Is switching from a cost model to fair value model of valuation of an investment property regarded as a prior period error or as a change in accounting policies?
International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) was introduced in Serbia by the Law on Accounting (“Law”) passed in 2013. The Law sets out that small legal entities must apply IFRS for SMEs for recognition, evaluation, presentation and disclosure of items in the financial statements starting from financial statements for 2014.
IFRS for SMEs brought a lot of changes compared to “full” IFRS, one of them being valuation of an investment property. While the “full” IFRS allows entities to choose whether they want to subsequently value their investment properties at cost or at fair value, Section 16 of IFRS for SMEs states that, at initial recognition, an entity shall measure investment property at its cost, while at each reporting date investment property whose fair value can be measured reliably without undue cost or effort shall be measured at fair value with changes in fair value recognized in profit or loss. It is fair to note that entities are not obligated to engage a professional appraiser for this job.
All of this means that all small legal entities had to “switch” to IFRS for SMEs as of 2014 and, subsequently, had to value their investment properties at fair value as at 31 December 2014. If for some reason, a small entity did not start measuring its investment property at fair value with the start of application of the new standard, but continued to measure it at cost, this is considered to be a prior period error, having in mind that small entities do not have an alternative regarding valuation of investment properties.
Section 10 of IFRS for SMEs states that, to the extent practicable, an entity shall correct a material prior period error retrospectively in the first financial statements after its discovery by restating the comparative amounts for the prior periods presented in which the error occurred, or if the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for the earliest prior period presented.
It is important to note that in this case, an entity must also change previous Corporate Income Tax return for periods affected by an error.
If an entity applying the “full” IFRS choses to “switch” from cost model to fair value model of valuation of its investment property, this would be regarded as a change in accounting policies. This change would need to be applied retrospectively adjusting the opening balance of each affected component of equity for the earliest prior period presented and the other comparative amounts disclosed for each prior period presented as if the new accounting policy had always been applied. Also, in this case, an entity would not need to change its Corporate Income Tax return for previous periods.