OBJECTIVE
IAS 40 sets out the accounting treatment and the disclosure requirements for Investment Properties.
DEFINITION
An investment property (land/buildings) is 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 for sale in the ordinary course of business.
The following are examples of an investment property:
- A building owned by the entity and leased out under an operating lease i.e. a lease whereby all the risks and rewards of ownership lie with the landlord.
- Land held for long-term capital appreciation.
A property that is being constructed or developed for future use as an investment property is not an investment property until construction or development is complete.
Owner-occupied property is 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 and is not an Investment Property.
RECOGNITION
An investment property shall be recognised 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.
MEASUREMENT AT RECOGNITION
An investment property shall be measured initially at cost. The cost of a purchased investment property comprises its purchase cost and any directly attributable expenditure.
Directly attributable expenditure includes professional fees for legal services, transfer taxes and other transaction costs.
The cost of a self-constructed investment property is its cost at the date when the construction or development is complete.
MEASUREMENT AFTER RECOGNITION
An entity shall choose as its accounting policy either the fair value model or the cost model and shall apply that policy to all of its investment properties.
Fair Value Model
The fair value of an investment property is the price at which the property could be exchanged between knowledgeable, willing parties in an arm’s length transaction.
A gain or loss arising from a change in the fair value of an investment property shall be recognised in the Statement of Comprehensive Income for the period in which it arises.
Cost Model
An entity that chooses the cost model shall measure all of its investment properties in accordance with IAS 16 i.e. cost less any accumulated depreciation and less any accumulated impairment losses.
TRANSFERS
Transfer can only be made when there is a change of use. There are four possibilities:
- From Investment Property to Owner occupied property – use fair value at date of change.
- From Investment Property to inventory – Carried at fair value from date of change.
- From Owner occupied to Investment Property to be carried at fair value. Note exception for previously re-valued assets.
- From Inventory to Investment Property to be carried at fair value. Any difference between previous carrying amount and fair value should be recognised in Statement of Comprehensive Income .
If a property is transferred from an investment property to an owner-occupied property or to inventory, the property’s deemed cost for subsequent accounting shall be its fair value at the date of transfer. Essentially if the property is used for the purpose of the business, depreciation will be based on the fair value at the date of transfer over the remaining useful life.
If a property is transferred from an owner-occupied property to an investment property the property will be carried at fair value at that date. The revaluation surplus/deficit shall be dealt with in accordance with IAS 16.
DISCLOSURE
Both Cost Based and Fair Value Base Investment Properties a) Whether cost or fair value model applied,
- Amounts included in Statement of Comprehensive Income for rental income and operating expenses for the period,
- Any restrictions on the realisability of property or the remittance of income and proceeds of disposal,
- Contractual obligations to purchase, construct or develop investment properties.
Fair Value Based Properties
- Methods and assumptions applied to determine the fair value of properties
- The extent to which fair value is based on a valuation by independent valuer
- Additions and disposals during the period
- Net gains or losses from fair value adjustments
- Transfers
Cost Based Investments
- Depreciation methods used
- Useful lives or depreciation rates used
- Gross carrying amount and accumulated depreciation at the beginning and the end of the period
- Fair value of the investment property or if not reliable a description of the property and explanation why fair value is not reliable, and if possible, the range of estimates within which fair value is likely to lie.
- Reconciliation of carrying amount at the beginning and end of the period:
- Additions
- Disposals
- Depreciation,
- Impairment losses recognised or reversed
