IAS 40 INVESTMENT PROPERTY
It defines investment property as property held to earn rentals or for capital appreciation or
both rather than for
a) Use in production or supply of goods or services
b) Sale in the ordinary course of business
Owner occupied property is property held by the owner (or by the lessee under a finance
lease) for use in the production or supply of goods or services or for administrative purposes.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date.
Cost is the amount of cash or cash equivalents paid or the fair value of other consideration
given to acquire an asset at the time of its acquisition or construction.
Carrying amount is the amount at which an asset is recognised in the SFP.
A property interest that is held by a lessee under an operating lease may be classified and
accounted for as an investment property, if and only if, the property would otherwise meet the
definition of an investment property and the lessee uses IAS 40 fair value model.
Examples of investment property include
1. Land held for long-term capital appreciation rather than for short-term sale in the
ordinary course of business
2. A building owned by the reporting entity (held by the entity under a finance lease) and
leased out under an operating lease
Examples of items that are not investment property
Property held for sale in the ordinary course of business - IAS 2 (Inventories)
Property being constructed or developed on behalf of 3rd parties - IAS 11 (Construction
Contracts)
Owner occupied property - IAS 16 (PPE)
Property being constructed or developed for future use as investment property- IAS 16
(until construction or development is complete, then treat as investment property)
Recognition
Investment property should be recognised as an asset when 2 conditions are met
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It is probable that the future economic benefits that are associated with the investment
property will flow to the entity.
The cost of the investment property can be measured reliably.
Initial measurement
An investment property should be measured initially at cost, including transaction costs. A
property interest held under a lease and classified as an investment property shall be
accounted for as if it were a finance lease. The asset is recognised at the lower of the fair value
of the property and the present value of the minimum lease payments. An equivalent amount
is recognised as a liability.
Measurement subsequent to initial recognition
Entities can choose between
A fair value model, with changes in fair value being measured
A cost model – the treatment most commonly used under IAS 16
Whatever policy it chooses should be applied to all of its investment property.
NB: 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.
Fair value model
a) 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.
b) A gain or loss arising from a change in the fair value of an investment property should be
recognised in profit or loss for the period in which it arises.
c) The fair value of the investment property should reflect market conditions at the year-
end.
Cost model
The cost model is the cost model in IAS 16. Investment property should be measured at cost
less accumulated depreciation less any accumulated impairment losses. An entity that chooses
the cost model should disclose the fair value of its investment property.
Changing models
Once the entity has chosen the fair value or cost model, it should apply it to all its investment
property. It should not change from one model to another 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
e.g. 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 the
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 change of date of use.
Conversely, an owner occupied property may become an investment property and need to be
carried at fair value. An entity should apply IAS 16 up to the date of change of use. It should
treat any difference at that date between the carrying value of the property under IAS 16 and
its fair value as a revaluation under IAS 16.
Question 1 (Transfer from Investment Property to Owner occupied property)
On 1 July 2019, X Ltd acquired land and buildings for its manufacturing operations at a cost of
$1 420 000. The property was leased immediately to Y Ltd at an annual rental of $250 000 in
terms of an operating lease. On 30 September 2020, X Ltd gave Y Ltd notice to vacate the
premises on 31 December 2020, as they were required for its own operations. X Ltd does not
depreciate land, but depreciates buildings on a straight line basis over 30 years, using the fair
value model for investment properties. On 30 June 2020, the property’s fair value amounted to
$625 000 land and $1 600 000 buildings. X Ltd’s financial year ends on 30 June.
Requirement
Outline the accounting treatment of the property in the books of X Ltd
Question 2 (Transfer from Owner occupied to Investment Property)
In each case below, outline briefly the appropriate accounting treatment and show the journal
entries in the financial statements of Williamson plc (Williamson) for year ended 31 March
2015, resulting from recording the events described. Any entry affecting the performance
statement must be clearly classified as either ‘profit or loss’ or ‘other comprehensive income’.
Williamson adopts the revaluation model of IAS 16 Property, Plant & Equipment and the fair
value model of IAS 40 Investment Property.
