CAF 1: FINANCIAL ACCOUNTING AND REPORTING I Ch 4: IAS 40
CHAPTER 4: IAS 40 INVESTMENT PROPERTY
Investment property:
Investment property is:
▪ property (land or a building—or part of a building—or both); held
- to earn rentals or
- for capital appreciation or
- both;
▪ rather than for use in the production or supply of goods or services or for
administrative purposes, or sale in the ordinary course of business.
Owner‑occupied property
Owner‑occupied property is property held:
▪ for use in the production or supply of goods or services; or
▪ for administrative purposes.
Examples of investment property:
i. land held for long‑term capital appreciation rather than for short‑term sale in the
ordinary course of business.
ii. land held for a currently undetermined future use i.e., if an entity has not determined
that it will use the land as owner‑occupied property or for short‑term sale in the
ordinary course of business, the land is regarded as held for capital appreciation.
iii. a building owned by the entity and leased out under one or more operating leases
(rental arrangement).
iv. a building that is vacant but is held to be leased out under one or more operating
leases.
v. property that is being constructed or developed for future use as investment
property.
Examples of items that are not investment property:
i. property intended for sale in the ordinary course of business;
ii. property in the process of construction or development for sale in the ordinary course
of business;
iii. property acquired exclusively with a view to subsequent disposal in the near future;
iv. property acquired exclusively for development and resale;
v. owner‑occupied property;
vi. property held for future use as owner‑occupied property;
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CAF 1: FINANCIAL ACCOUNTING AND REPORTING I Ch 4: IAS 40
vii. property held for future development and subsequent use as owner‑occupied
property;
viii. property occupied by employees (whether or not the employees pay rent at market
rates); and
ix. owner-occupied property awaiting disposal.
Property portions held for different purposes:
Some properties comprise a portion that is held to earn rentals or for capital appreciation
and another portion that is held for use in the production or supply of goods or services or
for administrative purposes.
Separable portions: If these portions could be sold separately, an entity accounts for the
portions separately.
Non-separable portions: If the portions could not be sold separately, the property is
investment property only if an insignificant portion is held for use in the production or
supply of goods or services or for administrative purposes.
Impact of ancillary services
In some cases, an entity provides ancillary services to the occupants of a property it holds.
Service Classification Example
If the Services are Investment The owner of an office building provides
Insignificant to the Property security and maintenance services to the
arrangement as a whole tenants who occupy the building.
If the Services are Not Investment An entity owns and manages a hotel and
Significant to the Property services provided to guests are significant
arrangement as a whole to the arrangement as a whole.
RECOGNITION AND MEASUREMENT
Recognition principle:
The recognition principle is similar to that of property, plant and equipment. An owned
investment property shall be recognised as an asset when, and only when:
▪ it is probable that the future economic benefits that are associated with the
investment property will flow to the entity; and
▪ the cost of the investment property can be measured reliably.
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Initial Measurement:
▪ An owned investment property shall be measured initially at its cost. Transaction
costs shall be included in the initial measurement.
▪ The cost of a purchased investment property comprises its purchase price and any
directly attributable expenditure. Directly attributable expenditure includes, for
example, professional fees for legal services, property transfer taxes and other
transaction costs. The cost of an investment property is not increased by:
- Start-up costs (unless necessary to bring the property to the condition necessary
for it to be capable of operating in the manner intended by management);
- Operating losses incurred before the investment property achieves the planned
level of occupancy; or
- abnormal waste incurred in constructing or developing the property.
▪ The accounting treatment for exchange of assets is same as those applied under IAS
16.
Subsequent Measurement:
After initial recognition an entity may choose as its accounting policy:
▪ The fair value model; or
▪ The cost model (in accordance with the requirements of IAS 16).
The chosen policy must be applied to all the investment property.
Fair value model:
Under the fair value model:
▪ All investment property is remeasured at fair value at the end of each period;
▪ Any resulting fair value gain or loss is recognised in profit or loss for the period; and
▪ The property would not be depreciated.
This is different to the revaluation model of IAS 16, where gains are reported in other
comprehensive income and accumulated as a revaluation surplus.
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Disposal:
An investment property shall be derecognised:
▪ 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 arising from the retirement or disposal of investment property shall be
determined as the difference between the net disposal proceeds and the carrying amount of
the asset and shall be recognised in profit or loss in the period of the retirement or disposal.
Inability to measure fair value reliably:
There is a rebuttable presumption that an entity can reliably measure the fair value of
investment property on a continuing basis. However, in exceptional cases following guidance
is applicable:
Investment property under construction:
If an entity determines that the fair value of investment property under construction is not
reliably measurable but expects the fair value of the property to be reliably measurable when
construction is complete, it shall measure that investment property under construction at
cost until either its fair value becomes reliably measurable, or construction is completed
(whichever is earlier).
Investment property (not under construction):
If an entity determines that the fair value of an investment property (other than an
investment property under construction) is not reliably measurable on continuing basis, the
entity shall measure that investment property using the cost model in IAS 16. The residual
value of such investment property shall be assumed to be zero. The entity shall continue to
apply IAS 16 until disposal of such investment property.
Previously measured at Fair value
If an entity has previously measured an investment property at fair value, it shall continue
to measure the property at fair value until disposal (or transfer to owner-occupied or
Inventory) even if comparable market transactions become less frequent or market prices
become less readily available.
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Example # 1
Sadaf owns several properties and has a year end of 31 December. Wherever possible, Sadaf
carries investment properties under the fair value model.
