Investment property

(IAS 40)

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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 under a finance lease) 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, or
√ Sale in the ordinary course of
business 2
 ..Examples of investment property
Z 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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 Recognition
Investment property should be
recognized as an asset when two
conditions are met.
1. It is probable that the future
economic benefits that are
associated with the investment
property will flow to the entity.
2. The cost of the investment
property can be measured
reliable.
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IAS 40 – Measurement at Recognition
Investment property is recognized
initially at cost – applying the cost
model of IAS 16 Property, Plant and
Equipment – including what is
capitalized in cost and the principles
for non-monetary transactions
Leased investment property is
measured according to IAS 17 Leases
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Measurement subsequent to initial recognition

IAS 40 requires an entity to choose between two

models:
1.The fair value model
2.The cost model
Where an entity chooses to classify a property held
under an operating lease as an investment
property, there is no choice. The fair value model
must be used for all the entity's investment
property, regardless of whether it is owned or
leased.
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 Fair value model

 After initial recognition, an entity that

chooses the fair value model should
measure all of its investment property at
fair value, except in the extremely rare
cases where this cannot be measured
reliably. In such cases it should apply
the IAS 16 cost model.
 A gain or loss arising from a change in
the fair value of an investment property
should be recognized in net profit or
loss for the period in which it arises.
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 Cost model

 The cost model in IAS 16.

 Investment property should be
measured at depreciated cost, less
any accumulated impairment
losses.
 An entity that chooses the cost model
should disclose the fair value of its
investment property.

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 Changing Models

 Once the entity has chosen the fair value or

cost model, it should apply it to all its
investment property.

 Itshould not change from one model to the

other unless the change will result in a
more appropriate presentation.

 IAS 40 states that it is highly unlikely that

a change from the fair value model to the
cost model will result in a more appropriate
presentation
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 Transfers
 Transfers to or from investment property
should only be made when there is a
change in use.
 For example, owner occupation
commences so the investment property will
be treated under IAS 16 as an owner-
occupied property.
 When there is a transfer from investment
property carried at fair value to owner-
occupied property or inventories, the
property's cost for subsequent accounting
under IAS 16 or IAS 2 should be its fair
value at the date of change of use. 10
Example: Transfer to investment property

A business owns a building which it has

been using as a head office. In order to
reduce costs, on 30 June 2009 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 2000 of $250,000 and was
being depreciated over 50 years. At 31
December 2009 its fair value was judged to
be $350,000. How will this appear in the
financial statements at 31 December 2009?11
 Solution:

Particulars Amount

Original cost 250,000

Depreciation 1.1.00 – 1.1.09, (250/50 × 9) (45,000)

Depreciation to 30.6.09, (250/50 × 6/12) (2,500)

Carrying amount at 30.6.09 202,500

Revaluation surplus 147,500

Fair value at 30.6.09 350,000

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 Solution…

The difference between the carrying amount and

fair value is taken to a revaluation surplus in
accordance with IAS 16.
Dr. Investment property 350,000 (at FV)
Dr. Acc Dep.…………… 47,500
Cr. Revaluation Surplus….147,500 (350000-202500)
Cr. PPE…………………. 250,000

**Do not depreciate while classified as investment property

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.

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 Solution…

 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.

Dr. Investment property………30,000

Cr. Gain on value appreciation….30,000

Unusually, the IASB allows a fair value model for

non-financial assets. This is not the same as a
revaluation where increases in carrying amount
above a cost-based measure are recognised as
revaluation surplus.

Under the fair-value model all changes in fair value

are recognised in profit or loss. 14
 Disposals
 Derecognize (eliminate from the SFP) 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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Questions or comments? 16

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