease - covered by SLAS 19 - Leases; The standard permits enterprises to choose either: (a) a fair value model; investment property should be measured at fair value and changes in fair value should be recognised in the income statement; or (b) a cost model. The cost model is the benchmark treatment in SLAS 18 - Property, Plant & Equipment investment property should be measured at depreciated cost (less any accumulated impairment losses). An enterprise that chooses the cost model should disclose the fair value of its investment property. The fair value model differs from the revaluation model permitted in SLAS 18 - Property, Plant & Equipment. Under the revaluation model, increases in carrying amount above a cost-based measure are recognised as revaluation surplus. However, under the fair value model, all changes in a fair value are recognised in the income statement. Some commentators express reservations about fair value model for investment property. They also believe the Sri Lankan property markets are not yet sufficiently mature for fair value model to work satisfactorily. While the Institute of Chartered Accountants of Sri Lanka took due cognisance of the view, it believes that it is desirable to permit a fair value model with certain safeguards. This evolutionary step forward will allow preparers and users to gain greater experience working with a fair value model and will allow time for certain property markets to achieve greater maturity. The Standard requires that an enterprise should apply the model chosen to all its investment property. A change from one model to the other model should be made only if the change will result in a more appropriate presentation. The Standard states that this is highly unlikely to be the case for a change from the fair model to the cost model. In exceptional cases, there is clear evidence when an enterprise first acquires an investment property (or when an existing property first becomes investment property following the completion of construction or development, or after a change in use) that the enterprise will not be able to determine the fair value of the investment property reliably on a continuing basis. This arises when and only when, comparable market transactions are infrequent and alternative estimates of fair value (for example, based on discounted cash flow projections) are not available. In such cases, the Standard requires an enterprise to measure the investment property using the benchmark treatment in SLAS 18 - Property, Plant & Equipment, until the disposal of the investment property. The residual value of the investment property should be assumed to be zero. An enterprise that has chosen the fair value model measures all its other investment property at fair value. |
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