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Valuation of Property
- 11 September 2024
- Accounting
- Marita Jordaan
This article is based on tax law for the year ending 28 February 2025.
1. Background
A South African company purchased land, which is being subdivided into plots for the construction of houses. Once completed, each plot with its corresponding house will be sold individually. The company seeks to reflect the potential value of these properties on its balance sheet.
2. The Question
Can the company reflect the potential new value of the properties on the balance sheet, or would they be categorised as inventory, which cannot be revalued and presented at a higher cost? Additionally, can the company provide details in the inventory note of the Annual Financial Statements (AFS), specifying that the properties will be marketed and sold, for example, 20 units at R500k each, with a total value of R10 million?
2. Applicable Law
ITA 58 of 1962, section 22(3)(a)(i)
3. Application of the Law to the Facts
It is agreed that the subdivided land is trading stock. For tax purposes, it will be recorded at the cost price of the land, apportioned to the individual plots, along with any further costs incurred to bring the stock to its condition and position as of the accounting date. This would include the cost of subdivision.
For accounting purposes, IFRS IAS 2 requires that inventory is measured at the lower of cost or net realisable value (NRV). NRV is the expected selling price of the asset, less any costs associated with selling it, such as fees or transport.