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This time in our Factsheet Series, we will look at the standard which govern the accounting requirements for investment properties – IAS 40 Investment Property. This standard defines investment property as property (either land or a building or any part of a building or both) held either to earn rentals, for capital appreciation or both rather than for use in the production or supply of goods or services or administrative purpose or sale in the ordinary course of business. On this basis, an investment property is distinguished from owner-occupied property. Owner-occupied property is accounted for under IAS 16 Property, Plant and Equipment or IFRS 16 Leases for property held by a lessee as a right-of-use asset.
Let’s now go through the 9 key takeaways on IAS 40.
#1: What are the examples of investment property in the scope and out of scope of IAS 40?
IAS 40 provides examples of investment property which are in the scope and outside the scope of the standard. They are as follows:
|In the scope of IAS 40||Out of the scope of IAS 40|
|Land held for long-term capital appreciation||Property held for intended sale in the ordinary course of business or in the process of construction or development for such sale (property is accounted for under IAS 2 Inventories)|
|Land held currently for undetermined future use||Owner-occupied property, including property held for future use as owner-occupied property, property occupied by employee|
|A building owned by the entity but leased out under operating lease||Property leased out to another entity under a finance lease|
|Property that is being constructed or developed for future use as investment property|
|A building that is vacant but is held to be leased out under operating lease|
There are instances whether a portion of the property is held to earn rentals and another portion is held for use in the production or supply of goods or services (or for administrative purpose). In such a situation, entities will need to account for the portions separately, if these portions could be sold or leased out separately. Otherwise, the property is investment property only if an insignificant portion is held for use in the production or supply of goods or service. Determining ‘significant’ or ‘insignificant’ requires judgment by entities.
#2: When do we recognise investment property?
Similar to other assets such as property, plant and equipment and intangible assets, an investment property is recognised only when (1) it is probable that the future economic benefits associated with the property will flow to the entity and (2) the cost of the investment property can be measured reliably.
#3: What is the initial measurement consideration for investment property?
IAS 40 states that investment property should initially be recognised at its costs. Transaction costs should also be included in the initial measurement of the costs. The costs include any directly attributable expenditure to acquire or obtain the investment property such as legal fees, property transfer tax and others. The initial measurement of investment property held by a lessee as a right-on-use asset is however, should be measured in accordance with IFRS 16 Leases. It is further discussed in IFRS 16 Leases – The lessee perspective.
IAS 40 also provides discussion on the measurement of investment property acquired in exchange for a non-monetary asset or a combination of a monetary and non-monetary asset. The accounting treatment in this circumstance is similar to the acquisition of property, plant and equipment in exchange for a non-monetary asset. This is covered in detail in IAS 16 Property, Plant and Equipment.
#4: What is the subsequent measurement model available for investment property?
Entities generally can choose either the fair value model or the cost model as the accounting policy for investment property. The accounting policy chosen should then be applied consistently to all of the investment property. Exception is however, available if an entity has investment property backing liabilities that pay a return linked directly to the fair value of, or returns from, specified assets. In such a case, entities can choose to measure such investment property either using the fair value model or the cost model. Entities than is allowed to choose either the fair value model or the cost model for all other investment property, independently from the choice made for investment property backing liabilities. Accordingly, there will be two measurement models for investment property for entities in such a case.
Important thing to note is that, if an entity adopts the cost model for its investment property, IAS 40 would still require a disclosure on the fair value of the investment property in the financial statements. In a situation where the fair value of the investment property cannot be measured reliably, entities must disclose:
- A description of the investment property;
- An explanation of why fair value cannot be measured reliably; and
- The range of estimates within which fair value is highly likely to lie (if possible).
#5: Is the any difference between fair value model and revaluation model?
Take note that fair value model for investment property is different from revaluation model, although both require fair value to be determined. For asset under the revaluation model, the asset is revalued at its fair value and then, adjusted for subsequent accumulated depreciation and impairment after the revaluation. For investment property under the fair value model, the fair value is determined and no further adjustments for depreciation and impairment losses are needed. The change in fair value of investment property is recognised in profit or loss in the period in which the change arises.
#6: Can we change the measurement model for investment property?
Entities can change the measurement model for investment property only if it results in providing a reliable and more relevant information. This change should be accounted for in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. However, it also stated in IAS 40 that it is highly unlikely that a change from the fair value model to the cost model will result in a more relevant presentation.
#7: What if the fair value of investment property cannot be measured reliably?
IAS 40 provides a rebuttable presumption that entities can measure the fair value of investment property on continuing basis. However, there are certain exceptional cases where the fair value of the investment property cannot be reliably measured on a continuing basis. This can only happen when the market for comparable properties is inactive and alternative reliable measurements of fair value are not available. In such a situation, entities shall measure the investment property using cost model in IAS 16 for owned investment property or in accordance with IFRS 16 for investment property held by a lessee as a right-of-use asset.
However, for asset under construction (“AUC”) where the fair value cannot be reliably measured, the investment property under construction is measured at cost until either the fair value becomes reliably measured or construction is completed (whichever the earlier). Once the construction is completed, it is presumed that fair value can be measured reliably. The presumption for investment property under construction can only be rebutted on initial recognition. The difference between the fair value and its previous carrying amount is recognised in profit or loss.
#8: What is the accounting requirement when there is a transfer in or out from investment property?
Transfer of property in or out from investment property can only happen when there is a change in use. This change occurs when the property meets or ceases to meet the definition of investment property and there must be evidence of the change in use. Please take note that a mere change in the management’s intentions for the use of the property does not provide evidence of a change in use.
If an owner-occupied property under IAS 16 or IFRS 16 becomes an investment property that will be carried at fair value, the difference between the carrying amount of the property at the date of change and its fair value is treated the same way as a revaluation in accordance with IAS 16.
If there is a transfer of property from inventories to investment property that will be carried at fair value, the difference between the fair value of the property at that date and the previous carrying amount is recognised in profit or loss.
#9: What is the accounting requirement for disposal of investment property?
IAS 40 states that investment property is de-recognised on disposal or when the investment property is permanently withdrawn from use and no future economic benefits are expected from its disposal. Gains or losses on disposal should be recognised in profit or loss in the period where the disposal took place. It is calculated by comparing the difference between the net disposal proceeds and the carrying amount of the asset.
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