FACR – ICMAP ML2 (S-21) IAS 40

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. The word “held” includes both (a) legal owner and (b) finance lease.

Examples for IP:

This standard provides the following examples land and buildings that should be classified as investment
property:
 Land held for long term capital appreciation.
 Land held for currently undetermined future use.
 Building leased out under an operating lease arrangement.
 Vacant buildings held to be leased out under operating lease.
 Property being constructed for future use as investment property.

Examples for NON-IP:

 Owner occupied property used for Production or supply of goods and services or administration.
(Covered in IAS-16)
 Property occupied by employees irrespective of whether they pay rent or otherwise.
 Owner occupied property awaiting disposal. (Covered in IFRS-05)
 Held for sale in ordinary course of business or in the process of construction or development for such
sale. (Covered in IAS-02)
 Property leased out under finance lease arrangement. (Covered in IFRS-16)
 Property being constructed or developed on behalf of third parties. (Covered in IFRS-15)

PROPERTY WITH DUAL USES:

There could be a situation where a building can be accounted for in two different ways. If an entity
occupies a premises but rents out certain floors to other companies, then the part occupied will be
classed as PP&E as per IAS 16, with the floors rented out classed as investment property per IAS 40.

If a building is rented by a subsidiary of the entity, then the building will be classed as an investment
property in the individual accounts, but will be classed as property, plant and equipment per IAS 16 in the
consolidated financial statements.

MEASUREMENT:
Initial Subsequent:
Fair value model: Cost model:
Investment properties should • The investment properties are • Continue to carry on costs
initially be measured at cost revalued to fair value at each same as per IAS-16.
i.e. purchase price plus directly reporting date. • The properties are
attributable costs. • Gains or losses on revaluation depreciated like any other
are recognised directly asset.
through P&L. • When fair value model is
• The properties are NOT impractical to apply.
depreciated.
IAS-40 encourages consistent application of adopted method to overall IP portfolio (not to specific
class). However, discourages change of method from fair value to cost model as it is highly unlikely that it
would result in fair presentation. As per IAS-08, voluntary change in accounting policy should be made
only when it being more reliable financial information and presentation.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance

FACR – ICMAP ML2 (S-21) IAS 40

Definition of Fair Value:

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date.

TRANSFERS / MIGRATION:

Transfers into and out of investment property should only be made when supported by a change of use of
the property.

FROM IAS 16 TO IAS 40 FROM IAS 40 TO IAS 16

Fair Value Model Cost Model: Fair Value Model Cost Model:
The asset must first The asset is transferred Revalue the property first The asset is
be revalued per IAS into investment properties per IAS 40 (taking the transferred into
16 (creating a at the current carrying gain or loss to the property, plant and
revaluation surplus in amount and continues to statement of profit or equipment at the
equity) and then be depreciated. loss) and then transfer to current carrying
transferred into property, plant and amount and continues
investment property at equipment at fair value. to be depreciated.
fair value.

Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance