IAS 40 Investment Property Overview
IAS 40 Investment Property, defines and sets out rules on accounting for Investment Property. In summary Investment Property differs from other property, which is used in the production or supply of goods or for administrative proposes or held for sale in ordinary course of business.
The Investment Property could be held by:
- The owner; or
- The lessee under a finance or an operating lease.
Investment Property – An Investment Property is property (land or a building, part of a building or both) held to earn rentals or for capital appreciation or both.
Practical Examples of IAS 40 Investment Property
The following are examples of investment property:
- Land held for long-term capital appreciation rather than for short-term sale in the ordinary course of business.
- Land held for a currently undetermined future use.
- A building owned by the entity (or a Right-of-use asset relating to a building held by the entity) and leaded out under one or more operating leases.
- A building that is vacant but is held to be leased out under one or more operating leases.
- Property that is being constructed or developed for future use as investment property.
Not Investment Property
The following are examples of items that are NOT investment property:
- Property intended for sale in ordinary course of business
- Property being leased to another entity under a finance lease.
- Biological assets related to agricultural activity
- Mineral rights and mineral reserve such as oil, natural gas and similar non-regenerative resources.
Accounting treatment of Investment Property
The recognition criteria for investment property are the same as for property, plant and equipment under IAS 16. An owned investment property should be recognized as an asset only when:
- It is probable that future economic benefits associated with the property will flow to the entity, and
- The cost of the property can be measured reliably.
Measurement at recognition
Owned investment property should be measured initially at cost plus any directly attributable expenditure (e.g. legal fees, property transfer taxes and other transaction costs) incurred to acquire the property.
The cost of an investment property is NOT increased by:
- Start-up costs
- Operating losses incurred before the investment property achieves the planned level of occupancy; or
- Abnormal waste incurred in constructing or developing the property.
After initial recognition an entity may choose as its accounting policy:
- The fair value model; or
- The cost model.
The chosen policy must be applied to all the investment property of the entity. Once a policy has been chosen it cannot be changed unless the change will result in a more appropriate presentation. IAS 40 states that a change from the fair value model to the cost model is unlikely to result in a more appropriate presentation.
Fair value model for Investment Property
Under the fair value model, the entity should:
- Revalue all its investment property to ‘fair value’ at the end of each financial year; and
- Recognize any resulting gain/loss in profit or loss for the period.
- The property would not be depreciated.
This is different to the revaluation model of IAS 16, where gains are reported as other comprehensive income and accumulated as a Revaluation Surplus.
Cost model for Investment Property
The cost model follows the provisions of IAS 16. The property is measured at cost less accumulated depreciation and less impairment loss if any.
Why investment properties are treated differently from other properties
- An investment property is held primarily because it is expected to increase in value. It generates economic benefits for the entity because it will eventually be sold at a profit.
- The most relevant information about an investment property is its fair value (the amount for which it could be sold). Depreciation is largely irrelevant. Therefore, it is appropriate to remeasure an investment property to fair value each year and to recognize gains and losses in profit or loss for the period.
IAS 40 Investment Property Disclosure requirements
The following disclosures are required by IAS 40 Investment Property:
Disclosure requirements applicable to both the fair value model and the cost model
- Whether the fair value model or the cost model is used
- The methods and assumptions applied in arriving at fair values
- Amount recognized as income or expense in the statement of profit or loss for:
- Rental income from investment property
- Operating expenses in relation to investment property
- Details of any restrictions on the ability to realize investment property or any restrictions on the remittance of income or disposal proceeds
- The existence of any contractual obligation to purchase, construct or develop investment property or for repairs, maintenance or enhancements.
Disclosure requirements applicable to the fair value model only
There must be a reconciliation, in a note to the financial statements, between opening and closing values for investment property, showing:
- Additions during the year
- Assets classified as held for sale in accordance with IFRS 5
- Net gains or losses from fair value adjustments
- Acquisitions through business combinations
Disclosure requirements applicable to the cost model only
- The depreciation methods used
- The useful lives or depreciation rates used
- Gross carrying amounts and accumulated depreciation at the beginning and end of the period
- A reconciliation between opening and closing values
When the cost model is used, the fair value of investment property should also be disclosed (if it can be measured reliably).
IAS 40 PDF
IAS 40 investment property pdf, click here to Download the Investment Property IAS 40 pdf