IAS 40 Investment property – Best Read

IAS 40 Investment property

Investment property is property (land or a building—or part of a building—or both) held (by the owner or by the lessee as a right-of-use asset) to earn rentals or for capital appreciation or both, rather than for:

  1. use in the production or supply of goods or services or for administrative purposes; or
  2. sale in the ordinary course of business.

Owner-occupied property is property held (by the owner or by the lessee as a right-of-use asset) for use in the production or supply of goods or services or for administrative purposes.

These definitions include:

  • 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. (If an entity has not determined that it will use the land as
  • owner-occupied property or for short-term sale in the ordinary course of business, the land is regarded as held for capital appreciation.
  • a building owned by the entity (or a right-of-use asset relating to a building held by the entity) and leased 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.

and exclude:

  • Property held for use in the production or supply of goods or services or for administrative purposes (IAS 16 Property, Plant and Equipment applies)
  • Property intended for sale in the ordinary course of business or in the process of construction or development for such sale (IAS 2 Inventories applies)
  • Owner-occupied property (IAS 16 and IFRS 16 applies)
  • Property leased to another entity under a finance lease (IFRS 16 applies).

Classification of property as investment property or owner-occupied property

Property held under an operating lease
A property interest that is held by a lessee under an operating lease may be classified and accounted for as investment asset if, and only if, the property would otherwise meet the definition of investment properties and the lessee uses the fair value model for the asset recognised.

This classification alternative is available on a property-by-property basis. However, once this classification alternative is selected for one such property interest held under an operating lease, all property classified as investment property shall be accounted for using the fair value model. When this classification alternative is selected, any interest so classified is included in the disclosures.

Partial own use
Investment properties are held to earn rentals or for capital appreciation or both. Therefore, investment properties generate cash flows largely independently of the other assets held by an entity. This distinguishes investment property from owner-occupied property. The production or supply of goods or services (or the use of property for administrative purposes) generates cash flows that are attributable not only to property, but also to other assets used in the production or supply process. IAS 16 Property, plant and equipment applies to owner-occupied property.

Some properties comprise 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 portions could be sold separately (or leased out separately under a finance lease), an entity accounts for the portions separately.

If the portions could not be sold separately, the property is investment property only if an insignificant portion is held for use in the production or supply of goods or services or for administrative purposes.

Provision of ancillary services to occupants
In some cases, an entity provides ancillary services to the occupants of a property it holds. An entity treats such a property as investment properties if the services are insignificant to the arrangement as a whole. An example is when the owner of an office building provides security and maintenance services to the lessees who occupy the building. In other cases, the services provided are significant.

Inter-company rentals
Property leased to, and occupied by, its parent or subsidiary does not qualify as investment properties in consolidated financial statements because the property is owner-occupied from the perspective of the group. Such property will be investment property in the separate financial statements of the lessor.Property investment

Recognition

Owned investment properties are recognised as an asset when it is probable that the future economic benefits that are associated with the property will flow to the enterprise, and the cost of the property can be reliably measured.

Investment properties held by a lessee as a right-of-use asset shall be recognised in accordance with IFRS 16.

Measurement

Initial measurement

Investment properties shall be measured initially at its cost. Transaction costs shall be included in the initial measurement. The cost of a purchased investment property comprises its purchase price and any directly attributable expenditure.

Directly attributable expenditure includes, for example, professional fees for legal services, property transfer taxes and other transaction costs. Cost does not include start-up costs, abnormal waste, or initial operating losses incurred before the investment property achieves the planned level of occupancy.

The initial cost of a property interest held under a lease and classified as an investment property shall be as prescribed for a finance lease, i.e. the asset shall be recognised at the lower of the fair value of the property and the present value of the minimum lease payments. An equivalent amount shall be recognised as a liability.

Subsequent measurement

An entity may:

  1. choose either the fair value model or the cost model for all investment property backing liabilities that pay a return linked directly to the fair value of, or returns from, specified assets including that investment property; and
  2. choose either the fair value model or the cost model for all other investment property, regardless of the choice made in (a).
Fair value model investment properties

Investment properties are measured at fair value, which is the price that would be received to sell the investment property in an orderly transaction between market participants at the measurement date (see IFRS 13 Fair Value Measurement)

Gains or losses arising from changes in the fair value of investment property must be included in profit or loss for the period in which it arises

In rare exceptional circumstances if fair value cannot be determined, the cost model in IAS 16 is used to measure the investment property.

