INVESTMENT PROPERTY
From the desk of M.Iftykhar Alam ..::: :::..
HISTORY OF IAS 40
October 1984 / Exposure Draft E26, Accounting for Investments
March 1986 / IAS 25, Accounting for Investments
1 January 1987 / Effective Date of IAS 25
December 1999 / Exposure Draft E64, Investment Property
April 2000 / IAS 40, Investment Property, superseded those portions of IAS 25 that addressed investment property and withdrew IAS 25
1 January 2001 / Effective Date of IAS 40 (2000)
AMENDMENTS UNDER CONSIDERATION BY IASB
Improvements to IFRS
SUMMARY OF IAS 40
Definition of Investment Property
Investment Property: Property (land or buildings ) held (whether by the owner or under a finance lease) to earn rentals or for capital appreciation or both. [IAS 40.4
Examples of investment property: [IAS 40.6]
- 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
- property held for sale in the ordinary course of business or in the process of construction of development for such sale (IAS 2 (r1993) Inventories);
- property being constructed or developed on behalf of third parties (IAS 11 (r1993) Construction Contracts);
- owner-occupied property (IAS 16 (r1998) 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; and
- property that is being constructed of developed for use as an investment property (IAS 16 (r1998) applies to such property until construction or development is complete). However, IAS 40 does apply to existing investment property that is being redeveloped for continuing use as investment property.
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 separately, they are accounted for separately. Therefore the part that is rented out is investment property. If the portions cannot be sold separately, the property is investment property only if the owner-occupied portion is insignificant. [IAS 40.8]
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.
Property that is held under an operating lease cannot be treated as investment property under IAS 40.
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 40.14]
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. [IAS 40.15]
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. [IAS 40.17]
Subsequent expenditure
Subsequent expenditure should be recognised as an expense as incurred, except when it is probable that future economic benefits in excess of the originally-assessed standard of performance will flow to the enterprise, in which case the expenditure should be added to the carrying amount of the investment property. [IAS 40.22]
Measurement subsequent to initial recognition
IAS 40 permits enterprises to choose between: [IAS 40.24]
- a fair value model; and
- a cost model.
Fair value model
Investment property is measured 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 should 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. [IAS 40.31] 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 40.39] In the absence of such information, the enterprise 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 40.40]
There is a rebuttable presumption that the enterprise will be able to determine the fair value of an investment property reliably on a continuing basis. However, if, in exceptional circumstances, an enterprise follows the fair value model but at acquisition concludes that a property's fair value is not expected to be reliably measurable on a continuing basis, the property is accounted for in accordance with the benchmark treatment under IAS 16, Property, Plant and Equipment (cost less accumulated depreciation less accumulated impairment losses). [IAS 40.47]
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 40.49]
Cost Model
After initial recognition, investment property is accounted for in accordance with the benchmark treatment under IAS 16, Property, Plant and Equipment (cost less accumulated depreciation less accumulated impairment losses. [IAS 40.50]
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: [IAS 40.51]
- 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.
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 40.54]
- 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 (r1998) at that date and the fair value is dealt with as a revaluation under IAS 16; [IAS 40.55]
- 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; [IAS 40.57] and
- when an enterprise 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. [IAS 40.59]
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. [IAS 40.60]
Disclosure
- Criteria that were used to classify property as investment property or not [IAS 40.66(a)]
- Method of determining fair value [IAS 40.66(b)]
- Extent of use of independent valuer in determining fair value [IAS 40.66(c)]
- Amounts included in income statement for: [IAS 40.66(d)]
- rental income
- direct operating expenses for property that did generate income
- direct operating expenses for property that did not generate income
- Restrictions on sale of investment property [IAS 40.66(e)
- Commitments to purchase or construct investment property [IAS 40.66(f)
- Under the fair value model: [IAS 40.67]
- property additions and disposals
- gains and losses from fair value adjustments
- foreign ex. differences related to investment property
- transfers to and from investment property
- special disclosures if at cost because fair value cannot be reliably measured
- Under the cost model: [IAS 40.69]
- depreciation method and useful lives
- gross carrying amount and accumulated depreciation
- reconciliation of carrying amount at beginning and end showing various components of change
- fair value of investment property carried at cost
For a change to fair value: adjust opening retained earnings of period in which IAS 40 is first applied. However, if fair value was disclosed in the past, apply the fair value model retroactively. [IAS 40.70]