Rather than distributing its excess cash to its shareholders an entity acquired a rare painting. The painting is held for capital appreciation rather than for: (a) use in the production or supply of goods or services or for administrative purposes; or (b) sale in the ordinary course of business.. The IFRS for SMEs does not explicitly specify how to account for investments in paintings. How should the entity account for its investment in the painting?
(a) Because the IFRS for SMEs does not explicitly specify how to account for an investment in a painting, on initial recognition the entity would recognise the expenditure on the painting as an expense in profit or loss.
(b) Because the carrying amount of the painting will be recovered through capital appreciation (or possibly rental to others), the relevant information that users’ of the entity’s financial statements would want about the painting is its current market value. Consequently, by analogy to the accounting specified for investment property (see Section 16 Investment Property) the entity should initially measure the painting at cost and thereafter at fair value, with changes in fair value being recognised in profit or loss.
(c) Same as (b). However, if the fair value of the painting cannot be measured reliably without undue cost or effort on an ongoing basis then, by analogy to Section 17 Property, Plant and Equipment (which includes investment property whose fair value cannot be determined reliably without undue cost or effort on an ongoing basis) the entity would account for the painting using the cost-depreciation-impairment model.
(d) Because the IFRS for SMEs does not explicitly specify how to account for an investment in a painting the entity must, in accordance with paragraph 2.46, measure the painting asset at its historical cost and subsequently, in accordance with paragraph 2.49, measure it at cost less impairment.