INVESTMENT PROPERTY (IAS 40)

There is a presumption in IAS 16 that property, plant and equipment is acquired for use in an
entity’s operations and is generally used up or “consumed” over the period of its useful life.
Depreciation charges are made so as to match the cost of consuming an asset against the
revenues which it helps to generate. But property which is acquired as an investment rather
than for use is not consumed in the entity’s operations and does not have a useful life. This
means that the accounting treatment required by IAS 16 is generally inappropriate for such
property. The objective of IAS 40 INVESTMENT property is to offer a more suitable accounting
treatment held as an investment.

Definitions:

Property: This is a land or building or both owned by the reporting entity or held by the
reporting entity under finance tease

Investment property: This is a property held for rental income or for capital appreciation or
both. This means that investment property generates cash flows largely independently of the
other assets held by an entity. It must be owned by the reporting entity or held by the reporting
entity under finance lease.

IAS 40 defines investment property as “property (land or a building or part of a building or both)
held to earn rentals or for capital appreciation or both, rather than:

(a) For use in the production or supply of goods or services, or

(b) For administrative purposes, or
(c) For sale in the ordinary course of business”

Owner occupied property: is property held by the owner (or by the lessee under a finance
ease) for use in the production or supply of goods or services or for administrative purposes.
Note the main difference between investment property and owner occupied is that investment
property generates cash flows largely independently of the other assets held by an entity while
owner occupied does not.

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 statement of financial
position.

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Examples of investment property:

(a) Land held for long-term capital appreciation rather than for short term sale in the ordinary
course of business.

(b) Land held for a currently undetermined future use.(if an entity has not determined that it
will use the land either as owner-occupied property or for short- term sale in the ordinary
course of business the land is considered to be held for capital appreciation)

(c ) A building owned by the reporting entity (or held by the reporting entity under a finance
ease) and leased out under one or more operating leases. That is, property held for lease rental
income.

d) A building that is vacant but held to be leased out under operating leases. That is, property is
for lease rental income.

Property partly used for rental or capital appreciation and partly used as owner occupied

Certain properties include a portion that is held to earn rentals or for capital appreciation and
another portion that is held for use in the production or supply of goods or services or for
administrative purposes.

If these portion could be sold separately (or leased out separately under a finance leases) the
entity should accounts for the portions separately (i.e. the portion held for capital appreciation
should be accounted as investment property while the portion held for use should be
accounted as owner-occupied using IAS 16).

If the portion could not be sold separately, then the property is investment property only if a
significant portion is held for rental income or capital appreciation while it should be treated as
owner occupied if an insignificant portion is used for rental income or capital appreciation.

Other issues in classifying a property into investment property or owner occupied

Where an entity provides ancillary services to the occupant of the property held by the entity
an entity treats such a property as investment property if the services are a relatively
insignificant component of the arrangement as a whole. An example would be where the
owner of an office building provides security and maintenance services to the lessees who
occupy the building.

However, where the services provided are a more significant component. For example if an
entity owns and manages a hotel services provided to guest are a significant component of the
arrangement as a whole therefore an owner managed hotel is owner occupied property rather
than investment property.

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Where an entity owns a property that is leased to and occupied by a group member (i.e. its
parent or another subsidiary), the property should be treated as owner occupied in
consolidated financial statements because the property is owner occupied from the perspective
of the group as a whole. However, in the separate or individual financial statements of the
entity that owns the property, it will be treated as investment property.

The following are example of items that are not investment property

i. Property held for sale in the ordinary course of business or in the process of
construction or development for such sale (IAS 2), for example property acquired
exclusively with a view to subsequent disposal in the near future or for the development
and resale.
ii. Property being constructed or developed on behalf of third parties (IAS 11 “construction
contracts”).
iii. Owner occupied property (IAS 16) held for future use as owner occupied property,
property held for future development and subsequent use as owner-occupied property,
property occupied by employees (whether or not the employees pay rent at market
rates) and owner occupied Property awaiting disposal.
iv. Property that is being constructed or developed for future use as investment property,
IAS 16 should be applied to such property until construction or development is
completed, thereafter the property becomes investment property (and IAS 40 now
applies). However, IAS 40 does apply to existing investment property that is being
developed for continued future use as investment property (i.e. IAS 40 does not apply to
the property during re-development).

Measurement of investment property

i. At initial recognition

At initial recognition investment property should be measured 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
recognized as a liability.

ii. Measurement subsequent to initial recognition

At subsequent measurement (i.e. after initial measurement), IAS 40 requires an entity to

choose between the cost model and fair value model.

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Once the entity has chosen the fair value or cost model, it should apply it to all of its investment
property. It should not change from one model to the other unless the change will result in a
more appropriate presentation. However IAS 40 prefers the use of fair value in measuring
investment property.

