Hello Christopher
I agree that AASB 140 applies the way that you have described in relation to revalued investments in real property.
All that said, there is a threshold question here as to why the unit trust that the SMSF has invested in, and that is a related party of the SMSF, is applying AASB 140 in the first place?
AASB 2020-2 removed the ability of certain private sector for-profit entities to prepare special purpose financial reports from 1 July 2021.
At the risk of over simplification, Tier 1 entities must prepare general purpose financial reports. Tier 1 entities include publicly listed companies and Australian Government, State, Territory and Local Governments.
Tier 2 entities include for-profit private sector entities that do not have public accountability. This would include an SMSF and presumably the related party unit trust. As a general proposition, these Tier 2 entities would only prepare “general purpose financial reports” if a third party expressly required it of them (maybe a bank that lent under an LRBA might required general purpose financial reports) or if the trust deed expressly requires the trust to either prepare “general purpose financial reports” OR to adhere to “Australian accounting standards” or “accounting standards”.
If the Deed of the unit trust made a reference to the preparation of financial statements based on “Australian accounting standards” or “accounting standards”, the unit trust is now required to prepare general purpose financial reports (and apply AASB 140, amongst other standards).
So the question is what does the deed of the unit trust require?
If it makes no reference to accounting standards or to general purpose financial reports, then the financials for the trust can still be prepared as a special purpose financial report, in which case AASB 140 does not need to be applied.
It is assumed that the unit trust is not a “registered managed investment scheme”. Such schemes are treated as if they have “public accountability” in which case they are required to prepare general purpose financial reports.
Other approach – where accounting standards are required to be adhered to
Where a trust is required by its deed to apply accounting standards as at 1 July 2021, then it will be required to prepare general purpose financial reports. This requirement remains even if the Deed was subsequently amended to remove references to “accounting standards”.
Where this is the case, one approach might be to prepare two different sets of financial accounts! Naturally this would come at an additional cost in professional services fees.
Prepare financial accounts that are general purpose financial reports which would apply AASB 140 – where an increase in the value of real estate that is an unrealised gain in going to the P&L.
Ensure that the deed allows the trustee to decide what is “distributable income” without reference to accounting standards. Then prepare another set of financial accounts to determine “distributable income” for trust purposes – that is, trust income as determined by the trust’s deed, not accounting profit as determined with reference to Australian Accounting Standards, and AABS 140 in particular.  This “distributable income”, where there is an increase in the value of an asset that is unrealised, is reflected by:
Dr Asset (Balance Sheet)
Cr Asset Revaluation Reserve (Equity Account)
The “distributable income” based on a trustee’s discretion to determine trust income (and not Australian Accounting Standards) would not give rise to the UPE problem you refer to.
I appreciate there is a bit of complexity to this response.
It is also noted that any potential changes to the deed of the trust would require legal advice provided by a legal practitioner.
Happy to hear the thoughts of other fund auditors in relation to this matter.
Best regards
The Auditors Institute