TOPIC 2 - IAS 40 INVESTMENT PROPERTY Definitions: Investment Property: Property held to earn rentals or for capital appreciation or both. An entity may own land or a building as an investment rather than for use in the business. Property: Land and/or building (including part of a building) held by owner or lessee (finance or operating lease) Note: A building owned by the reporting entity (or held by the entity under a finance lease) and leased out under an operating lease qualifies as an Investment Property under IAS 40. Note: IAS 40 provides that an asset whose use has yet to be determined is held as an investment property. The following are not investment property 1. Property intended for sale in the ordinary course of business (Accounted for under IAS 2 Inventories) 2. Property being constructed or developed on behalf of third parties (Accounted for under IAS 11 Construction Contracts) 3. Owner occupied property e.g. Head Office (IAS 16 PPE) 4. Property being constructed or developed for future use as an investment property (IAS 16 until construction or development is complete, then treat as an investment property) 5. Property being leased to another entity under a finance lease i.e. the reporting entity does not control the asset Accounting Treatment Recognition Criteria Probable future economic benefits Cost can be measured reliably Initial Recognition Cost plus the transaction costs incurred to acquire the property 1
After initial recognition, entity may choose 1. Fair Value Model 2. Cost Model Fair Value Model 1. Revalue all its investment property to fair value (open market value)at the end of each financial year and 2. N.B.- Resulting gain or loss to profit or loss for the period in which it arises 3. No depreciation Note: This is different to the revaluation model of IAS 16, where unrealised gains are reported as other comprehensive income (not profit or loss) and credited to a revaluation reserve. The reason for the difference is to make the treatment of investment property consistent with that of investments under IFRS 9 (i.e. financial assets at fvtpl) where gains or losses on subsequent revaluation are recognised in profit or loss Cost Model: Property is valued at cost and the non land element is depreciated Transfers of Investment Property Transfer from Investment Property to non Investment Property and vice versa Transfers to or from investment property should only be made when there is a change in use. For example owner occupation commences so the investment property will be treated under IAS 16 as an owner occupied property. 2
When there is a transfer from investment property carried at fair value to owner occupied property, the property s cost for subsequent accounting under IAS 16 should be its fair value at the date of change of use Any adjustment required will be taken to the Statement of Profit or Loss as a movement in Fair Value Conversely an owner occupied property may become an investment property and need to be carried at fair value. An entity should apply IAS 16 up to the date of change of use. It should treat any difference at that date between the carrying amount of the property under IAS 16 and its fair value as a revaluation under IAS 16 Worked Example : Transfer to Investment Property A business owns a building which it has been using as a head office. In order to reduce costs, on 30 June 2009, it moved its head office functions to one of its production centres and is now letting out its head office. Company policy is to use the fair value model for investment property. The building had an original cost on 1 January 2000 of $250,000 and was being depreciated over 50 years. At 30 June 2009 its fair value was judged to be $350,000. How will this appear in the financial statements at 31 December 2009? Solution The building will be depreciated up to 30 June 2009 $ Original Cost 250,000 Depreciation - 1.1.00 31.12.08 (45,000) Depreciation to 30/6/09 (2,500) Carrying Amount at 30/6/09 202,500 Revelation Surplus 147,500 Fair Value at 30.6.09 350,000 3
The difference between the carrying amount and fair value is taken to a revaluation surplus in accordance with IAS 16. However the building will be subjected to a fair value exercise at each year end and these gains or losses will go to profit or loss. If at the end of the following year the fair value of the building is found to be $380,000, $30,000 will be credited to profit or loss. Gains or losses on disposals of Investment Properties N.B. Any gain or loss on disposal of investment property are included in profit or loss in the statement of comprehensive income in the period in which the disposal occurs. Disclosure Fair value model and cost model (a) whether it applies the fair value model or the cost model. (b) if it applies the fair value model, whether, and in what circumstances, property interests held under operating leases are classified and accounted for as investment property. (c) the methods and significant assumptions applied in determining the fair value of investment property, including a statement whether the determination of fair value was supported by market evidence or was more heavily based on other factors (which the entity shall disclose) because of the nature of the property and lack of comparable market data. (d) the extent to which the fair value of investment property (as measured or disclosed in the financial statements) is based on a valuation by an 4
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. If there has been no such valuation, that fact shall be disclosed. (e) the amounts recognised in profit or loss for: (i) rental income from investment property; (ii) direct operating expenses for the period (f) the existence and amounts of restrictions on the realisability of investment property or the remittance of income and proceeds of disposal. (g) contractual obligations to purchase, construct or develop investment property or for repairs, maintenance or enhancements. Fair value model (a) additions, disclosing separately those additions resulting from acquisitions and those resulting from subsequent expenditure recognised in the carrying amount of an asset; (b) additions resulting from acquisitions through business combinations; (c) assets classified as held for sale or included in a disposal group classified as held for sale in accordance with IFRS 5 and other disposals; (d) net gains or losses from fair value adjustments; (e) the net exchange differences arising on the translation of the financial statements into a different presentation currency, and on translation of a foreign operation into the presentation currency of the reporting entity; (f) transfers to and from inventories and owner-occupied property; 5
Cost model (a) the depreciation methods used; (b) the useful lives or the depreciation rates used; (c) the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period; (d) a reconciliation of the carrying amount of investment property at the beginning and end of the period, showing the following: (i) additions, disclosing separately those additions resulting from acquisitions and those resulting from subsequent expenditure recognised as an asset; (ii) additions resulting from acquisitions through business combinations; (iii) assets classified as held for sale or included in a disposal group classified as held for sale in accordance with IFRS 5 and other disposals; (iv) depreciation; (v) the amount of impairment losses recognised, and the amount of impairment losses reversed, during the period in accordance with IAS 36; vi) transfers to and from inventories and owner-occupied property; and vii) If using Cost Model, disclose fair value as a note to the accounts In the exceptional cases when an entity cannot determine the fair value of the investment property reliably, it shall disclose: (i) a description of the investment property; (ii) an explanation of why fair value cannot be determined reliably; and (iii) if possible, the range of estimates within which fair value is highly likely to lie. 6
Where One Part of a Property is Used In the Day to Day Activities of the Company and the Other Part Is Used as an Investment Property IAS 40.10 states 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. Example Aspire Ltd is a manufacturer of electrical products In 2007, the company purchased a premises for 6.5m. The company occupies 70% of the premises. The intention was that the remaining part of the premises should be leased to a tenant. However, no tenant has as yet been found What is the appropriate accounting treatment of the 30% portion? Solution Assuming that the 30% portion can be separately leased out (i.e. own entrance) then treat the 70% under IAS 16 and the 30% under IAS 40 7
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PAST EXAM QUESTIONS P1 IAS 40 PAST EXAM QUESTIONS P2 IAS 40 Q5 April 2015 Q (a) April 2013 Q2 August 13 Q1 Aug 2011 Issue 6 Q3 (7) August 13 Q1 Apr 2010 Note 5,6,7,8 Q3 (4) April 13 Q2, Q4 April 2011 Q4 Aug 2010 Q2 April 2010 10