Practical Implementation of IAS 40 in Manufacturing sector at BEXIMCO

BEXIMCO Group is a prominent and diversified conglomerate based in Bangladesh with a

strong presence in the manufacturing sector. Established in 1972, the company has grown to
become one of the largest industrial groups in the country. Beximco's manufacturing division
encompasses a wide range of industries, including textiles, pharmaceuticals, ceramics, and more.
The company is known for its commitment to quality and innovation, making it a key player in
Bangladesh's industrial landscape. Beximco's contributions to the manufacturing sector have not
only bolstered the nation's economy but also earned it a reputation as a global player in various
industries.

IAS 40 governs investment property, defining it as land, a building, or part of a building (or a
combination of these) held to earn rental income, capital appreciation, or both. This contrasts
with property used for producing or supplying goods and services, administrative purposes, or
those intended for sale in the ordinary course of business. Notably, IAS 40 is applicable to all
investment properties regardless of the nature of an entity’s business, meaning it isn’t restricted
to entities within the real estate sector.

On initial recognition, investment properties are measured at cost. Thereafter, entities can choose
between the cost model or the fair value model for valuing these assets. The fair value is
determined in line with IFRS 13, and any revaluation gains or losses are recognised in profit or
loss.
This represents Land & Building held by the company for capital appreciation and/or rental
income.

However, during the year ended 30 June 2016, a revaluation was done by an independent valuer
Shiraz Khan Basak & Co., Chartered Accountants, R K Tower, 86 Bir Uttam C R Datta Road
(312, Sonargaon), Level 10, Hatirpool, Dhaka-1205, and the valuer has revalued the said land of
the Company as of 30 March 2016, following “current cost method”.

The current cost method in IAS 40 involves measuring investment property at its current cost,
which is essentially the cost of its replacement or reproduction at the current market prices. It's
less commonly used than the fair value model. This approach aims to reflect the property's
current economic condition.

This represents Land & Building held by the company for capital appreciation and/or rental
income. The Company has applied IAS 40, “Investment Property” and has adopted “fair value
model”.

The fair value of an asset is reliably measurable if

(a) the variability in the range of reasonable fair value measurements is not significant for that
asset or

(b) the probabilities of the various estimates within the range can be reasonably assessed and
used when measuring fair value. If the entity is able to measure reliably the fair value of either
the asset received or the asset given up, then the fair value of the asset given up is used to
measure cost unless the fair value of the asset received is more clearly evident. (Para 29 as per
IAS 40)
Any changes in the fair value of an investment property are immediately recognised in profit or
loss (IAS 40.35). When determining the property’s fair value as per IFRS 13, entities must
consider rental income from current leases and other market-related assumptions. If a lessee opts
for the fair value model for a right-of-use asset, the measurement applies to the RoU asset and
not the underlying property (IAS 40.40-40A).

When calculating the carrying amount of investment property using the fair value model, entities
must avoid double-counting assets or liabilities recognised separately. For instance:

 Integral equipment like lifts in a building typically form part of the building’s fair
value and aren’t recognised separately (IAS 40.50).
 A furnished office’s fair value often covers the furniture’s value too, given the rental
income pertains to the furnished space. Thus, the furniture isn’t recognised as a
separate asset.
 Prepaid or accrued lease income isn’t part of the property’s fair value as it’s
recognised separately.
 For properties held by a lessee as a right-of-use asset, the fair value considers expected
cash flows (including variable lease payments). If a valuation is net of expected
payments, any recognised lease liability must be added back to determine the
property’s carrying amount under the fair value model.

When adding a replacement part to the carrying amount of an investment property, the carrying
amount of the replaced part should be derecognised. With the fair value model, the investment
property’s valuation might already factor in the reduction in value of the part set to be replaced.
However, in some instances, it may be challenging to ascertain the precise fair value movement
due to the replacement. If this is the case, a viable approach is to add the cost of the replacement
to the asset’s carrying amount. Subsequently, the property’s fair value should be re-evaluated,
similar to processes for additions that don’t involve replacements (IAS 40.68).
Transfers from investment property under fair value model:

If an investment property, carried at fair value, is transferred to owner-occupied property or

inventories, the property’s deemed cost for subsequent accounting in accordance with IAS
16, IFRS 16 or IAS 2 is its fair value at the date of transfer (IAS 40.60).

Transfers to investment property under fair value model:

When an owner-occupied property transitions into an investment property, IAS 16 or IFRS 16

applies until the transfer date. Any difference between the carrying amount and fair value at the
time of transfer is treated as a revaluation model in line with IAS 16. Consequently, the P/L
impact doesn’t include cumulative net fair value increases from before the classification as
investment property (IAS 40.61-62).

If a property moves from inventory to investment property carried at fair value, any difference
between the fair value on the transfer date and its previous carrying amount is recognised in
profit or loss (IAS 40.63-64).

Upon finishing the construction or development of a self-built investment property that will be
carried at fair value, any difference between its fair value at transfer date and its previous
carrying amount is also recognised in profit or loss (IAS 40.65).