Investment Property

IAS - 40
IAS 40 - Definition
Investment property (IAS 40): property (land or building – or part of a building – or both)
held (by the owner or by the lessee as a right-of-use asset) to earn rentals or for capital
appreciation or both, rather than for:
a) Use in the production or supply of goods or services or for administrative purposes; or
b) Sale in the ordinary course of business.
The definition would therefore include
▪Land held for a currently undetermined future use
▪A building leased out under an operating lease
▪Land held long term in order to benefit from an increase in market value
▪It also includes property which is currently under construction but will be used in the future
to earn rentals or for capital appreciation.
▪A building held by a parent and leased to a subsidiary. Note, however, that while this is
regarded as an investment property in the individual parent company financial statements,
in the consolidated financial statements this property will be regarded as owner-occupied
(because it is occupied by the group) and will therefore be treated in accordance with IAS
16.
▪If a company occupies a premises but rents out certain floors to other companies, then the
part occupied will be classed as property, plant and equipment per IAS 16 with the floors
rented out classed as investment property per IAS 40.
Example
Rich Co owns a piece of land. The directors have not yet decided whether to build a factory
on it for use in its business or to keep it and sell it when its value has risen.
◦ Would this be classified as an investment property under IAS 40?

Answer:
Yes. If an entity has not determined that it will use the land either as an owner-occupied
property or for short-term sale in the ordinary course of business, the land is considered to
be held for capital appreciation.
Excluded
The following are not investment property (IAS 40: para. 9):
a) Property held for sale in the ordinary course of business or in the process of construction or
development for such sale
b) Owner-occupied property, 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
c) Property leased to another entity under a finance lease
Recognition
Investment property should be recognised as an asset when two conditions are met:
◦ It is probable that the future economic benefits that are associated with the investment property
will flow to the entity.
◦ The cost of the investment property can be measured reliably.
Measurement at recognition
Investment property should be measured initially at cost, including directly attributable
expenditure and transaction costs (IAS 40: para. 21).
Measurement after recognition
IAS 40 requires an entity to choose between two models:
◦ The fair value model
◦ The cost model

Whatever policy it chooses should be applied to all of its investment property.

Cost Model
Investment properties accounted for using the cost model are held in accordance with IAS
16, at cost less depreciation less impairment losses.
These properties cannot be revalued.
Fair value model
Under the fair value model:
◦ the asset is revalued to fair value at the end of each year
◦ the gain or loss is shown directly in the statement of profit or loss (not other comprehensive
income)
◦ no depreciation is charged on the asset.
◦ Fair value is normally established by reference to current prices on an active market for properties
in the same location and condition.
Example
Celine, a manufacturing company, purchases a property for $1 million on 1 January 20X1 for
its investment potential. The land element of the cost is believed to be $400,000, and the
buildings element is expected to have a useful life of 50 years. At 31 December 20X1, local
property indices suggest that the fair value of the property has risen to $1.1 million.
Required:
Show how the property would be presented in the financial statements as at 31 December
20X1 if Celine adopts:
◦ the cost model
◦ the fair value model.
Solution
Cost model
Depreciation in the year is = $12,000
Therefore:
◦ in the statement of profit or loss, there will be a depreciation charge of $12,000
◦ in the statement of financial position, the property will be shown at a carrying amount of
$1,000,000 – $12,000 = $988,000.

