INVESTMENT PROPERTY IAS 40

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. [IAS 40.5]

Examples of investment property: [IAS 40.8]

• land held for long-term capital appreciation
• land held for a currently undetermined future use
• building leased out under an operating lease
• vacant building held to be leased out under an operating lease
•   property that is being constructed or developed for future use as investment property

The following are not investment property and, therefore, are outside the scope of IAS 40: [IAS 40.5 and 40.9]

•       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 leased to another entity under a finance lease

An entity may make the foregoing classification on a property-by-property basis.

·         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. [IAS 40.10]

·         Ancillary services. If the entity provides ancillary services to the occupants of a property held by the entity, 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 entity 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. [IAS 40.13]

·        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. [IAS 40.15]

Recognition

Investment property should be recognized as an asset when it is probable that the future economic benefits that are associated with the property will flow to the entity, and the cost of the property can be reliably measured. [IAS 40.16]

Measurement subsequent to initial recognition

IAS 40 permits entities to choose between: [IAS 40.30]

·         a fair value model, and

·         a cost model.

However, property held under an operating lease shall be measured initially using the principles contained in IAS 17, Leases—at the lower of the fair value and the present value of the minimum lease payments. A key matter here is that the item accounted for at fair value is not the property itself but the lease interest.

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 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. [IAS 40.5] 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. [IAS 40.35]

Fair value should reflect the actual market state and circumstances as of the balance sheet date. [IAS 40.38] 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. [IAS 40.45] In the absence of such information, the entity may consider current prices for properties of a different nature or subject to different conditions, recent prices on less active markets with adjustments to reflect changes in economic conditions, and discounted cash flow projections based on reliable estimates of future cash flows. [IAS 40.46]

There is a rebuttable presumption that the entity will be able to determine the fair value of an investment property reliably on a continuing basis. However: [IAS 40.53]

If an entity determines that the fair value of an investment property under construction is not reliably determinable but expects the fair value of the property to be reliably determinable when construction is complete, it measures that investment property under construction at cost until either its fair value becomes reliably determinable or construction is completed.

 If an entity determines that the fair value of an investment property (other than an investment property under construction) is not reliably determinable on a continuing basis, the entity shall measure that investment property using the cost model in IAS 16. The residual value of the investment property shall be assumed to be zero. The entity shall apply IAS 16 until disposal of the investment property.

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. [IAS 40.55]

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. [IAS 40.56]

Transfers to or from investment property classification

Transfers to, or from, investment property should only be made when there is a change in use, evidenced by one or more of the following: [IAS 40.57 (note that this list was changed from an exhaustive list to an non-exhaustive list of examples by Transfers of Investment Property in December 2016 effective 1 January 2018) ]

•      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) 
•   end of construction or development (transfer from property in the course of    construction/development to investment property

When an entity decides to sell an investment property without development, the property is not reclassified as inventory but is dealt with as investment property until it is derecognised. [IAS 40.58]

The following 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 [IAS 40.60]
•       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 [IAS 40.61]
•      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 profit or loss [IAS 40.63]
•    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 profit or loss. [IAS 40.65]