IAS 40- INVESTMENT PROPERTY

INVESTMENT PROPERTY - IAS 40

Investment property defined
Investment property is a property held to earn rentals or for capital
appreciation or both.
Rather than for
o Used in production/supply of goods or service of for administration
purpose
o Sell in the ordinary course of the business (these will be inventories)
Examples of items that qualify to be investment properties
 Land held for long term capital appreciation
 Property held for a currently undetermined future use
 Vacant building held for leasing out
 Building leased out under operating lease
 Property constructed or developed for future use as investment
property
Example of item that are not investment properties
 Property intended for sale in the ordinary course of the business (IAS 2)
 Property constructed or developed on behalf of the third party
 Owner-occupied property (IAS16)
 Property held for future use or development of owner occupied property
 Property rented to own employees
Example 1
Explain whether the following should be classified as investments properties
1) An entity owns a stately home used for executive training which is no
longer required and is now being held for sales
2) An entity purchase some land for its investment potential. Planning
permission has not been obtained for the building construction of any
kind
3) A new office building used by an insurance entity as its head office was
purchased specifically in the centre of a major city in order to exploit its
capital gain potential.

Recognition criteria of investment property under IAS 40

Investment property should be recognized as an asset when and only when:
 It is probable that the future economic benefits that are associated
with the investment property will flow to the entity; and
 The cost of the investment property can be measured reliably.

By: Sumawe (MSc; Finance & Investment; CPA(T)). 1

Measurement at Recognition
Initial measurement
Investment property should initially be measured at cost plus directly
attributable costs
 Purchase cost
 Materials
 Labour
 Borrowing cost
 Import duties and other non refundable taxes
 cost of site preparation
 Initial delivery and handling costs
 Installation costs
 Testing
 Professional fees (architects, engineers)

Subsequent measurement
IAS 40 stipulates that an entity should choose as its accounting policy:
 Either the Fair Value Model;
 or the Cost Model

Cost model
If the cost model is adopted the properties should be accounted for in
accordance with IAS16 (should be measured at cost less accumulated
depreciation and impairment losses if any)
Even if this model is adopted the fair value of the investment property should
be disclosed in the financial statements

Fair value model

If the fair value model is adopted, the accounting treatment is as follows
 the asset is revalued to the fair value/market value at the end of each
year
 the gain/loss on revaluation/ fair value adjustment is shown direct in
the income statements
 no depreciation is charged on the asset
Note;
When an entity has a property held under an operating lease, there is no
choice of model. The fair value model must be adopted.
IAS 40 insisted on the use of fair value on investment property.
Example 2
Celine a manufacturing company purchased a property to Tshs 1 million on 1
January 2011 for its investment potential. The land element of the cost is
believed to be Tshs 400,000 and the building element is expected to have a
useful life of 50yrs. At 31 December 2011 local property indices suggest the
fair value of the property has risen to Tshs1.1 million.

By: Sumawe (MSc; Finance & Investment; CPA(T)). 2

Show how the property would be presented in the financial statements as at
31 December 2011 if Celine adopts
a) the cost model
b) the fair value model
Example 3
An entity owns two investment properties A and B. the entity measures its
investment property using the fair value model. Fair values have been
assessed as follows
31 December 2007 31 December 2008

Property A 18,000,000 24,000,000

Property B 12,000,000 10,000,000

Required
For the year ended 31 December 2008 show the amounts which should be
recognized in the financial statements

Transfers (change in use)

An entity may change the way in which is uses its property example
Occupation of an investment property by the entity itself. This property is
now classified as PPE and should be recognized in accordance with
IAS16, and the fair value should be treated as deemed cost for future
accounting
Changing of an investment property to inventory. The property should be
reclassified as inventory and its fair value at the date of change should
be treated as deemed cost.
Example 4
An entity with a 31 December year end purchased an office building with a
useful life of 50yrs for Tshs 5.5 millions on 1 January 2011. The entity used
the building as its head office for 5 years until 31 December 2015 when the
entity moved its head office to large premises. The building was reclassified on
that date as an investment property and leased out under 40 years lease. The
fair value of building at 31 December 2015 was Tshs 6 millions. Explain the
treatment of the building if
i. Cost model is used
ii. Fair value model is used

Retirement or Disposal
An investment property shall be derecognized (eliminated from the statement of
financial position) on disposal or when the investment property is permanently
withdrawn from use and no future economic benefits are expected from its
disposal.
Gains or Losses arising from the Retirement or Disposal

By: Sumawe (MSc; Finance & Investment; CPA(T)). 3

Gains or losses arising from the retirement or disposal of investment property
are:
 Equal to the difference between net disposal proceeds and carrying
amount of the asset.
 Recognized in the statement of profit or loss in the period
when the asset is sold or retired.
 For sale and leaseback transactions, IAS 17 should be
followed.
Example 5
An entity purchased an investment property on 1 January 2003
for a cost of Tshs 3.5 millions. The property had a useful life of
50yrs with no residual value. 31 December 2005 had the fair
value of Tshs 4.2 millions. On 1 January 2006 the property was
sold for net proceeds of Tshs 4 millions.
Required
Calculate the profit or loss on disposal under both the cost and
fair value model

By: Sumawe (MSc; Finance & Investment; CPA(T)). 4