IAS 40 Investment Property

Transcription

1 IAS 40 Investment Property

2 Scope Applies in the: recognition, measurement and disclosure of investment property measurement in a lessee s financial statements of investment property interests held under a lease accounted for as a finance lease; and measurement in a lessor s financial statements of investment property provided to a lessee under an operating lease

3 What s not in? Matters covered in IAS 17 Leases, including: classification of leases as finance leases or operating leases; recognition of lease income from investment property; measurement in a lessee s financial statements of property interests held under a lease accounted for as an operating lease; measurement in a lessor s financial statements of its net investment in a finance lease; accounting for sale and leaseback transactions; and disclosure about finance leases and operating leases Biological assets related to agricultural activity Mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources.

4 IAS 40 - Definitions Investment property Property (land or a building or part of a building or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for: Use in production / supply of goods or services or for administrative purposes; OR Sale in the ordinary course of business Owner occupied property Property held (by owner or lessee under a finance lease) for use in production / supply of goods or services or for administrative purposes. Always accounted for as Property, Plant & Equipment

5 Company A Operating Lease Company B Operating Lease Company C

6 Property under Operating Lease Where held under an operating lease can elect to account for it as a FINANCE lease if: Would meet the definition of an Investment Property (remember the criteria?) Lessee uses the fair value model Can elect to do this classification on a lease by lease basis HOWEVER, if you use it, ALL investment properties must be accounted for using the fair value model

7 Company A Company B Operating Lease Finance Lease Operating Lease Company C

8 Recognition Recognised as an asset when, and only 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

9 How do we recognise them on initial recognition? At cost! Including any Transaction Costs incurred

10 So what s included in Cost? Cost of a purchased investment property comprises: purchase price; and any directly attributable expenditure. professional fees for legal services; property transfer taxes; and other transaction costs

11 And what s not? Cost of an investment property is not increased by: start-up costs (unless they are necessary to bring the property to the condition necessary for it to be capable of operating in the manner intended by management); or operating losses incurred before the investment property achieves the planned level of occupancy; or abnormal amounts of wasted material, labour or other resources incurred in constructing or developing the property. any imputed interest expense recognised, where the settlement of the purchase price is deferred

12 Investment Property under lease Cost of property that is held under a lease and classified as an investment property is accounted for in terms of the accounting for a finance lease in IAS 17, i.e. the asset is recognised at the lower of the fair value of the property; and the present value of the minimum lease payments; With an equivalent amount recognised as a liability

13 Subsequent Measurement You have a choice: Cost model Apply IAS 16 Fair value model Differs from the revaluation model, changes recognised in profits and losses If the fair value is no longer reliably determinable, then cost model should be applied until disposal Chosen model must be applied to all investment properties

14 Determining Fair Value IAS 40 requires all entities to determine the fair value of investment property, for the purpose of either: Measurement (if using the fair value model); or Disclosure (if using the cost model) Encouraged, but not required, to determine the fair value of investment property on the basis of a valuation by an independent valuer who holds a recognised and relevant professional qualification and has recent experience in the location and category of the investment property being valued

15 Determining Fair Value Market conditions at reporting date Reflects rental income & any cash outflows

16 Determining Fair Value Current prices in active market for similar property in same location & condition & subject to similar lease & other contracts If different nature, condition or location (or subject to different lease or other contracts) adjust for those differences Recent prices of similar properties on less active markets Adjust for changes in economic conditions since the date transactions occurred at those prices DCF based on reliable estimates of future cash flows

17 Fair value Vs. Value in use Fair value reflects the knowledge and estimates of knowledgeable, willing buyers and sellers IFRS 13 Value in use reflects the entity s estimates, including the effects of factors that may be specific to the entity and not applicable to entities in general

18 Determining Fair Value Fair value should not reflect any of the following factors to the extent that they would not be generally available to knowledgeable, willing buyers and sellers: additional value derived from the creation of a portfolio of properties in different locations; synergies between investment property and other assets; legal rights or legal restrictions that are specific only to the current owner; and tax benefits or tax burdens that are specific to the current owner.

19 Double-counting Do not double-count assets or liabilities that are recognised as separate assets or liabilities e.g.: equipment such as lifts or air-conditioning is often an integral part of a building and is generally included in the fair value of the investment property, rather than recognised separately as PPE. if an office is leased on a furnished basis, the FV of the office generally includes the FV of the furniture, as the rental income relates to the furnished office. When furniture is included in the FV of IP, then it is not recognised as a separate asset.

20 Double-counting FV excludes prepaid or accrued operating lease income, because the entity recognises it as a separate liability or asset FV of IP held under a lease reflects expected cash flows (including contingent rent that is expected to become payable). If a valuation obtained for a property is net of all payments expected to be made, then add back any recognised lease liability to arrive at the carrying amount of the investment property using the fair value model.

21 Determining Fair Value Assumption: FV can be reliably determined on a continuing basis UNLESS Comparable market transactions infrequent & alternative reliable estimates of FV (eg DCF) are not available If not, apply IAS 16 Residual Value assumed to be 0

22 Investment Property Under Construction What about Investment Property Under Construction? If an entity has adopted the Fair Value model then it is presumed that fair value can be reliably determined during and after constructions...unless rebutted

23 Interaction between IFRS 3 & IAS 40? Oh, one last thing... If an entity acquires a building with tenants, is this an acquisition of an Investment Property or is this a Business Combination within the scope of IFRS 3?

24 Classification IAS 40 vs IFRS 3 Classification of property as investment property or business combination Apply judgement to determine whether an acquisition is that of investment property or a business combination in terms of IFRS 3 Business Combinations. Separate application of both Standards is required when determining the correct classification of the acquisition.