IFRS: Investments



Nowadays, the transition to the International Accounting Standards (IAS) and financial reporting is one of the conditions for companies to receive support from governmental agencies. In particular, for the countries with high-risk financial conditions, the recognition of the International Financial Reporting Standards (IFRS) will be an important step to attract foreign investments. The transition to international accounting practices will greatly facilitate the relationships with foreign investors and help to increase the number of joint projects. It should be mentioned that the process of harmonization and standardization of accounting systems is global. For example, within the European Union, this work is carried out for about 40 years (Ankarath et al., 2010). Recently, due to the widespread introduction of modern communication technologies, requirements for uniform interpretation of financial results of a company have increased even more. Investing is increasingly performed in real-time through a worldwide electronic network, which is another serious argument in the favor of unification of accounting standards. Therefore, the following essay is dedicated to the specific international standards that set the rules for the accounting of investments.

Property and Related Disclosure Requirements

The accounting of investments is governed by IAS 40, which prescribes the rules for the accounting of investment property and related disclosure requirements. In particular, this standard applies to the calculation of investment property under the lease that is taken into account as finance or operating lease. It should be noted that for investments in the form of land and buildings to be recognized as an investment property, assets must not be intended for sale. Besides, a company should not use these facilities for its own administrative or production needs. In case a company leases the property for rent to its associate or joint venture, it is taken into account as an investment. It should be noted that a company may lease the investment property only as an operating lease. In case the object is transmitted to a finance lease, it cannot be accounted for as an investment property. Moreover, in case a company receives the object under finance or operating leases, it will have to pass this object only in the operating sublease for it to be accounted for as an investment property (Mackenzie et al., 2013).

Investment Property

In case a company buys or builds an investment property, it is initially assessed by its cost. Therefore, it includes only the costs required to bring the facility into a state that is suitable for use. In this case, the operating losses incurred before the object has been put into use are not included in it. The initial cost also includes the cost of the professional legal services (relating to the acquisition of the object) and taxes on the transfer of property (Ankarath et al., 2010).

The initial cost of the property in the possession of a company under a finance lease and classified as an investment property is determined in the same manner as for finance leases. The assets are recognized by selecting the lowest of the two values: the fair value of a real estate or the current value of lease payments. According to the standard, an equivalent amount is to be considered as a liability (Mackenzie et al., 2013).

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After the initial recognition, it is possible to select one of the following accounting methods of investment property: a model of the fair value model or the initial cost model. The fair value means that at the end of the reporting period, the cost of the investment property does not contain any special conditions (discounts and special financing conditions), as well as the potential costs for the sale or the other disposal. Therefore, it can be considered as a hypothetical market price, at which two independent, knowledgeable parties may have an agreement on the purchase and sale of an investment property. It should be noted that fair value is determined only at a specific date (a certain time), namely, the reporting date (Ankarath et al., 2010).

The method of accounting by the initial cost implies a reflection of the investment property following requirements that apply to the accounting for regular assets. Therefore, in the balance sheet, the cost of an object is stated at its initial cost minus the amortization and depreciation. It should be noted that in the case of fair value accounting, amortization or impairment are not taken into account (Mackenzie et al., 2013).

However, some organizations make significant investments in other companies, which do not provide complete control over them. Therefore, these companies are not affiliated. In case, an investing group has a significant influence on the policy of the other company, it will have an active interest in its net assets and results. Therefore, the nature of the relationship between an investor and a company will be different from a simple investment. For the proper investments in associates, it is required to apply IAS 28 (Ankarath et al., 2010).

It should be noted that the inclusion of the investment in the report of the group does not provide an objective display of its character. To provide an objective reflection of the nature of investments in the financial reports, it is necessary to show the group’s share of net assets and financial results of a company, which is called an associate in the consolidated financial reports (the method of the equity). This method prescribes the investment to be initially recorded at cost. Moreover, the carrying amount changes depending on the recognized investor’s share of profits and financial losses of the investee. The income coming from an investee reduces the carrying amount of investments. The adjustment to the carrying value may also be important to show the changes in the investor’s share. Usually, it takes place due to the changes in the equity of the investee, which were not included in the account of profits and losses. As a result, the standard also defines the status of an investor depending on its share. In case an investor holds at least 20% of shares of the investee, which are eligible to vote, it means that it has a significant influence on its associate unless the contrary can be proved. Conversely, in case an investor holds less than 30% of shares of the investee, which are eligible to vote, it means that there is no significant influence from its side unless it can be proved (Mackenzie et al., 2013).

Therefore, the abovementioned standards provide comprehensive instructions concerning the calculation, accounting, and reporting of the investment property and the investments to associates.


In conclusion, it is possible to say that, the need for a transition to IFRS should be determined by the overall strategy of reforms aimed at building a market economy in a country. In turn, the market economy must have the appropriate infrastructure elements. Since accounting and financial reports are the elements of this infrastructure, it is possible to talk about the construction of accounting and reporting systems corresponding to the new market conditions. In the business and professional world, it is recognized that IFRS most closely matches the market economy system of financial reporting. In particular, it provides the market with financial information that is useful for a wide range of interested users. It also provides an opportunity to build a new efficient system of management of a company and is a significant component of corporate management. As a result, comprehensive knowledge of IFRS is important in modern realities.

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