Company XYZ purchases land for $5,000,000. XYZ intends
to hold the land for a long term (20 years) and rent the land out to generate
income. Under IFRS, at which price is the company allowed to use on its
financial reports for the value of the land?
The first question you should ask here is the
classification of land. Is it PPE (Property, Plant, Equipment) or investment
land? Since it is being used for generating income (rather than for
operations), it is investment land.
How does IFRS allow valuation of investment land? Either at cost or at market price. XYZ
must choose a method and be consistent with it, but XYZ is allowed to choose
either method. Since XYZ is holding the land for a long time, they may choose
to value it at cost so as to not be affected by market volatility.