When determining whether a transaction should be recognised as an expense or capitalised as an asset, the substance of the transaction must take precedence over the legal form. Thus even though the property was not registered in the name of the client (legal form/requirement) the transaction should be assessed based on the intention of the client (substance – to acquire the property). When accounting for transactions as an asset it is important consider control over the asset rather than legal ownership. The fact that a sale transaction was concluded indicated the intention to acquire ownership. Furthermore, the fact that the client undertook to complete improvements and/or renovations indicates that the client had unrestricted control over the use of the property. This implies that the property should have been recognised as the property when the contract was concluded together with an assessment of the likelihood that the transfer would have taken place – more than 50% probability that the transaction taking place.
Furthermore, if the improvements/renovations were material (amount is considered to be significant) then it must be capitalised provided it will enhance the future economic benefits associated with the underlining asset. If the expenditure was expensed in prior periods then the correct should be recognised as a Change in Accounting Policy in terms of IAS 8 which stipulates a retrospective adjustment. This will require the adjustment to be implemented by reversing the expense via the Profit & Loss and adjusting the Investment Property in the statement of financial position. If the property was not recognised then the improvements/renovation should be recognised as part of Property, Plant & Equipment. When the property is recognised as Investment Property, the improvements/renovations should be re-classified from PPE to investment Property.
From a tax perspective, the improvements/renovations conducted prior to ownership being acquired can be recognised as that of a capital nature unless it was part of a lease improvement agreement or as part of the purchase contract which will then be included in the sale agreement. In such a case the client can attempt to claim the expense as a general deduction. If this is the case (recognised as a deduction) then there will be deferred tax implications – carrying amount will be the cost of improvements but the tax base will be zero (allowed as an expense).
Furthermore, the fact that the client has concluded a contract for the acquisition of the property must be considered as an event after the balance sheet for the reporting period ended 2015 or the transaction must be included as part of a capital commitment note to the financial statements