IAS 16 – Property, Plant and Equipment
applies to all properties “…that are held by an enterprise for use in the production or supply of goods and services,
for rental to others, or for administrative purpose and that are expected to used during more than one period.”
GAAP in the US has historically reported real estate value in financial reports at historical
cost less accumulated depreciation. This is known as the “Benchmark Treatment”. IFRS allows the value of real
estate to be reported at fair market value, which is known as the “Allowed Alternative Treatment”. The principle
of the Allowed Alternative Treatment is “true and fair view” and represents a mark-to-market approach. The property
“... should be carried at a revalued amount, being its fair value […] less any subsequent accumulated depreciation
[…] impairment losses.”
To keep this value up-to-date a “sufficient regularity” of revaluations
is required. Any gains or losses through revaluation adjustments have generally no direct impact on the income statement as
long as it is possible to show them directly in the stockholder’s equity.
16.34 prohibits the revaluation of a single property by requiring the company to use the same measurement methods within an
The new 2005 version of the standards will further require
a separate depreciation calculation for each part of the property with a significant share of the total costs. This will lead
to separate depreciation and cost measurements for the main property parts, such as land, structure, HVAC, fuel service, and
IAS 16 and IAS 40 require a detailed disclosure of the
used valuation methods and their underlying assumptions.
version of IFRS states the “the fair value of land and buildings is usually its market value” It is determined
by an “appraisal normally undertaken by professional qualified valuers” (IAS 16.30) and represents the “amount
for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction (IAS 16.6).
The IVS characterizes market value as ”the estimated amount for which a property should
exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after
property marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion”. The comparison
of the characteristics of market value and fair value shows that the recent version of the IFRS and the IVA have very similar
The revised standards now support the value of the highest and
best use of all possible uses. This concept dropped the previous “market value for the existing use” and brought
IFRS closer to the USPAP in the U.S.
The impairment test is “value in use”.
This value is a non-market assessment and equals the present value of the estimated future cash flows including the property’s
According the IFRS, the “best evidence of fair
value is normally given by current prices in an active market for similar property” (IAS 40.39). In the U.S. this is
referred to as the sales comparison approach. In the absence of current prices in an active market, the IFRS give three alternatives:
(1) to adjust the current prices of differing properties to reflect these differences. (2) to adjust the recent prices of
similar properties to reflect economic change or (3) to use discounted cash flow projections.