The ‘OBJECTIVE’ of IAS 40 is to prescribe the accounting treatment for Investment Property and related disclosure requirements.
Table of Contents
IAS 40 Effective Date
An entity shall apply this Standard for annual periods beginning on or after 1 January 2005.
Earlier application is ‘ENCOURAGED’.
If an entity applies this Standard for a period beginning before 1 January 2005, it shall disclose that fact.
IAS 40 – Scope
This Standard shall be applied in the ‘Recognition’, ‘Measurement‘ and ‘Disclosure‘ of Investment Property.
This Standard does NOT apply to:
- Biological Assets related to agricultural activity; AND
- Mineral Rights and Mineral Reserves including Oil, Natural Gas and similar Non‑regenerative Resources.
Investment Property (As Per IAS 40)
It is a land or building (or a part of it) or BOTH:
- Held by the owner or by the lessee as a Right of Use (RoU) asset;
- To Earn Rentals or for Capital Appreciation or both.
| Includes |
|---|
| (a) Land held for long-term capital appreciation; |
| (b) Land held for undetermined future use; |
| (c) Building leased out under operating lease; |
| (d) Vacant building held to be leased out under operating lease; AND |
| (e) Property being constructed/developed for future use as an Investment Property. |
| Excludes |
|---|
| (a) Property held for production or supply of goods or services (IAS 16) |
| (b) Property held for administrative purposes (IAS 16) |
| (c) Property held for sale in the ordinary course of business or in the process of construction or development for such sale (IAS 2) |
| (d) Property being constructed or developed on behalf of 3rd parties (IFRS 15) |
| (e) Owner-occupied property (IAS 16) |
| (f) Property occupied by employees whether or not the employee(s) pay rent at Market rates (IAS 16) |
| (g) Property leased to another entity under a finance lease (IFRS 16) |
Recognition
It is RECOGNIZED as an Asset when:
- It is probable that future economic benefits associated with the property will flow to the entity; AND
- Cost of property can be reliably Measured.
Measurement at Recognition
| It is initially MEASURED at cost including the transaction cost. |
| The Cost includes: – Its purchase price; AND – Any directly attributable expenditure INCLUDING legal fees, professional fees, property tax, etc. |
| Such Cost does INCLUDE: – Start-up Expenses; – Operating Losses incurred before the ‘Investment Property‘ achieves planned occupancy level; AND – Abnormal Waste. |
| When Payment is deferred, discount it to its present value (PV) to set Cash Price equivalent. |
Measurement After Recognition
After ‘Initial Recognition’, an entity can choose between Fair Value and Cost Model.
The Accounting Policy CHOICE to be applied to all ‘Investment Property‘.
| Exception to the Rule |
|---|
| An Entity May: (a) Choose EITHER ‘Fair Value’ or ‘Cost Model’ for all investment property backing liabilities that pay a return linked directly to the fair value (FV) of, or returns from, specified assets including that investment property; AND |
| (b) Choose EITHER ‘Fair Value’ or ‘Cost Model’ for all other investment property regardless of the choice Made in (a). |
1. Cost Model
Itis MEASURED in accordance with Requirements set out in IAS 16.
2. Fair Value Model
| – The entity shall Measure all of its investment property at fair value (FV), EXCEPT in the extremely rare cases where this cannot be Measured reliably. Hence, it should APPLY the IAS 16 ‘Cost Model’. |
| – Fair Value is the price that’d be received to sell the Investment Property in an orderly transaction between Market participants at the Measurement date. |
| – Gain/(Loss) arising from Changes in fair value (FV) is recognized in profit or loss for the period in which it arises. |
| – In RARITY, if fair value (FV) cannot be determined (e.g ‘Active Market’ cease to exist), the IAS 16 Cost Model is used for Measurement. |
2.1 Inability to Measure Fair Value Reliably
If Fair Value of Investment Property under Construction is NOT ‘Reliably Measurable’, the entity shall MEASURE that property at cost until either its fair value becomes reliably Measurable or construction is Completed (whichever is earlier).
- In EXCEPTIONAL cases, there is ‘clear evidence‘ that fair value ‘Reliably Measurable‘ on continuing basis. [This arises only when the Market for comparable properties is inactive and alternative reliable Measurements of fair value are not available].
- In such case, the entity shall Measure using Cost Model in IAS 16.
- Residual value assumed to be ZERO.
- The entity shall APPLY IAS 16 until disposal.
