IAS 40 Investment property

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Definition
• Investment property is property (land or a 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:
• Use in the production or supply of goods or services or for administrative
purposes.
• Sale in the ordinary course of business

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Examples of investment property
• A building owned by the reporting entity (or held by the entity as a
right-of-use asset) and leased out under an operating lease.
• 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.
• Property that is being constructed or developed for future use as an
investment property

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Examples of investment property - continue
• 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?
• 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.

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Examples of investment property - continue
• Items that are not investment property.

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Accounting treatment
• An asset held by an entity as a right-of-use asset under FRS 16 and
leased out under an operating lease is treated as investment
property.
• Some properties may be partly owner-occupied and partly held for
investment purposes. Under IAS 40, if these portions could be sold
separately (or leased out separately under a finance lease), an entity
should account for the portions separately. If the portions 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 administrative purposes ie if only an
insignificant part is owner-occupied.

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Recognition
• Investment property should be recognized as an asset when two
conditions are met:

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

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Recognition - continue

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Measurement
Initial measurement:
• An investment property should be measured initially at its cost,
including transaction costs.

• A right-of-use asset classified as an investment property should be

measured in accordance with FRS 16.

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Measurement
Measurement subsequent to initial recognition.
• The entity choose between two models:
• The fair value model (No depreciation will be calculated, will be revaluated
on a yearly basis & recognize the changes to the P&L, if the property is owner
occupied IAS 16 revaluation result will be charges to P&L in case of loss, in
case of loss will be charged to OCI).
• The cost model (will be depreciated if applicable, no revaluation)
• Whatever policy it chooses should be applied to all of its investment
property.

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Transfer
• Transfers to or from investment property should only be made when there
is a change in use.
• Example:
A business owns a building which it has been using as a head office. In order
to reduce costs, on 30 June 2019 it moved its head office functions to one of
its production centers 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 2010 of $250,000 and was
being depreciated over 50 years. At 31 December 2019 its fair value was
judged to be $350,000.
How will this appear in the financial statements at 31 December 2019

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Transfer - continue

• The difference between the carrying amount and fair value is taken to a
revaluation surplus in accordance with IAS 16 as originally it was accounted under
the cost model.
• 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.
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Disposals
• Derecognize (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
recognized as income or expense in profit or loss.
• Compensation from third parties for investment property that was
impaired, lost or given up shall be recognized in profit or loss when
the compensation becomes receivable.

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Thank you