9/1/2018

IAS 40-Investment
property

Scope
• IAS 40-Investment property does not apply to:
• Biological assets (IAS 41-Agriculture and IAS 16-Property, Plant & Equipment)
• Mineral rights and mineral reserves such as oil, natural gas…

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Contents
• Definitions
• Identification
• Recognition and Measurement
• Presentation and disclosure

Definitions of terms
• Investment property: Property (land/building/part of a building) held
(by the owner or by the lessee under a finance lease) to earn rental
income or for capital appreciation purpose or both, rather than for:
• Use in the production or supply of goods or services or for administrative
purposes
• Sale in the ordinary course of business

Owner-occupied
Inventories
property
(IAS 2) (IAS 16)
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Identification
• Example of investment property
• Land held for long-term capital appreciation
• Land held for currently undetermined future use
• A building owned by the reporting entity (or held by the reporting entity
under a financial lease) and leased out under one or more operating leases
• A vacant building held by an entity to be leased out under one or more
operating leases
• Property under construction or being developed for future use as investment
property.

Identification
• Example of items that are not investment property
• Property employed in the business
• Owner-occupied property
• Property being constructed on behalf of third parties
• Property held for sale in the ordinary course of business or in the process of
production/development for such sale
• Property that is leased to another entity under a finance lease

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Identification
Joint use properties
• Properties used for a variety of purpose: a portion is used to earn rental
income, a portion is used in the production or supply of goods or services or
administrative purposes.
Can each portion be sold or leased out
Insignificant?
separately? Professional
judgement
Yes No

Entire property is classified as

Each portion is classified Property, Plants and Equipment;
separately Unless the owner-occupied portion is
insignificant => Entire property is
classified as Investment property 7

Identification
Ancillary services
• Entity may provide ancillary services to the occupants of its property:
maintenance of the building, security

Ancillary services are insignificant or incidental?

Yes No

Property is classified as Property is classified as

Investment property Property, Plants and
Equipment
(used for supply of services)
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Example
• Entity X built a residential property with the intention of selling it. In
the past, X has regularly developed property and sold it immediately
after completion. To increase the chances of a sale, X chooses to let
some of the flats as soon as they are ready for occupation. The
tenants move into the property before completion.
=> X should classify this property as…………………………………..

Answer
• Inventory

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Recognition & Measurement

Investment Property costs is recognized as an Asset
: When
 It becomes probable that the entity will enjoy the future economic benefits
which are attributable to it
 Costs of investment can be reliably measured

If the owner’s likelihood of receipt of economic benefits is less than probable,

costs incurred are recognized as expenses.
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Recognition & Measurement

Measurement: Amount?

Initially

Cost

Subsequently

Entity may choose

Cost Fair value
model model

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Initial measurement
Cost of investment property
Cost = Purchase cost + directly attributable expenditure (i.e. legal fees,
property transfer taxes & other transaction costs)
Cost of investment property does not include:
• Startup cost (unless they are essential in bringing the property to its
working condition)
• Initial operating losses incurred before the investment property
achieves the planned level of occupancy;
• Abnormal amounts of wasted materials, labor or other resources
incurred in constructing or developing the property

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Example
An entity purchased land for the purpose of long-term capital
appreciation. Following expenditures related to the acquisition:
• Purchase price: $600,000
• Broker’s commission: $30,000
• Cost of grading the land: $5,000
• Property transfer tax: $4,000
• Property tax paid for the current financial year after the purchase
date: $ 2,000
What is the cost of the land?

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Answer
• Capitalized cost of land: 600,000+30,000+5,000+4,000 = 639,000
• Property tax paid for the current financial year after the purchase
date: $ 2,000 => should be expensed

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Subsequent measurement
• Subsequent expenditures may be added to carrying amount of the
investment property if they meet recognition criteria, i.e, innovation
costs
• Entity may choose to measure investment property at either:(*)
• Fair value (fair value model), or
• Depreciated cost less accumulated impairment (Cost model)
• Cost model can be change to fair value model if new policy results in
more reliable and relevant information. However, if the fair value
model is chosen, it is almost impossible to subsequently change to
the cost model(**)
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Subsequent measurement
Fair value model
• Fair value: 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
• Carrying amount: the amount at which an asset is
recognized in the statement of financial position

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Subsequent measurement
Fair value model
Each Carrying amount Re-measured FAIR VALUE
subsequent
financial
reporting
date The difference:
Reported in the Profit or Loss

Debit Profit or Loss Loss from fair Debit Investment property Gain from fair
Credit Investment property value change Credit Profit or Loss value change

When choosing fair value model, all investment properties must be measured at fair
value, except for those whose fair value cannot be reliably measured
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Subsequent measurement
Rare
Fair value model circumstances

Entity acquired investment property for

the first time
Market for comparable Alternative reliable measurement
properties is inactive of fair value is not available

fair value cannot be reliably measured

Using cost model

residual value =0

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Subsequent measurement
Fair value model
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

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Example
• ABC Ltd. applies IFRS and applied the fair value model for its
investment properties. The company has acquired a property for
$2million, then it spent a further $7million on renovations to be let as
an investment property.
• At the year end, its fair value is determined to be $10million
• Accounting treatment for this property at acquisition & at the year
end?