If an entity has previously MEASURED at fair value, it shall continue to Measure the property at fair value until disposal even if comparable Market transactions become less frequent or Market price become less readily available.
Switching the Models – Change in Policy
| Switching from Cost Model to Fair Value or Vice Versa is allowed but only if the change results in the ‘Financial Statements’ providing reliable and More relevant information. Further the Switch would probably MEET the condition and is therefore allowed. |
| Switch from Fair Value to Cost Model is highly unlikely to result in More reliable presentation. |
1. Transfer to/from Investment Property
Transfer to/from can be Made only when there is a Change in the use of the property.
1.1 For Investment Property at Cost Model
Transfer between Investment Property, Owner-occupied Property and Inventories Neither change the Carrying Amount of the property transferred Nor the cost of that property for Measurement or Disclosure purposes.
1.2 For Investment Property at Fair Value (FV) Model
| Circumstance | Transfer | Accounting Treatment |
|---|---|---|
| (a) Commencement of Owner-Occupation | From IAS 40 to IAS 16 | – Revalue the ‘Property’ as per IAS 40 and then transfer it to IAS 16. – Fair value (FV) at the date of transfer becomes the deemed cost. |
| (b) Commencement of Development with a View to Sale | From IAS 40 to IAS 02 | – Revalue the ‘Property’ as per IAS 40 and then transfer it to IAS 02. – Fair value (FV) at the date of transfer becomes the deemed cost. |
| (c) End of Owner Occupation & Commencement of Operating Lease | From IAS 16 to IAS 40 | – Revalue the ‘Property’ to its fair value (FV) as per IAS 16 and then transfer it to IAS 40. |
| (d) End of Inventory & Commencement of Operating Lease | From IAS 02 to IAS 40 | – Transfer the ‘Property’ at Carrying Amount (CA) and then revalue it as per IAS 40. – Fair value (FV) at the date of transfer and any difference between previous carrying amount is recognized in P&L. |
De-Recognition of Investment Property
When It’s de-recognized, a gain or loss on disposal should be RECOGNIZED in P&L.
Gain/(Loss) should be determined as the DIFFERENCE between the net disposal proceeds and the Carrying Amount of that asset.
IAS 40 – Other Concepts
1. Partial Own Use
| Some ‘Properties’ comprise a portion that is held to Earn Rentals or for Capital Appreciation and another portion that is Held for Own Use. |
| (a) If these portions could be sold separately (or leased out separately under a Finance Lease), they are accounted for separately. The part that is rented out is ‘Investment Property‘. |
| (b) If the portions cannot be sold or leased out separately, the property is ‘Investment Property‘ ONLY if the owner-occupied PPE portion is insignificant. |
2. Provision of Ancillary Services to Occupants
| (a) If those services (e.g Security or Maintenance Services) are relatively INSIGNIFICANT, then the entity May treat the property as ‘Investment Property‘. |
| (b) Where the services provided are SIGNIFICANT (For Instance an ‘Owner-Managed Hotel’), the property should be classified as owner-occupied PPE. |
3. Inter-Company Rentals
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, It will be ‘Investment Property’ in the separate financial statements of the lessor, if it Meets the definition of investment property.
4. Property Held Under an Operating Lease
A property interest that is held by a lessee under an operating lease May-be CLASSIFIED and accounted for as ‘Investment Property’ if:
- The rest of the criteria of the investment property is Met;
- The operating lease is accounted for as if it were a finance lease in accordance with IFRS 16 Leases; AND
- The lessee uses the fair value Model set out in IAS 40 for all investment properties.
IAS 40 – Disclosure
Entity shall disclose:
- Whether it follows the fair value or cost Model;
- Whether property interest held as an operating lease is included in investment property;
- Criteria for classification;
- Assumptions in determining fair value (FV);
- Use of independent professional valuer (Optional);
- Rental income and expenses; AND
- Any restrictions or obligations.
1. Fair Value Model
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.
2. Cost Model
These relate Mainly to the Depreciation Method, Rates and Useful Lives used alongside reconciliation of the carrying amount at the beginning and end of the period.
In addition, an entity that adopts the Cost Model should disclose the fair value (FV) of the ‘Investment property’.
Synopsis
IAS 40 was REISSUED in December 2003 and applies to annual periods beginning on or after 1 January 2005. It applies to the accounting for property held to earn rentals (land and/or buildings) or for capital appreciation (or both).
Chartered Accountant – ICAP
Bachelor of Accounting (Honours) – AeU, Malaysia