IAS 40-INVESTMENT PROPERTY
The objective of this Standard is to prescribe the accounting treatment for investment property and related disclosure requirements.
Investment property is property held to earn rentals or for capital appreciation or both, rather than for:
- Use in the production or supply of goods or services or for administrative purposes; or
- Sale in the ordinary course of business.
Owner-occupied propertyis property held (by the owner or by the lessee under a finance lease) for use in the production or supply of goods or services or for administrative purposes.
The following are examples of investment property:
- Land held for long-term capital appreciation
- Land held for a currently undetermined future use
- Building leased out under operating lease
- A building that is vacant but is held to be leased out under one or more operating leases.
- Property that is being constructed or developed for future use as investment property
The following are examples of items that are not investment property:
- Property held for use in the production or supply of goods or services or for administrative purposes
- Property held for sale in the ordinary course of business or in the process of construction of development for such sale (IAS 2 Inventories)
- Property being constructed or developed on behalf of third parties
- Owner-occupied property (IAS 16 Property, Plant and Equipment), including property held for future use as owner-occupied property, property held for future development and subsequent use as owner-occupied property, property occupied by employees and owneroccupied property awaiting disposal
- Property leased to another entity under a finance lease
Property held under an operating lease.
A property interest that is held by a lessee under an operating lease may be classified and accounted for as investment property provided that:
- The rest of the definition of investment property is met
- The operating lease is accounted for as if it were a finance lease in accordance with IFRS 16 Leases
- The lessee uses the fair value model set out in this Standard for the asset recognised
An entity may make the foregoing classification on a property-by-property basis.
Partial own use
If the owner uses part of the property for its own use, and part to earn rentals or for capital appreciation, and the portions can be sold or leased out separately, they are accounted for separately. Therefore the part that is rented out is investment property. If the portions cannot be sold or leased out separately, the property is investment property only if the owner-occupied portion is insignificant.
If the entity provides ancillary services to the occupants of a property held by the entity, the appropriateness of classification as investment property is determined by the significance of the services provided. If those services are a relatively insignificant component of the arrangement as a whole (for instance, the building owner supplies security and maintenance services to the lessees), then the entity may treat the property as investment property. Where the services provided are more significant (such as in the case of an owner-managed hotel), the property should be classified as owner-occupied.
Property rented to a parent, subsidiary, or fellow subsidiary is not investment property in consolidated financial statements that include both the lessor and the lessee, because the property is owner-occupied from the perspective of the group. However, such property could qualify as investment property in the separate financial statements of the lessor, if the definition of investment property is otherwise met.
Investment property shall be recognized as an asset when
- It is probable that the future economic benefits that are associated with the investment property will flow to the entity; and
- The cost of the investment property can be measured reliably.
- An investment property shall be measured initially at its Cost + Transaction costs.
- The cost of a purchased investment property = Purchase price + any directly attributable expenditure.
The cost should not include start-up costs, abnormal waste, or initial operating losses incurred before the investment property achieves the planned level of occupancy.
This should be added to the carrying amount of the investment property when it is probable that future economic benefits in excess of the originally assessed standard of performance of the existing investment property will flow to the enterprise. All other subsequent expenditure should be recognized as an expense in the period in which it is incurred.
Exchanges of assets
An investment property may be acquired in exchange or part exchange for a non-monetary asset or assets or a combination of monetary and non-monetary assets.
The cost of such an item is the fair value unless the exchange transaction lacks commercial substance or the fair value of the asset given up / acquired is not reliably measurable. Then the cost of the asset acquired will be the carrying value of the asset given up
IAS 40 permits entities to choose between
- A fair value model, and A cost model.
Under cost model, investment property should be measured at depreciated cost, less any accumulated impairment losses.
FAIR VALUE MODEL
Under the fair value model the entity should:
- Revalue all its investment property to ‘fair value’ (open market value) at the end of each financial year, and
- Take the resulting gain or loss to profit or loss for the period in which it arises.
Fair value is the price that would be received to sell an asset or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.
