Chapter 05

Investment property (IAS 40)

Learning Outcomes

At the end of this chapter, students will be able to:

▪ Identify and distinguish PPE and investment property,
▪ Prepare the accounting entries for investment property.

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Investment Property (IAS 40)

Property, land and building held for:

1. Rentals
2. Capital appreciation
3. Land held for undetermined use
4. Investment property being constructed

Note:
▪ Property used in production, supply of goods/services, admin
▪ Property sold in the ordinary course of business
▪ Owner or employee occupied property

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Measurement of Investment Property

An entity must apply one method to all investment property:

1. Fair value model In IFRS for SMEs,

• Revalue to fair value each year companies must use
• Gain/loss in fair value is in profit the fair value model
• No depreciation and cannot use cost.

2. Cost model:
• Account the same as PPE cost under IAS 16
• Must disclose the fair value in the notes
• Depreciate

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Property Transfers

When the fair value model is followed, on the date of any transfer, investment property is revalued.

Transfer Revaluation Gain

▪ From investment property to PPE In Profit
▪ From investment property to inventory In Profit
▪ From inventory to investment property In Profit
▪ From PPE to investment property In OCI and Revaluation Reserve

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IAS 40 Disclosures

▪ The choice of cost or fair value

▪ Additions, transfers
▪ Fair value gains and losses
▪ Whether a qualified independent valuer was used
▪ Rental income and related costs
▪ For the cost model, the disclosures are the same as assets under PPE cost, but the fair value
still needs to be disclosed

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Example

Addlington owns a property that it is using as its head office. At 1 January 2015, its carrying value
was $20 million and its remaining useful life was 20 years. On 1 July 2015 the business was
reorganized cheaper premises were found for use as a head office. It was therefore decided to
lease the property under an operating lease.

The property was valued by a qualified professional, who assessed the property’s value as $21
million on 1 July and $21.6 million on 31 December 2015.

Explain the accounting treatment of the property in the financial statements for the year-
ended 31 December 2015.

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Answer

▪ Addlington will treat the property using IAS 16 for the first six-months of the year before applying IAS 40 once the
change in use of the property took place.

▪ The property will be depreciated for the first six-months of the year resulting in a depreciation expense through
profit or loss of $0.5 million ($20 million/20 years x 6/12), thus reducing the carrying value to $19.5 million ($20
million - $0.5 million).

▪ The property is revalued to its fair value of $21 million on 1 July 2015 under IAS 16, giving a gain through other
comprehensive income of $1.5 million ($21 million - $19.5 million).

▪ The property is now classified as investment property and no longer depreciated.

▪ It is revalued to a fair value of $21.6 million at the reporting date with the gain of $0.6 million going through profit or
loss.

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END OF CHAPTER