(a) Cost model

Where an entity has chosen to use the cost model to measure its investment property, the entity
should recognize its investment property at cost less any accumulated depreciation and any
accumulated impairment loss (i.e. measured as if it is PPE). An entity that chooses the cost
model should disclose the fair value of its investment property.

(b) Fair value model

Where an entity has chosen to use the fair value model to measure its investment property after
initial recognition, the entity 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 the statement of profit or loss for the period in which it arises.

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.

Recognition

According to IAS 40, investment property should be recognized as a non-current asset in the
statements of financial position while changes in the fair value of investment property should
be recognized as fair value gain or loss in statement of profit loss of the period when the
changes occurred.

Disposal of investment property

An investment property should be derecognized 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 be recognized as income or expense in profit or loss.

Transfers Following a Change in Usage

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A change in the use of a property may lead to it no longer being recognized as an investment
property. The following table sets out where there might be evidence that a change in use has
occurred and how the property should be treated following the change in use.

S/N Evidence Accounting treatment

of change in use
1 Occupying of the property by the The property is now owner – occupied and should
entity itself therefore be recognized as a property in use by the
entity in accordance with IAS 16.
Where investment property was measured at fair
value, its fair
Value at the date of change in use should be
treated as the deemed cost (i.e. the cost of the
owner occupied property) for future accounting.
2 Development of the property The property is being held for sale in the normal
commences with the intention business and should therefore be classified as
that it will be sold by the entity. inventory and recognized in accordance with IAS 2”
Inventories”
Where the investment property was measured at
fair value, its fair
Value at the date of change in use should be
treated as the deemed cost (i.e. the cost of the
inventory)
3 Development of the property The property should continue to be held as an
commences, with the intention investment property under IAS 40
that it will continue to be an
investment property after
completion of the development
works.
4 A building that was occupied by The property is no longer owner –occupied and
the entity is vacated so that it can therefore should be transferred to investment
be let to third party. properties and recognized in accordance with IAS
40
5 A Property that was originally The property is no longer held for resale and is
held as inventory has now been instead held to generate future rental income and
let to a third party. therefore should be transferred to investment
properties and recognized in accordance with IAS
40.Where investment properties are measured at
fair value the property should be revalued at the
date of change in use and any difference should be
recognized directly in profit or loss for the period.
6 An entity has constructed a Whilst the property is being constructed it is
property that it now intends to let accounted for in accordance with IAS 16, However,

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 out of a number of third parties. on completion it should be transferred to
investment properties where investment
properties are measured at fair value the property
should be revalued at the date of change in use
and any difference should be recognized directly in
profit or loss for the period (IAS 40 .65).

Disclosure requirements

 Whether the fair value model or cost model has been followed
 Whether assets held under operating Leases are included in investment property
 Criteria for classification as investment property
 Assumption made in the determination of fair value
 Use of independent professional valuer (encouraged but not required).
 The amount of direct operating expenses recognized in the statement of profit or loss
 The amount of rental income or expenses recognized in the statement of profit or loss
 Any restrictions or obligations

An entity that adopts the fair value model must also disclose a reconciliation of the carrying
amount of the investment property at the beginning and end of the period.

PRACTICE QUESTIONS
QUESTION 1

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;
(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) Spartacus owns the following properties as 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 re-
organisation on 1 October 2012, the property was let to a third party and reclassified as an
investment property applying Spartacus’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 Spartacus. At 1 April 2012, it had a
fair value of #1·5 million which had risen to #1·65 million at 31 March 2013.

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Required:
Prepare extracts from Spartacus’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
Spartacus’s consolidated statement of financial position.

QUESTION 2

A business owns a building which it has been using as a head office. In order to reduce costs, on
30 June 20X9 it moved its head office functions to one of its production centres 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 20X0 of $250,000 and was being
depreciated over 50 years. At 31 December 20X9 its fair value was judged to be $350,000.
How will this appear in the financial statements at 31 December 20X9?

QUESTION 3

Anaconda, a manufacturing company, purchases a property for #1m on 1 st January 2011 for its
investment potential. The land element of the cost is believed to be #400,000 and the building
element is expected to have a useful life of 50 years. At 31st December 2011, local property
indices suggest that the fair value of the property has risen to #1.1m. Show how the property
would be presented in the financial statements as at 31st December if Anaconda adopts:

 Cost model
 Fair value model

On 1 January Year 1 Entity P purchased a building for its investment potential. The building cost
₦1 million with transaction costs of ₦10,000. The depreciable amount of the building
component of the property at this date was ₦300,000. The property has a useful life of 50
years. At the end of Year 1 the property’s fair value had risen to ₦1.3 million.

QUESTION 4

The following relates to Owonikoko Plc. for the period ended 31st December 2014:

 An entity has a factory which due to a decline in activity is no longer required and is now
being held for sale.
 Farming land is purchased for its investment potential. Planning permission has not
been obtained for building constructions of any kind.
 A factory is in the process of being constructed on behalf of the government.
 A new office building used by Owonikoko Plc. As its head office which purchased
specifically in the centre of a major city in order to exploit its capital gains potential.

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QUESTION 5

Animashaun Plc. is an entity that owns three properties. All the three properties were
purchased on 1st January 2015. Details of the purchase price and market values of the
properties are as follows:

Purchase Price Market Value Market Value

1/01/2015 31/12/2015 31/12/2016
#’000 #’000 #’000
Property A 30,000 42,000 53,000
Property B 25,000 35,000 34,500
Property C 36,000 28,000 45,000

Property A and C are used by Prince Plc. as factories while property B is let to non-related third
party at a commercial rent. Animashaun Plc. doesn’t depreciate any of the properties on the
basis that they are valued at market values that are generally expected to increase over time.

Required:

 Access whether Animashaun’s policy of non-depreciation of properties A-C is in

accordance with IFRS.
 Show how the movement in the carrying amount of each property will be
reflected in the financial statements of Animashaun Plc. for the years ended 31st
December 2016 and the statements of financial position as at each year end.

QUESTION 6

a. The objectives of IAS 40- Investment Property is to prescribe the accounting treatment
and disclosure requirements for investment property. The main issue in accounting for
investment properties is to distinguish these properties separately from owner-occupier
properties.
Required: Explain how treatment of an investment property carried at fair value model
differs from an owner-occupier property carried under revaluation model.
b. KOLA NITDA Nigeria Plc. is a company engaged in the manufacturing of hand sanitizer to
prevent Ebola disease. The following information relates to property owned by the
company.
N‟000

Land – Plot 404 Apapa Industrial Area 32,000

Building therein (acquired June 30, 2013) 84,000
Improvement to the building to extend rented floor capacity 16,000

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 Repairs and maintenance to investment property for the year 2,000
Rental received for the year 6,400

Approximately six percent of the property floor space is used as the administrative head office
of the company. The property can be sold only as a complete unit. The remainder of the
building is leased out under operating leases. The company provides lessees with security
services. The company values investment property using the fair value model on December 31,
2014 which is the company’s year-end. Tewogbade & Co. (an independent valuer) valued the
property at N144,000,000 on that date.

Required:

i. Advise the Directors of KOLA NITDA Nigeria Plc. on how the property should be treated
in the financial statements of the company as at December 31, 2014 in order to ensure
strict compliance with provisions of IAS 40.
ii. Calculate the value of investment property that should be disclosed in the statement of
financial position as at December 31, 2014 and the amount that should be charged to
the statement of profit or loss and other comprehensive income for the period then
ended.

QUESTION 7

Shanowole owns several properties and has a year-end of 31st December. Wherever possible,
Shanowole carries investment properties under fair value model.

Property 1 was acquired on 1st January 2001. It had a cost of $1m, comprising $500,000 for land
and $500,000 for building. The building had a useful life of 40 years. Shanowole uses the
property as its head office.

Property 2 was acquired many years ago for $1.5m for its investment potential. On 31st
December 2007, it had a fair value of $2.3m. By 31st December 2008, its fair value had risen to
$2.7m. This property has a useful life of 40 years.

Property 3 was acquired on 30th June 2002 for $2m for its investment potentials. The directors
believe that the fair value of the property was $3m on 31st December 2007 and $3.5m on 31st
December 2008. However, due to the specialized nature of this property, the figures could not
be corroborated. This property has a useful life of 50 years.

Required:

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 a. For each of the following properties, briefly state how it will be treated in the financial
statements of Shanowole for the year ended 31st December 2008, identifying any
impact on profit or loss.
b. Produce an analysis of PPE for the year ended 31st December 2008, showing each of the
properties separately.

QUESTION 8

a. Define the term investment property” and explain the two models permitted by
international standard IAS 40 for the measurement of investment property after its
initial recognition.
b. How do these two models differ from the two models permitted by IAS 16 in relation to
the measurement of property, plant and equipment?

QUESTION 9

FARGIN Properties owns several properties which are revalued each year. Three of its
properties are rented out under annual contract. Details of these properties and their valuation
are:

Properties Cost Value @ 30/09/12 Value @ 30/09/13

A 150,000 240,000 200,000
B 120,000 180,000 145,000
C 120,000 140,000 150,000

The three properties were acquired on 1st October 2011. The valuations of the properties are
based on the carrying value of assets at the beginning of the relevant period. Property A is let
out to a subsidiary of FARGIN properties on normal commercial terms. The other properties are
let on normal commercial terms to companies not related to FARGIN Properties.

FARGIN Properties adopts the fair value model of accounting for investment properties in IAS
40 and the cost model for owner occupied properties in IAS 16.

Required:

i. Describe the possible accounting treatment for investment properties under IAS 40 and
why they may require a different accounting treatment to owner occupied property.
ii. Prepare extracts of the consolidated financial statements of FARGIN Properties for the
year to 30/09/2013 in respect of the above properties assuming the company adopts
the fair value method in IAS 40.

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