10/4/2022

IAS 40 - Investment
Property

Contents

1 Scope and definitions

2 Initial recognition & cost measurement

3 Subsequent measurements

4 Disclosure

1
 10/4/2022

Objective & Scope

 IAS 40 Investment Property applies to the accounting for property
(land and/or buildings) held:
to earn rentals or for capital appreciation (or both).
Investment properties are initially measured at cost and,
with some exceptions may be subsequently measured using:
a cost model or fair value model,
with changes in the fair value under the fair value model being
recognised in profit or loss.

Definitions
What is investment property?
 The investment property is a land, a building (or a part of it), or
both, held for the following specific purposes (IAS 40.5) :
o To earn rentals;
o For capital appreciation; or
o Both.

2
 10/4/2022

Examples of investment property

 Examples of investment property: [IAS 40.8]

 land held for long-term capital appreciation

 land held for a currently undetermined future use

 building leased out under an operating lease

 vacant building held to be leased out under an operating lease

 property that is being constructed or developed for future use as

investment property

3
 10/4/2022

Examples of investment property

 Land held as an investment for long-term capital appreciation, or

for future undetermined use (i.e. you don’t know yet what you’ll
use it for).
 However, if you buy a land and you intend to build some
production hall for your own purposes sometime in the future,
then this land is NOT an investment property.

Examples of investment property

 Any property that you actually construct

or develop for future use as investment
property.
Be careful here again, because when you
construct a building for some third party, this

 . is NOT an investment property, but you

should apply IAS 11 Construction contracts,
or IFRS 15 Revenue from Contracts with
Customers.

4
 10/4/2022

Examples of investment property

 A building owned by the entity and leased out under one

or more operating leases. This includes a building that is
still vacant, but you plan to lease it out

Definitions

What is carrying amount?

 The amount at which an asset is recognized in the statement of
financial position

What is fair value?

 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

5
 10/4/2022

Ex1:
PPEs or Investment Property ?

How would you classify the following properties?

You own a small apartment to rent out,

but your tenant goes bankrupt. You are
looking for another tenant and during
your search, you use the apartment as
your office.

 Held for use in production or

PPEs supply good or services
 Held for rental
 Held for administrative purpose

6
 10/4/2022

How would you classify the following properties?

You own an office building with 50

offices. You use 20 offices for your own
consulting business and you sublet 30
offices to tenants.

PPEs IP

How would you classify the following properties?

You enter into a 30-year finance lease

for a part of a building that you plan to
let to your tenants.

 To earn rentals
IP  For capital appreciation
 Both

7
 10/4/2022

How would you classify the following properties?

You run a hotel. Its main activity is to

rent apartments and rooms on the
short-term basis.

 Held for use in production or

PPEs supply good or services
 Held for rental
 Held for administrative purpose

How would you classify the following properties?

You acquired a building under 30-year

finance lease. You refurbished the offices
and plan to sublet these offices, but you
are awaiting approvals from the local
authorities.

IP  To earn rentals
 For capital appreciation
 Both

8
 10/4/2022

2. Initial recognition & cost measurement

•Investment property should be recognised as

an asset when it is probable that:
• the future economic benefits that are
associated with the property will flow to
the entity, and
Initial recognition ?
• the cost of the property can be reliably
measured. [IAS 40.16]

2. Initial recognition & cost measurement

Investment property is initially measured at

COST, including transaction costs.
Such cost should not include start-up costs,
Cost measurement? abnormal waste, or initial operating losses
incurred before the investment property
achieves the planned level of occupancy.
[IAS 40.20 and 40.23]

9
 10/4/2022

Initial cost of IP

Purchase
Price (less
trade
discount)
Initial
cost of
IP
Professional fees for
Directly legal services
attributable
costs Property transfer taxes
Other transaction costs

Initial cost of IP

Property interest of lease

Right of use asset (IFRS 16)

Subsequent expenditures

Subsequent expenditures may be added to carrying

amount of the investment property if they meet
recognition criteria, i.e, innovation costs

10
 10/4/2022

Ex2:
Cost ?

Example

An entity purchased land for the purpose of long-term capital

appreciation. Following expenditures related to the acquisition:
$ Cost Expense
Purchase price 600,000 X
Broker’s commission 30,000 X
Cost of grading the land 5,000 X
Property transfer tax 4,000 X
Property tax paid for the 2,000
current financial year after X
the purchase date
Total 639,000

11
 10/4/2022

3. Subsequent measurement of IP

 Models  Cost model

 Fair value model

Cost model vs revaluation model:

 One method must be adopted for all of an entity's
investment property
 Property interest: Fair value model

12
 10/4/2022

3. Subsequent measurement of IP

Option 1: Fair value model:

 an IP is carried at fair value at the reporting date.

 The FV is determined in line with IFRS 13 Fair Value
Measurement.2
 A gain or loss from re-measurement to FV shall be
recognized in profit or loss.

 Sometimes, the FV cannot be reliably measurable after initial

recognition (rare circumstances: e.g. active marked ceased
existing): To measure the IP using COST model

Subsequent measurement
Fair value model

Each Carrying
Re-measured FAIR VALUE
subsequent amount
financial
reporting The difference:
date Reported in the Profit or Loss

Debit Profit or Loss Loss from Debit Investment property Gain from
Credit Investment property fair value Credit Profit or Loss fair value
change change

When choosing fair value model, all investment properties must

be measured at fair value, except for those whose fair value
cannot be reliably measured

13
 10/4/2022

Fair value cannot be reliably measured

Entity acquired investment property for the first time

Market for comparable Alternative reliable measurement

properties is inactive of fair value is not available

fair value cannot be reliably measured

Using cost model

residual value =0

3. Subsequent measurement of IP

Option 2: Cost model

To take the same methodology as in IAS 16. Switching the
models?

 The answer is YES, but only if the change results in the

financial statements providing better, more reliable
information about company’s financial position, results and
other events.

14
 10/4/2022

The fair value model is the same as the revaluation model.

Ex3:
Fair value model and Cost model

15
 10/4/2022

ABC Ltd. applies IFRS and applied the fair value model for its investment
properties. The company has acquired a property for $2million

Fair Value Model

Acquisition IP 2
date Cash 2

then it spent a further $7million on renovations to be let as an

investment property.

Fair Value Model

Acquisition IP 2
date Cash 2
Renovation IP 7
Cash 7

16
 10/4/2022

At the year end, its fair value is determined to be $10million

Fair Value Model

Acquisition date IP 2
Cash 2
Renovation IP 7
Cash 7
At the end IP 1
Gain from FV change (P/L) 1

Transfers to, or from, IP should only be made when there is a change

in use, evidenced by one or more of the following:

 commencement of owner-
IP PPEs
occupation
 commencement of development
IP Inventory
with a view to sale

17
 10/4/2022

Transfer to or from investment property is made only when

there is a “change in uses”

Change in management’s
intention for the use of a
property is not an
evidence of change in use

Transfers
(2) =>(1) When owner
occupation ends

(1) Investment property (2)Owner occupied

Transfer to/from
property
(3)=>(1) When operating lease
to a third parties commences (1) =>(2) When owner
occupation commences

(3)Inventories

(1) =>(3) On commencement of

development with a view to sale

18
 10/4/2022

Transfer
Determining carrying value
 Under cost model: transfers do not change the carrying amount of property.
 Under fair value model: carrying amount is adjusted to its fair value at the
date of change

Transfer
Under fair value model

• Owner-occupied property => investment property (fair value model)

Carrying amount Fair value
Adjust to
(Apply IAS 16 until the (at the date of change )
date of change)

Difference at the date of change: treated in a same way as a

revaluation under IAS 16
 Fair value < Carrying amount: Decrease is recognized in the Profit or Loss. However, to the extent that amount is
included in revaluation surplus, decrease is recognized in Other comprehensive Income & reduce revaluation surplus within
equity.
 Fair value > Carrying amount: to the extent that the increase reverses previous impairment loss, increase is recognized in
the Profit or Loss.The remaining part of increase is recognized in Other comprehensive Income

19
 10/4/2022

Transfer
Under fair value model

• Inventories => investment property (fair value model)

Carrying amount Fair value
Adjust to
(Apply IAS 02) (at the date of change

 Differences: recognized in the Profit or Loss

Disclosure

Both Fair Value Model and Cost Model:

 whether the fair value or the cost model is used
 Fair value model: IP under operating leases
 the criteria to distinguish IP from other property (if classification
is difficult)
 the extent to which the FV of IP is based on a valuation by a
qualified independent valuer;
 the amounts recognised in P/L.
 restrictions on the realisability of IP or the remittance of income
and proceeds of disposal
 contractual obligations to purchase, construct, or develop IP or for
repairs, maintenance or enhancements

20
 10/4/2022

Disclosure

Additional Disclosures for the Fair Value Model:

 Reconciliation of the CA of IP at the beginning and end of period
 Reconciliation between the valuation obtained and the adjusted
valuation included in the financial statement (if there is significant
adjustment for the purpose of financial statement)
 When entity using cost to measure IP (due to lack of reliable fair
value), above reconciliation should disclose:
 amounts for that IP separately from others
 Description of that IP, the reason why fair value cannot be
measured reliably
 On disposal of such IP, the fact that entity has disposed of IP not
carried at fair value, its carrying amount at the time of disposal
and gain/losses.

Example

21
 10/4/2022

Example (cont.)

Example (cont.)

22