Williamson owns a piece of property it purchased on 1 April 2012 for $3.5 million. The land
component of the property was estimated to be $1 million at the date of purchase. The useful
economic life of the building on this land was estimated to be 25 years on 1 April 2012. The
property was used as the corporate headquarters for two years from that date. On 1 April 2014,
the company moved its headquarters to another building and leased the entire property for
five years to an unrelated tenant on an arms-length basis in order to benefit from the rental
income and future capital appreciation. The fair value of the property on 1 April 2014 was $4.1
million (land component $1.9 million), and on 31 March 2015, $4.8 million (land component
$2.1 million). The estimate of useful economic life remained unchanged throughout the period.
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Land and buildings are considered to be two separate assets by the directors of Williamson.
Question 3 (Transfer from Owner occupied to Investment Property)
C Ltd acquired land and buildings for its manufacturing operations at a cost of $75 000 (land
$20 000 and buildings $55 000) on 1 October 2016. On 1 January 2018, the company moved
into new premises and decided to lease the old premises to D Ltd at an annual rental of $15 000
in terms of an operating lease. C Ltd depreciates its buildings on a straight line basis over 20
years and uses the fair value model for investment properties. On 1 January 2018, the fair value
of the property amounted to $95 000 (land $25 000 and buildings $70 000) and $120 000 on 30
September 2019. C Ltd’s financial year ends on 30 September.
Requirement
Outline the accounting treatment for the property in the books of C Ltd
Disposals - De-recognise (eliminate from the SFP)
An investment property is de-recognised on disposal or when it is permanently withdrawn from
use or no future economic benefits are expected from its disposal. A gain or loss on disposal is
the difference between the net disposal proceeds and the carrying value of the asset. It should
generally be recognised as income or expense in profit or loss.
Compensation from 3rd parties for investment property that was impaired, lost or given up shall
be recognised in profit or loss when the compensation becomes receivable.
Question 3
a. On 1 January 2019, C Ltd leased land with a fair value of $356 000 from D Ltd for a period of
3 years, at an annual rental of $56 000 payable in arrears. C Ltd sub-let the land to E Ltd for
the same period at $80 000 p.a. also payable in arrears. C Ltd accounts for this land as an
investment property, using an interest rate of 12% p.a.
Required
Calculate the re-measurement gain or loss for this property in the books of C Ltd on 1 January
2019 and 31 December 2019, (NB: The present value annuity factor of 12% and 3 years is
𝟏
2,4018. The present value annuity factor of 12% and 2 years is 1.6901). [𝟕 𝟐 marks]
Question 4
(a) The accounting treatment of investment properties is prescribed by IAS 40 Investment
Property.
Required:
i. Define investment property under IAS 40 and explain why its accounting treatment is
different from that of owner-occupied property;
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ii. Explain how the treatment of an investment property carried under the fair value model
differs from an owner-occupied property carried under the revaluation model.
(b) Speculate owns the following properties at 1 April 2012:
Property A: An office building used by Speculate for administrative purposes with a
depreciated historical cost of $2 million. At 1 April 2012 it had a remaining life of 20
years. After a reorganisation on 1 October 2012, the property was let to a third party
and reclassified as an investment property applying Speculate’s policy of the fair value
model. An independent valuer assessed the property to have a fair value of $2·3 million
at 1 October 2012, which had risen to $2·34 million at 31 March 2013.
Property B: Another office building sub-let to a subsidiary of Speculate. At 1 April 2012,
it had a fair value of $1·5 million which had risen to $1·65 million at 31 March 2013.
Required:
Prepare extracts from Speculate’s entity statement of profit or loss and other comprehensive
income and statement of financial position for the year ended 31 March 2013 in respect of the
above properties. In the case of property B only, state how it would be classified in Speculate’s
consolidated statement of financial position.
