Accounting Treatment for Changes in the Purpose of Holding Real Estate for Sale and Fixed Assets

In companies that own multiple properties, changes in the purpose of holding real estate can occur due to factors such as shifts in the economic environment, real estate market conditions, corporate restructuring, or internal organizational changes. This article explains the accounting treatment methods and related disclosures in Japan concerning changes in the purpose of holding real estate, specifically for properties intended for sale and fixed assets.

1. General Accounting Treatment for Real Estate Held for Sale and Fixed Assets

The general accounting treatment for real estate held for sale and fixed assets that a company owns can be considered as follows.

As such, accounting treatment for properties a company owns can vary depending on whether they are categorized as real estate held for sale or fixed assets. Therefore, when deciding on the accounting treatment for properties a company owns, it is crucial to determine whether the property should be classified as real estate held for sale or fixed assets based on the intended purpose and usage policy at the time of acquisition. Subsequently, the chosen accounting treatment should be consistently applied unless there is a change in the intended purpose.

2. Accounting Standards and Regulations Related to Changes in the Purpose of Holding Real Estate for Sale and Fixed Assets

In our country's accounting standards, there are no specific provisions that dictate changes in the purpose of holding real estate for sale and fixed assets. Instead, accounting treatment is carried out in compliance with relevant accounting standards. Additionally, the "Audit Considerations for the Valuation of Real Estate for Sale" (Report No. 69 of the Audit and Assurance Practices Committee of the Japanese Institute of Certified Public Accountants) outlines matters that auditors should pay attention to when it comes to these changes in the purpose of holding such assets.

In the "7. Handling of Changes in the Purpose of Holding Real Estate for Sale and Fixed Assets" section of the "Audit Considerations," the following provisions are specified:

As such, in the "Audit Considerations," it is stipulated that auditors should consider the determination of the carrying amount upon a change in the purpose of holding, assess the reasonableness of the change in purpose, and make appropriate disclosures in cases where the purpose of holding is changed.

3. Assessment of the Rationality of Changing the Purpose of Holding

According to the audit considerations, when it comes to the accounting treatment of changes in the purpose of holding real estate for sale and fixed assets, the following matters need to be assessed. It is considered necessary for companies to document these verification results from an internal control perspective:

Verification of the validity of the change in the purpose of holding.

• The existence of a specific and reliable business plan approved by the board of directors, etc.
• The economic rationality of the reasons for the change.

Therefore, it is necessary to have a specific business plan related to the transfer of real estate, which has been created and received approval in accordance with the company's decision-making procedures, and to ensure the economic rationality of the changes and the reasons. For specific points to consider, please refer to the following table.

In particular, when the period from the initial acquisition of the property to the change in the purpose of holding is short, or when the period from the change in purpose to the sale is short, it is considered necessary to carefully assess the economic rationality of the reasons for the change.

4. Determination of the carrying amount upon a change in the purpose of holding and accounting treatment for any losses

When the reason for changing the purpose of holding is deemed valid, the next step is to determine the carrying amount upon the change. The method for determining the post-transfer book value and the accounting treatment for any resulting losses are as follows.

5. Disclosure of the change in the purpose of holding

In terms of audit considerations, it is stated that when the change in the purpose of holding real estate for sale and fixed assets has a significant impact on a company's financial statements, it is necessary to make a note in the balance sheet to provide additional information regarding the nature and amount of that impact.

Additionally, Article 8-5 of the "Regulations for Financial Statements" specifies that besides the notes provided for in the regulation, if there are items deemed necessary for stakeholders to make a proper judgment about the company's financial position, operating results, and cash flow, these items must be noted.

Similarly, a similar provision can be found in Article 15 of the "Consolidated Financial Statements Regulations," and similar provisions exist in other regulations such as Article 22 of the "Quarterly Financial Statements Regulations" and Article 14 of the "Quarterly Consolidated Financial Statements Regulations."

Therefore, when a change in the purpose of holding real estate for sale and fixed assets is judged to have a significant impact on a company's financial statements, appropriate notes should be made to provide the necessary information.

Example 1 of a note:

Example 2 of a note: