IAS 40

INVESTMENT PROPERTY

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Contents

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

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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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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

Inventories Owner-occupied 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.
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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 Insignificant?
Professional judgement
Joint use properties
• Properties used for a variety of purpose: (i) a portion is used to earn
rental income and (ii) a portion is used in the production or supply of
goods or services or administrative purposes.
Can each portion be sold or leased out separately?

Yes No

Each portion Entire property is classified as Property, Plant, Equipment;

is classified Unless the owner-occupied portion is insignificant
separately → Entire property is classified as Investment property
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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 Property, Plant, Equipment

Investment property (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 ……………………………………………………..

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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.
Investment Property is measured at the amount of
▪ Initially: Cost
▪ Subsequently:
• Subsequent expenditures may be added to carrying amount of the
investment property if they meet recognition criteria (innovation costs)
• Entity may choose COST MODEL or FAIR VALUE MODEL
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Initial measurement
Cost of investment property
Cost = Purchase cost + Directly attributable expenditure
(i.e. legal fees, property transfer taxes and 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?
• 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
Cost model
• Carrying amount = Cost – Accumulated Depreciation
– Accumulated Impairment Losses

IAS 16
Property, Plant & Equipment

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

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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
At each Carrying amount Re-measured FAIR VALUE
subsequent
financial
reporting
date The difference is 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.
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 $2 million. Then it spent a
further $7 million on renovations to be let as an investment property.
• At the year end, its fair value is determined to be $10 million.
→ Accounting treatment for this property at acquisition and at the year
end?

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Subsequent measurement
Fair value model or Cost model?
• 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 or Cost model?
• 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?
→ …………………………………………………………………………………………………………

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Subsequent measurement Rare
circumstances
Fair value model or Cost model?
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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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
(2) Owner occupied
(1) Investment property Transfer to/from
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 (Apply IAS 16) Fair value
(until the date of change) Adjust to (at the date of change )

Difference: 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 and 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)

Carrying amount Fair value

Adjust to
(Apply IAS 02) (at the date of change)

Difference: recognized in the Profit or Loss

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Disposal

• Disposal: sale, or enter into a financial lease

Net disposal Carrying amount

Gains or Losses
proceeds 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 IFRS 16

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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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THE END

THANK YOU!

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