Fair value model

◦ In the statement of financial position, the property will be shown at its fair value of $1.1 million.
◦ In the statement of profit or loss, there will be a gain of $0.1 million representing the fair value
adjustment.
◦ No depreciation is charged.
Example
In the light of poor market interest rates and a dip in property prices, the financial controller
of Abbott Inc was instructed by the managing director in June 20X8 to invest some of the
company’s surplus cash in a plot of land costing $1million. This land may be used by Abbott
Inc in the future to build a new factory on, or it may be sold to realise a profit, depending on
property prices in the coming years.
It is now the year end, 30 June 20X9 and the financial controller is preparing Abbott Inc’s
financial statements for presentation to the Board. He knows that the land has fallen slightly
in value to $950,000, but is unsure of how to account for it.
Required:
Advise the financial controller.
Solution
▪This land meets the IAS 40 definition of investment property. As yet the future purpose is
undetermined, and therefore despite a possible use of the land by Abbott Inc itself, the land is
currently treated as held for capital appreciation.
▪The land should initially be measured at the cost of $1million, and then either the cost or fair
value model of IAS 40 should be applied.
▪If Abbott Inc currently has any other investment properties, the model applied to these should
also be applied to the land, as IAS 40 requires consistency.
▪If the cost model is applied, the land should be held in accordance with the requirements of the
cost model of IAS 16. In other words it should be held at cost of $1million. There is no
requirement to depreciate land as its benefits are not consumed.
▪If the fair value model is applied, the land should be held at its year end fair value of $950,000,
with a $50,000 loss recognised in the SPL.
▪Where the model applied is not dictated by an existing policy, in the light of the current fair
value, the cost model seems more attractive in terms of showing a better position and
performance in the financial statements.
▪It should, however, be remembered that the policy adopted cannot be changed other than to
result in a fairer presentation, and therefore adopting the cost model now may mean that future
increases in market value cannot be reflected in the financial statements.
Transfers to or from investment property
Transfers to or from investment property should only be made when there is a change in use
(IFRS 40: para. 57).
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 (IAS 40: para. 57). For example,
owner occupation commences so the investment property will be treated under IAS 16 as an
owneroccupied property.
In isolation, a change in management's intentions for the use of a property does not provide
evidence of a change in use (IAS 40: para. 57).
Accounting for Transfer
IAS-16 to IAS-40 IAS-40 to IAS-16
To FV Model To Cost Model To FV Model To Cost Model
▪ Revalue as per IAS- ▪ Transferred at ▪ Revalue as per IAS- ▪ Transferred at
16 current carrying 40 current carrying
▪ Creating a amounts ▪ Taking the gain or amounts
revaluation reserve ▪ Continues to be loss to the SPL ▪ Continues to be
in equity depreciated ▪ Then transfer to depreciated
▪ Then transferred property, plant and
into investment equipment at fair
property at fair value
value ▪ Subsequent G/L in
▪ Subsequent G/L in the revaluation
the SPL reserve/OCI
Example
A business owns a building which it has been using as a head office. In order to reduce
costs, on 30 June 20X9 it moved its head office functions to one of its production centres
and is now letting out its head office. Company policy is to use the fair value model for
investment property.
The building had an original cost on 1 January 20X0 of $250,000 and was being depreciated
over 50 years. At 31 December 20X9 its fair value was judged to be $350,000.
How will this appear in the financial statements at 31 December 20X9?
Solution
The building will be depreciated up to 30 June 20X9.
$
Original cost 250,000
Depreciation 1.1.X0 – 1.1.X9 (250/50 x 9) (45,000)
Depreciation to 30.6.X9 (250/50 x 6/12) (2,500)
Carrying amount at 30.6.X9 202,500
Revaluation surplus 147,500
Fair value at 30.6.X9 350,000

The difference between the carrying amount and fair value is taken to a revaluation surplus
in accordance with IAS 16.
However the building will be subjected to a fair value exercise at each year end and these
gains or losses will go to profit or loss. If at the end of the following year the fair value of
the building is found to be $380,000, $30,000 will be credited to profit or loss.
Disposals
Derecognise (eliminate from the statement of financial position) an investment property on
disposal or when it is permanently withdrawn from use and no future economic benefits
are expected from its disposal.
Any gain or loss on disposal is the difference between the net disposal proceeds and the
carrying amount of the asset. It should generally be recognised as income or expense in
profit or loss.
Compensation from third parties for investment property that was impaired, lost or given
up shall be recognised in profit or loss when the compensation becomes receivable.
Disclosure requirements
These relate to:
◦ Choice of fair value model or cost model
◦ Whether property interests held as operating leases are included in investment property
◦ Criteria for classification as investment property
◦ Assumptions in determining fair value
◦ Use of independent professional valuer (encouraged but not required)
◦ Rental income and expenses
◦ Any restrictions or obligations

Fair value model – additional disclosures

◦ An entity that adopts this must also disclose a reconciliation of the carrying amount of the
investment property at the beginning and end of the period.

Cost model – additional disclosures

◦ These relate mainly to the depreciation method. In addition, an entity which adopts the cost model
must disclose the fair value of the investment property.