PAS 40 INVESTMENT PROPERTY

Investment property (paragraph 5)

 Land or building, or part of a building, or both, the asset must be immovable/ real property.
 Assets must be held by owner or lessee of right of o use asset
Right of use asset - is an asset that represents a lessee’s right to use an underlying asset for
the lease term
 To/for earn rentals or capital appreciation, or both
 Rather use in production or supply of goods and services or administrative purposes, or
sales in the ordinary course business.

Examples of Investment Property

1. Land held for long term capital appreciation rather than for short term sale in the ordinary
course of business
2. Land held for currently undetermined future use.
3. Building owned by the entity leased out under one or more operating leases
Operating lease – no actually transfer of lease of reward
4. Property that is being constructed or developed for future use as investment property

Not investment property

1. Property intended for sale in the ordinary course of business or in the process of
construction or development for such sale
2. Owner- occupied 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
3. Property that’s leased to another entity under a finance lease

Special considerations:

1. Properties with dual purpose

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 administration purposes.
a. If there portions could be sold separately ( or leased out separately under a finance
lease ) an entity accounts for the portion separately/
b. If the portion 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 administration purposes.
2. Ancillary Services
In some cases, an entity provides ancillary services to the occupants of a propert if holds
a. If the services are insignificant to the arrangement as a whole ( eg. When an owner
of an office building provides security and maintenance services to the leases who
occupy the building)
 b. If the services are significant to the arrangement as a whole (eg. A hotel owned and
managed by an entity) – owner occupied property
3. Properties between parent and subsidiary
In some cases, an entity owns property that is leased to, and occupies by, it parent or
another subsidiary.
a. In the separate FS, the lessor treat the property as investment property in its
individual financial statements.
b. In the consolidated FS, the property is owned-occupied from the perspective of the
group

Illustration:

Green cross Co. has a right-of-use building. During the year Green cross CO. leased out
portion of the building to Sunshine Co., a subsidiary , under operating lease

Purposes of Classification
Separately FS of Green cross Co. Investment Property
Consolidated FS between Green cross Co. Owner- occupied Property
and Sunshine Co.

Recognition

An owned investment property shall be recognised as an asset when, and only when:

a. It is probable that the future economic benefits that are associated with the investment
property will flow to the entity, and
b. The cost of the investment property can be measured reliably

Initial measurement

An owned investment property shall be measured initially at its cost. Transaction costs shall be
included in the initial measurement

a. Purchase – purchase price, directly attributable expenditure. For example, professional fees
for legal services, property transfer taxes and other transaction costs
b. Deferred payment – cash price equivalent. The difference between CPE and the total
payments in recognized as interest expense over the period of credit
c. Exchange – fair value of asset given up, unless the exchange transaction lacks commercial
substance or the fair value of neither the asset received nor the asset given up is reliable
measurable. If the acquired asset is not measured at fair value, its cost is measured at the
carrying amount of the asset given up.
d. Right-of-use asset – shall be measured initially at its cost in accordance with IFRS 16.

Measurement after Recognition

An entity shall choose as its accounting policy either the

 a. Fair value model – after initial recognition, an entity that chooses the fair value model shall
measure all of its investment property at fair value

Important notes:

- Estimated disposal costs are ignored

- The investment property is not depreciated
- A gain or loss arising from a change in the fair value of investment property shall be
recognized in profit or loss for the period in which it arises
- For right-of-use asset held by lessee as investment property, the lessee shall measure the
right-of-use asset and not the underlying asset, at fair value

Inability to Measure Fair Value Reliably

- In exceptional cases that the fair value of the investment property is not reliably measurable
on a continuing basis:
1. The entity shall measure that investment property using the cost model until disposal,
and
2. The residual value of the investment property shall be measured to be zero.
3. Investment under construction is not reliably measurable but expects the fair value of
the property to be reliably measurable when construction is complete.
b. Cost model – after intial recognition, an entity that chooses the cost model shall measure all
of its investment property in accordance with:
1. If it meets the criteria to be classified as held for sale ( or included in a disposal group
that is classified as held for sale)
2. Held by lessee as a right-of-use asset and is not held for sale, and
3. The requirements in IAS 16 for the cost model in all other cases

And shall apply policy to all of its investment property

Transfer of Investment Property

- An entity shall transfer a property to, or from, investment property when, and only when ,
there’s a change in use
a. Commencement of owner-occupied, or of development with a view to owner-
occupation, for a transfer from investment property to owner-occupied property;
b. Commencement of development with a view to sale, for a transfer from investment
property to inventories;
c. End of owner-occupation, for a transfer from owner-occupied property to investment
property; and
d. Inception of an operating lease to another party, for a transfer from inventories to
investment property,

Transfers at fair value

1. Investment at fair value to owner-occupied property or inventory – the FV at the date of

change is the deemed cost
 Inventory XX
Investment property XX
2. Owner- occupied property to investment property at FV – the difference between FV and
the previous carrying amount is treated as follows:
a. Decrease in carrying amount is either impairment loss or cancellation of revaluation
surplus, if there’s any
Investment property at FV
Revaluation Surplus
Land at CA
b. Increase in CA is recorded as revaluation surplus
Investment property at FV xx
Land at CA xx
Revaluation Surplus xx
3. Inventory to investment property at FV- the difference between FV and the previous
carrying amount is taken to profit or loss.
Investment property at FV
Inventory at COST
Gain
4. Completion of self- constructed investment property at FV – the difference between FV and
the previous carrying amount is taken to profit or loss
Investment property at FV
Construction in property
Gain

Presentation

Investment property shall be shown separately as a line item on the face of the Statement of
Financial Position under non-current assets.

Disposal

Shall be derecognized on disposal or when the investment property is permanently withdrawn

from use and no future economic benefits are expected from its disposal.

Gain or loss on disposal of investment property = net disposal proceeds less the carrying amount
of the asset and recognized in profit or loss

Compensation from third party for investment property that was impaired, lost or given up shall be
recognized in profit or loss when the compensation becomes receivable (IAS 37)

Receivable XX

Income XX