Investment property is remeasured at fair value, which is the amount for which the property could be exchanged between knowledgeable, willing parties in an arm’s length transaction.
Fair value should reflect the actual market state and circumstances as of the reporting date. The best evidence of fair value is normally given by current prices on an active market for similar property in the same location and condition and subject to similar lease and other contracts. In the absence of such information, the entity may consider current prices for properties of a different nature or subject to different conditions, recent prices on less active markets with adjustments to reflect changes in economic conditions, and discounted cash flow projections based on reliable estimates of future cash flows.
There is a rebuttable presumption that the entity will be able to determine the fair value of an investment property reliably on a continuing basis. However:
- If an entity determines that the fair value of an investment property under construction is not reliably determinable but expects the fair value of the property to be reliably determinable when construction is complete, it measures that investment property under construction at cost until either its fair value becomes reliably determinable or construction is completed.
- If an entity determines that the fair value of an investment property (other than an investment property under construction) is not reliably determinable on a continuing basis, the entity shall measure that investment property using the cost model in IAS 16. The residual value of the investment property shall be assumed to be zero. The entity shall apply IAS 16 until disposal of the investment property.
Where a property has previously been measured at fair value, it should continue to be measured at fair value until disposal, even if comparable market transactions become less frequent or market prices become less readily available.
The cost model is the same treatment in IAS 16. Investment property should be measured at cost less accumulated depreciation less any accumulated impairment losses. An enterprise that chooses the cost model should disclose the fair value of its investment property.
Adoption and change of models
One method must be adopted for all of an entity’s investment property. Change is permitted only if this results in a more appropriate presentation. IAS 40 notes that this is highly unlikely for a change from a fair value model to a cost model.
Transfers to, or from, investment property should only be made when there is a change in use, evidenced by one or more of the following:
- Commencement of owner-occupation (transfer from investment property to owner-occupied property)
- Commencement of development with a view to sale (transfer from investment property to inventories)
- End of owner-occupation (transfer from owner-occupied property to investment property)
- Commencement of an operating lease to another party (transfer from inventories to investment property)
- End of construction or development (transfer from property in the course of construction/development to investment property
When an entity decides to sell an investment property without development, the property is not reclassified as inventory but is dealt with as investment property until it is derecognised.
RULES FOR TRANSFER:
- For a transfer from investment property carried at fair value to owner-occupied property or inventories, the fair value at the change of use is the ‘cost’ of the property under its new classification
- For a transfer from owner-occupied property to investment property carried at fair value, IAS 16 should be applied up to the date of reclassification. Any difference arising between the carrying amount under IAS 16 at that date and the fair value is dealt with as a revaluation under IAS 16
- For a transfer from inventories to investment property at fair value, any difference between the fair value at the date of transfer and it previous carrying amount should be recognized in profit or loss
- When an entity completes construction/development of an investment property that will be carried at fair value, any difference between the fair value at the date of transfer and the previous carrying amount should be recognized in profit or loss.
When an entity uses the cost model for investment property, transfers between categories do not change the carrying amount of the property transferred, and they do not change the cost of the property for measurement or disclosure purposes.
An investment property should be derecognized on disposal or when the investment property is permanently withdrawn from use and no future economic benefits are expected from its disposal.
The gain or loss on disposal should be calculated as the difference between the net disposal proceeds and the carrying amount of the asset and should be recognized as income or expense Compensation from third parties is recognized when it becomes receivable.
ACCOUNTING TREATMENT DIFFERENCE – Fair value model & Revaluation model
Superficially, the revaluation model and fair value sound very similar; both require properties to be valued at their fair value which is usually a market-based assessment (often by an independent valuer).
However, any gain (or loss) over a previous valuation is taken to profit or loss if it relates to an investment property, whereas for an owner-occupied property, any gain is taken to a revaluation reserve (via other comprehensive income and the statement of changes in equity).
A loss on the revaluation of an owner-occupied property is charged to profit or loss unless it has a previous surplus in the revaluation reserve which can be used to offset the loss until it is exhausted. A further difference is that owner-occupied property continues to be depreciated after revaluation, whereas investment properties are not depreciated.