WEEK 9 Investment Property IAS 40
Learning Objectives Define the term investment property. Explain the recognition and measurement procedures in IAS 40 Discuss how to treat disposable of an asset Discuss the mandatory disclosures in IAS 40
Definition Investment property is 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. Examples Land held for long-term capital appreciation Land held for undecided future use Building leased out under an operating lease Vacant building held to be leased out under an operating lease
Items Which 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 (IAS 11 Construction Contracts); 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 owner-occupied property awaiting disposal; property that is being constructed of developed for use as an investment property
Classification Issues 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 IAS 17 Leases; and the lessee uses the fair value model set out in this Standard for the asset recognised.
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.
Ancillary services If the enterprise provides ancillary services to the occupants of a property held by the enterprise, 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 enterprise 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.
Intracompany rentals 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.
Recognition Investment property should be recognised as an asset when it is probable that the future economic benefits that are associated with the property will flow to the enterprise, and the cost of the property can be reliably measured.
Initial measurement Investment property is initially measured at cost, including transaction costs. Such cost should not include start-up costs, abnormal waste, or initial operating losses incurred before the investment property achieves the planned level of occupancy.
Measurement subsequent to initial recognition a fair value model; and a cost model. 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.
Fair value model 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. Gains or losses arising from changes in the fair value of investment property must be included in net profit or loss for the period in which it arises. Fair value should reflect the actual market state and circumstances as of the balance sheet 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 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.
Cost Model After initial recognition, investment property is accounted for in accordance with the cost model as set out in IAS 16, Property, Plant and Equipment cost less accumulated depreciation and less accumulated impairment losses.
Transfers to or from Investment Property Classification 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); or end of construction or development (transfer from property in the course of construction/development to investment property.
Rules apply for accounting for transfers between categories 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;
Rules apply for accounting for transfers between categories 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 recognised in net profit or loss for the period; and 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 recognised in net profit or loss for the period.
Disposal An investment property should be derecognised 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 recognised as income or expense in the income statement. Compensation from third parties is recognised when it becomes receivable.
Disclosure Both Fair Value Model and Cost Model whether the fair value or the cost model is used; if the fair value model is used, whether property interests held under operating leases are classified and accounted for as investment property; if classification is difficult, the criteria to distinguish investment property from owner-occupied property and from property held for sale. the methods and significant assumptions applied in determining the fair value of investment property. the extent to which the fair value of investment property is based on a valuation by a qualified independent valuer; if there has been no such valuation, that fact must be disclosed
Disclosure Both Fair Value Model and Cost Model the amounts recognised in profit or loss for: rental income from investment property; direct operating expenses (including repairs and maintenance) arising from investment property that generated rental income during the period; and direct operating expenses (including repairs and maintenance) arising from investment property that did not generate rental income during the period.
Disclosure Both Fair Value Model and Cost Model Restrictions on the realisability of investment property or the remittance of income and proceeds of disposal. Contractual obligations to purchase, construct, or develop investment property or for repairs, maintenance or enhancements.
Additional Disclosures for the Fair Value Model a reconciliation between the carrying amounts of investment property at the beginning and end of the period, showing additions, disposals, fair value adjustments, net foreign exchange differences, transfers to and from inventories and owner-occupied property, and other changes. significant adjustments to an outside valuation (if any) if an entity that otherwise uses the fair value model measures an item of investment property using the cost model, certain additional disclosures are required.
Additional Disclosures for the Cost Model the depreciation methods used; the useful lives or the depreciation rates used; the gross carrying amount and the accumulated depreciation at the beginning and end of the period; a reconciliation of the carrying amount of investment property at the beginning and end of the period, showing additions, disposals, depreciation, impairment recognised or reversed, foreign exchange differences, transfers to and from inventories and owner-occupied property, and other changes; the fair value of investment property. If the fair value of an item of investment property cannot be measured reliably, additional disclosures are required, including, if possible, the range of estimates within which fair value is highly likely to lie.
Summary Investment property is 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. Investment property should be recognised as an asset when it is probable that the future economic benefits that are associated with the property will flow to the enterprise, and the cost of the property can be reliably measured. Investment property is initially measured at cost, including transaction costs. Such cost should not include start-up costs, abnormal waste, or initial operating losses incurred before the investment property achieves the planned level of occupancy. Measurement subsequent to initial recognition IAS 40 permits enterprises to choose between a fair value model and a cost model.