Property 1 was acquired on 1 January 2011. It had a cost of Rs. 1 million, comprising Rs.
500,000 for land and Rs. 500,000 for buildings. The buildings have a useful life of 40 years.
Sadaf uses this property as its head office.
Property 2 was acquired many years ago for Rs. 1.5 million for its investment potential
having residual value of 0.3 million. On 31 December 2017 it had a fair value of Rs. 2.3
million. By 31 December 2018 its fair value had risen to Rs. 2.7 million. This property has a
useful life of 40 years.
Property 3 was acquired on 30 June 2012 for Rs. 2 million for rental to others. The directors
believe that the fair value of this property was Rs. 3 million on 31 December 2017 and Rs.
3.5 million on 31 December 2018. However, due to the specialised nature of this property,
these figures cannot be corroborated. This property has a useful life of 50 years.
Required: Prepare extract of financial statements for Sadaf for the year ended 31 December
Year 8, showing each of the above properties separately?
TRANSFERS:
An entity shall transfer a property to, or from, investment property when, and only when,
there is a change in use. A change in use occurs when the property meets, or ceases to meet,
the definition of investment property and there is evidence of the change in use. In isolation,
a change in management’s intentions for the use of a property does not provide evidence of
a change in use.
Transfer from Transfer to Examples of evidence of a change is use
Investment Owner-occupied Commencement of owner‑occupation, or of
property property development with a view to owner-occupation.
Investment Inventories Commencement of development with a view to
property sale.*
Owner-occupied Investment End of owner‑occupation.
property property
Inventories Investment Inception of an operating lease (rental
property arrangement) to another party.
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* When an entity decides to dispose of an investment property without development, it
continues to treat the property as an investment property until it is derecognised (eliminated
from the statement of financial position) and does not reclassify it as inventory.
Transfer to/from investment property (cost model):
When an entity uses the cost model, transfers between investment property,
owner‑occupied property and inventories do not change the carrying amount of the property
transferred and they do not change the cost of that property for measurement or disclosure
purposes.
Transfer to/from investment property (fair value model):
Transfer from Transfer to Accounting treatment Entries
IAS 40 (At FV) IAS 16 Fair value at the date of PPE Dr.
change of use becomes the Investment Property Cr.
deemed cost for future
accounting purposes.
IAS 40 (At FV) IAS 2 Fair value at the date of Inventory Dr.
change of use becomes the Investment Property Cr.
deemed cost for future
accounting purposes.
IAS 16 IAS 40 (At Apply IAS 16 revaluation Investment Property Dr.
FV) model (even if policy is cost PPE Cr
model) on the date of
transfer and treat the
difference in accordance
with IAS 16. On subsequent
disposal of the investment
property, the revaluation
surplus included in equity
may be transferred to
retained earnings.
IAS 2 IAS 40 (At Measure investment Investment Property Dr.
FV) property at fair value at the Loss (P&L) Dr.
date of the transfer, and any Inventory Cr.
difference compared to Loss (P&L) Cr.
previous carrying amount is
recognised in profit or loss.
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DISCLOSURE
General disclosure (both models):
An entity shall disclose:
i. Whether it applies the fair value model or the cost model;
ii. When classification is difficult, the criteria it uses to distinguish investment property
from owner‑occupied property or inventory;
iii. The extent to which the fair value (as measured or disclosed in the financial
statements) of investment property is based on a valuation by an independent valuer
who holds a recognised and relevant professional qualification and has recent
experience in the location and category of the investment property being valued. If
there has been no such valuation, that fact shall be disclosed;
iv. The existence and amounts of restrictions on the realisability of investment property
or the remittance of income and proceeds of disposal; and
v. Contractual obligations to purchase, construct or develop investment property or for
repairs, maintenance or enhancements.
An entity shall also disclose the amounts recognised in profit or loss for:
a) rental income from investment property; and
b) direct operating expenses (including repairs and maintenance) arising from investment
property:
▪ that generated rental income during the period; and
▪ that did not generate rental income during the period.
Additional disclosure (fair value model only):
An entity shall disclose a reconciliation between the carrying amounts of investment
property at the beginning and end of the period, showing the following:
i. Additions (acquisitions & subsequent expenditure separately);
ii. Disposals;
iii. Net gains or losses from fair value adjustments;
iv. Transfers; and
v. Other changes.
For investment properties included at cost model because fair value cannot be measured
reliably, in addition, an entity shall disclose:
▪ a description of the investment property;
▪ an explanation of why fair value cannot be measured reliably;
▪ if possible, the range of estimates within which fair value is highly likely to lie; and
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▪ the fact of disposal of such investment property, its carrying amount and gain or loss
on disposal.
Additional disclosure (cost model only):
An entity shall disclose:
i. The depreciation methods used;
ii. the useful lives or depreciation rates used; and
iii. gross carrying amounts and accumulated depreciation at the beginning and at the end
of the period.
iv. A reconciliation between opening and closing values showing:
▪ Additions (acquisitions & subsequent expenditure separately);
▪ depreciation;
▪ disposals;
▪ impairment losses and reversal thereof;
▪ transfers; and
▪ other changes.
When the cost model is used, the fair value of investment property shall be disclosed. If the
fair value cannot be estimated reliably, the same additional disclosures should be made as
are disclosed under the fair value model for investment properties included at cost model
because fair value cannot be measured reliably.
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