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Answer
Acquisition cost
Dr Investment property: 2
Cr Cash 2
Renovation cost
Dr Investment property: 7
Cr Cash 7
At the year end
Dr Investment property: 1
Cr Fair value gain 1

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Subsequent measurement
Cost model
• Carrying amount = Cost – Accumulated Depreciation –
Accumulated Impairment Losses
IAS 16
Property, Plant
&Equipment

Except for
• Held-for-sale assets (apply IFRS 5 – Non current assets held for sale and
Discontinued Operations)
• Right-of-use assets held by a lessee & is not held for sale (apply IFRS 16)

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Example
• Can a company opt for the fair value model for an investment
property under construction, while all other completed investment
properties are valued using the cost model?
• No

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Transfers
Transfer to or from investment property is made only when
there is a “change in uses”

Change in management’s
intention for the use of a
property is not an evidence of
change in use

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Transfers
(2) =>(1) When owner
occupation ends

(1) Investment property Transfer to/from

(2)Owner occupied
property
(3)=>(1) When operating lease (1) =>(2) When owner
to a third parties commences occupation commences

(3)Inventories

(1) =>(3) On commencement of

development with a view to sale

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Transfer
Determining carrying value
• Under cost model: transfers do not change the
carrying amount of property.
• Under fair value model: carrying amount is adjusted
to its fair value at the date of change

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Transfer
Under fair value model
• Owner-occupied property => investment property (fair value model)
Carrying amount Fair value
Adjust to
(Apply IAS 16 until (at the date of change )
the date of change)

Difference at the date of change: treated in a same way as a

revaluation under IAS 16
 Fair value < Carrying amount: Decrease is recognized in the Profit or Loss. However, to the extent that amount is
included in revaluation surplus, decrease is recognized in Other comprehensive Income & reduce revaluation
surplus within equity.
 Fair value > Carrying amount: to the extent that the increase reverses previous impairment loss, increase is
recognized in the Profit or Loss. The remaining part of increase is recognized in Other comprehensive Income
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Transfer
Under fair value model
• Inventories => investment property (fair value model)
Fair value
Carrying amount
Adjust to (at the date of
(Apply IAS 02) change

 Differences: recognized in the Profit or Loss

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Disposal
• Disposal: sale, or enter into a financial lease

Net disposal Carrying

Gains / Losses
proceeds amount of asset

recognized in the Profit

or Loss

To determine the date of sale: apply IFRS 15

When entering into a financial lease & sale and lease back: apply IAS 17(*) 30

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Presentation
• When material, the aggregate carrying amount of the entity’s
investment property should be presented in the statement of
financial position

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Disclosure
Disclosures applicable to all investment
property
• Where it applied the fair value model or cost model
• When classification is difficult, entity should disclosure the criteria
used to identify investment property
• The methods and significant assumptions that were used in
ascertaining the fair values of investment properties.
• The extent to which fair value of investment property is based on a
valuation by an independent valuer who holds a recognized and
relevant professional qualification and has recent experience in the
location and category of IP being valued. If there has been no such
valuation, that fact should be disclosed
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Disclosure
Disclosures applicable to all investment
property
• Disclosure in the Statement of comprehensive income:
• The amount of rental income derived from investment property
• Direct operating expenses arising from investment property that generate and
did not generate rental income during the period
• Cumulative change in fair value recognized in profit or loss on sale of
investment property from a pool of assets in which the cost model is used
into a pool in which the fair value model is used
• The existence and the amount of any restrictions which may potentially affect
the realisability of investment property or the remittance of income and
proceeds from disposal to be received.
• Material contractual obligations to purchase or build investment property or
to make repair, maintenance …

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Disclosure
Disclosures applicable to IP using fair
value model
• Reconciliation of the carrying amount of investment property at the
beginning and end of period
• Reconciliation between the valuation obtained and the adjusted valuation
included in the financial statement (if there is significant adjustment for the
purpose of financial statement)
• When entity using cost to measure investment property (due to lack of
reliable fair value), above reconciliation should disclose:
• amounts for that investment property separately from others
• Description of that investment property, the reason why fair value cannot be
measured reliably
• On disposal of such investment property, the fact that entity has disposed of
investment property not carried at fair value, its carrying amount at the time of
disposal and gain/losses.

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Disclosure
Disclosures applicable to IP using
cost model
• The depreciation methods used
• The useful lives or the depreciation rates used
• The gross carrying amount and accumulated depreciation at the
beginning and the end of period
• Reconciliation of the carrying amount of investment property at the
beginning and end of period
• Fair value of investment property carried under the cost model. When
fair value cannot be reliably estimated, entity should disclose:
• Description of that investment property, the reason why fair value cannot be
measured reliably
• Range of estimates within which fair value is highly likely to lie (if possible)
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Example

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