IAS 40 SPECIFIES the requirement for all entities to MEASURE the fair value of investment property, for the purpose of either ‘Measurement‘ (if the entity uses the Fair Value Model) or ‘Disclosure‘ (if it uses the Cost Model).
Table of Contents
IAS 40 – Investment Property
Investment Property 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 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 employees pay rent at market rates (IAS 16) |
| (g) Property leased to another entity under a finance lease (IFRS 16) |
1. 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.
2. Initial Measurement
| Investment property is initially MEASURED at cost including the transaction cost. |
| The Cost of Investment Property includes: – Its purchase price; AND – Any directly attributable expenditure such as legal fees, professional fees, property tax, etc. |
| Such Cost does INCLUDE: – Start-up expenses; – Operating losses incurred before the investment property achieves the planned occupancy level; AND – Abnormal waste. |
| When payment for investment property is deferred, discount it to its present value to set cash price equivalent. |
3. Subsequent Measurement
After ‘Initial Recognition’, an entity can choose between Fair Value and Cost Model.
The Accounting Policy CHOICE to be applied to all ‘Investment Property’ (with ‘few exceptions’).
| 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 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). |
3.1 Cost Model
‘Investment Property’ is MEASURED in accordance with requirements set out for that model in IAS 16.
3.2 Fair Value Model
| – The entity shall measure all of its investment property at fair value, EXCEPT in the extremely rare cases where this ‘cannot be measured reliably‘. In such a case, it should APPLY the IAS 16 Cost Model. |
| – Fair Value is the price that would be received to sell the investment property in an orderly transaction between market participants at the measurement date. |
| – Gain or loss arising from changes in fair value of investment property is recognized in profit or loss for the period in which it arises. |
| – In RARE exceptional circumstances, if fair value cannot be determined (e.g. active market cease to exist), the IAS 16 Cost Model is used to measure the investment property. |
3.2.1 Inability to Measure Fair Value Reliably
If Fair Value of investment property under construction is NOT ‘Reliably Measurable’ but the fair value of the property is expected to be when construction is complete, IAS 40 specifies that 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 of investment property is not ‘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 that investment property using Cost Model in IAS 16.
- Residual value of the investment property assumed to be ZERO.
- The entity shall APPLY IAS 16 until disposal of the investment property.
If an entity has previously MEASURED an investment property 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.
IAS 40 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 such 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
IAS 40 STATES that Transfer to/from investment property 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 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.
1.2 For Investment Property at Fair Value 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 at the date of transfer becomes the deemed cost for future accounting purposes. |
| (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 at the date of transfer becomes the deemed cost for future accounting purposes. |
| (c) End of Owner Occupation & Commencement of Operating Lease | From IAS 16 to IAS 40 | – Revalue the property to its fair value as per the rules of 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 and then revalue it as per IAS 40. – Fair value at the date of transfer and any difference between previous carrying amount is recognized in P&L. |
IAS 40 – De-Recognition of Investment Property
When an investment property is de-recognized, a gain or loss on disposal should be RECOGNIZED in P&L.
IAS 40 STATES that the gain or loss should normally 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 the portions 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 property, plant and equipment portion is insignificant. |
2. Provision of Ancillary Services to Occupants
| (a) If those services (e.g. security or maintenance services) are relatively INSIGNIFICANT component of the arrangement as a whole, then the entity may treat the property as investment property. |
| (b) 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, plant and equipment. |
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, such property 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 maybe 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 Disclosures
An entity shall DISCLOSE:
- Whether it follows the fair value model or cost model;
- Whether property interest held as an operating lease is included in investment property;
- Criteria for classification as an investment property;
- Assumptions in determining fair value;
- Use of independent professional valuer (Optional);
- Rental income and expenses; AND
- Any restrictions or obligations.
1. Additional Disclosures – Fair Value Model
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.
2. Additional Disclosures – Cost Model
These relate mainly to the depreciation method, rates and useful lives used as well as a reconciliation of the carrying amount at the beginning and end of the period.
In addition, an entity that adopts the cost model must disclose the fair value of the investment property.
Synopsis
International Accounting Standard 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 (Institute of Chartered Accountants of Pakistan)
Bachelor of Accounting Honours (Asia e University, Malaysia)