Disclosure requirements
Fair value model and cost model
An entity should disclose:
a. Whether it applies the fair value model or the cost model
b. If it applies the fair value model, whether, and in what circumstances, property interests
held under operating leases are classified and accounted for as investment property.
c. When classification is difficult, the criteria it uses to distinguish investment property from
owner-occupied property and from property held for sale in the ordinary course of
business.
d. The methods and significant assumptions applied in determining the fair value was
supported by market evidence or was more heavily based on other factors (which the entity
should disclose) because of the nature of the property and lack of comparable market data.
e. The extent to which the fair value of investment property (as measured or disclosed in the
financial statements) is based on a valuation by an independent valuer and has recent
experience in the location and category of the investment property being valued. If there
has been no such valuation, that fact should be disclosed.
f. The amounts recognised in profit and loss
i. Rental income from investment property
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ii. Direct operating expenses (including and maintenance) arising from investments that
generated income during the period.
iii. Direct operating expenses (including repairs and maintenance) arising from investment
property that did not generate rental income during the period.
iv. The cumulative change in fair value recognised in profit or loss on a sale of investment
property from a pool assets in which the costs model is used into a pool in which the fair
value model is used.
v. The existence and amounts or restrictions on the reliability of investment property of
the remittance of income and proceeds of disposal.
vi. Contractual obligations to purchase, construct or develop investment property or for
repairs, maintenance or enhancements.
Fair value model
In addition to the disclosures required above an entity that applies the fair value model should
disclose reconciliation between carrying amounts of investment property at the beginning and
end of the period, showing the following.
a. Additions, disclosing separately those additions resulting from acquisitions and those
resulting from subsequent expenditure recognised in the carrying amount of an asset.
b. Additions resulting from acquisition through business combinations.
c. Assets classified as held for sale or included in disposal group classified as held for sale in
accordance or losses from fair value adjustments.
d. Net gains or losses from fair value adjustments
e. The net exchange differences arising on the translation of the financial statements into a
different presentation currency, and on translation of a foreign operation into the
presentation currency of the reporting entity.
f. Transfers to and from inventories and owner-occupied property.
g. Other changes
When a valuation obtained for investment property is adjusted significantly for the purpose of
the financial statements e.g. to avoid double-counting of assets or liabilities that are recognised
as separate assets and liabilities the entity should disclose a reconciliation between the
valuation obtained and the adjusted valuation included in the financial statements. This
reconciliation should show separately the aggregate amount of any recognised lease obligation
that have been added back, and any other significant adjustments.
When an entity measures investment property using the cost model in IAS 16, the
reconciliation should disclose amounts relating to that investment property separately from
amounts relating to other investment property. In addition, the entity should disclose:
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i. A description of the investment property
ii. An explanation of why fair value cannot be determined reliably
iii. On disposal of investment property not carried at fair value
a. The fact that the entity has disposed of investment property not carried at fair value
b. The fact that the entity had disposed of investment property at the time of sale and
amount
c. The amount of gain or loss recognised
Cost model
In addition to the disclosures indicated above, an entity that applies the cost model should
disclose:
a. The depreciation method(s) used
b. The useful lives or the depreciation rates used
c. The gross carrying amount and the accumulated depreciation (aggregated with
accumulated impairment losses) at the beginning of the end of the period.
d. A reconciliation of the carrying amount of investment property at the beginning and end
of the period showing the following
i. Additions, disclosing separately those additions resulting from acquisition, and those
resulting from subsequent expenditure recognised as an asset.
ii. Additions resulting from acquisitions through business combinations
iii. Assets classified as held for sale or included in a disposal group classified as held for sale in
accordance with IFRS and other disposals
iv. Depreciation
v. The amount of impairment losses recognised, and the amount of impairment losses
reserved, during the period in accordance with IAS 36
vi. The net exchange differences arising on the translation of the financial statements into a
different presentation currency of the reporting entity
vii. Transfers to and from inventories and owned-occupied property and
viii. Other changes
e. When an entity cannot determine the fair value of investment property reliably(para 53
of the standard), it should disclose:
i. A description of the investment property
ii. An explanation of why fair value cannot be determined reliably
iii. If possible, the range of estimates which fair value is highly likely to lie
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