International Financial Reporting Standard and Fair value

Fair value of real estates declared in business books as property tax base for micro legal entities

According to the provisions of Article 7 paragraph 7 of Law on Property Taxes the basis of property tax on real property of taxpayer who keep business books and whose value in its books is expressed according to the method of the fair value in accordance with International Accounting Standards (IAS) respectively International Financial Reporting Standards (IFRS) and the adopted accounting policies shall be the fair value expressed on the last day of the business year of the taxpayer in the current year.

International Financial Reporting Standard for Small and Medium-Sized Entities and fair value of real estates

According to the provisions of Article 22 of Law on Accounting micro and other legal persons (legal persons whose business is partly financed from public funds or other government sources, in part or in whole based on membership and not established for the purpose of gaining profit) regardless of their size, may opt to apply the IFRS for small and medium-sized entities (SMEs) and in that case they shall applly the IFRS for SMEs in continuity.

Micro legal persons which have not decided to apply IFRS for SMEs for recognition, evaluation, presentation and disclosure of items in the individual financial statements, shall apply a secondary legislation passed by the minister in charge of finance affairs, which shall be based on general accounting principles and in in this case they do not have the possibilty to measure the value of the property according to fair value.

If they decide to apply IFRS for SMEs for recognition, evaluation, presentation and disclosure of items in the individual financial statements micro legal persons have possibility to evaluate only the investment properties according to fair value.

Fair value of the investment properties

The definition of investment properties is given in the Article 15 of the Rulebook on the method of recognition, evaluation, presentation and disclosure of items in the individual financial statements of micro and other legal persons and in the paragraph 16.2 of the IFRS for SMEs.

Investment properties are real estates (land or building – or part of a building – or both), which the owner or lessee under financial lease holds to earn rentals or for capital appreciation or for both of them, and not for the purpose of:

  • use for the production or supply of goods or services or for administrative purposes; or
  • sales in the ordinary frame of business.

Upon initial recognition the investment property shall be valued according to purchase value respectively cost price.

After initial recognition, investment property can be assessed according to fair value if fair value can be measured reliably without unnecessary cost and efforts, and changes of the fair value shall be recognized as a profit or loss in the Income Statement.

Only investment properties whose fair value can be measured reliably without unnecessary cost or efforts on an ongoing basis, shall be assessed according to fair value through the Income Statement.

All other investment properties shall be valued according to purchase value using the model of depreciation costs and impairment in the manner prescribed for long-term tangible assets (property, plant and equipment) in accordance with Article 14 of the Rulebook on the method of recognition, evaluation, presentation and disclosure of items in the individual financial statements of micro and other legal persons.

Based on the above basis for calculating of property tax for micro legal entity can be fair value only if it is the investment property in the sense of Article 15 of the mentioned Rulebook and paragraph 16.2 of the IFRS for SMEs and if the legal entity shall value the underlying property according to fair value.

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