When a lessee uses the fair value model to measure an investment property that is held as a right-of-use asset, it shall measure the right-of-use asset, and not the underlying property, at fair value.

A gain or loss arising from a change in the fair value of investment properties shall be recognised in profit or loss for the period in which it arises.

Cost model investment properties

After initial recognition, an entity that chooses the cost model shall measure all of its investment properties in accordance with IAS 16’s requirements for that model, other than those that meet the criteria to be classified as held for sale (or are included in a disposal group that is classified as held for sale) in accordance with IFRS 5.

Investment properties that meet the criteria to be classified as held for sale (or are included in a disposal group that is classified as held for sale) shall be measured in accordance with IFRS

Transfers

Transfers to, or from, investment properties shall be made when, and only when, there is a change in use, evidenced by:

  1. commencement of owner-occupation, for a transfer from investment properties to owner-occupied property;
  2. commencement of development with a view to sale, for a transfer from investment properties to inventories;
  3. end of owner-occupation, for a transfer from owner-occupied property to investment properties ; or
  4. commencement of an operating lease to another party, for a transfer from inventories to investment properties.

For a transfer from investment property carried at fair value to owner-occupied property or inventories:

  • the property’s deemed cost for subsequent accounting in accordance with IAS 16 Property, plant and equipment or IAS 2 Inventories shall be its fair value at the date of change in use. If an owner-occupied property becomes an investment property that will be carried at fair value, an entity shall apply IAS 16 Property, plant and equipment up to the date of change in use.
  • the entity shall treat any difference at that date between the carrying amount of the property in accordance with IAS 16 Property, plant and equipment and its fair value in the same way as a revaluation in accordance with IAS 16 Property, plant and equipment

For a transfer from inventories to investment property that will be carried at fair value, any difference between the fair value of the property at that date and its previous carrying amount shall be recognised in profit or loss.

When an entity completes the construction or development of self-constructed investment properties that will be carried at fair value, any difference between the fair value of the property at that date and its previous carrying amount shall be recognised in profit or loss.

Disposals

Investment properties shall be de-recognised (eliminated from the statement of financial position) on disposal or when the investment properties are permanently withdrawn from use and no future economic benefits are expected from its disposal.

Gains or losses arising from the retirement or disposal of investment properties shall be determined as the difference between the net disposal proceeds and the carrying amount of the asset and shall be recognised in profit or loss.

Compensation from third parties for investment properties that was impaired, lost or given up shall be recognised in
profit or loss when the compensation becomes receivable.

Presentation and disclosure

An entity shall present and disclose information that enables users of the financial statements to evaluate the financial effects of investment properties held in accordance with either the cost model or the fair value model

IFRS Reference

Issue

Relevant disclosures or references

IAS 40 75(a)

Measuring investment properties at fair value

Investment properties, principally office buildings, are held for long-term rental yields and are not occupied by the group. They are carried at fair value. Changes in fair values are presented in profit or loss as part of other income.

IFRS 13 91(a),

IFRS 13 93(d),

IAS 16 77(a),

IAS 40 75(e)

Valuation techniques used to determine level 2 and level 3 fair values

The group obtains independent valuations for its investment properties at least annually and for its freehold land and buildings related to manufacturing sites (classified as property, plant and equipment) at least every three years.

At the end of each reporting period, the directors update their assessment of the fair value of each property, taking into account the most recent independent valuations. The directors determine a property’s value within a range of reasonable fair value estimates.

The best evidence of fair value is current prices in an active market for similar properties. Where such information is not available the directors consider information from a variety of sources including:

  • current prices in an active market for properties of a different nature or recent prices of similar properties in less active markets, adjusted to reflect those differences
  • discounted cash flow projections based on reliable estimates of future cash flows
  • capitalised income projections based on a property’s estimated net market income, and a capitalisation rate derived from an analysis of market evidence.

All resulting fair value estimates for properties are included in level 3 except for land held for resale. The level 2 fair value of land held for resale has been derived using the sales comparison approach. The key inputs under this approach are the price per square metre from current year sales of comparable lots of land in the area (location and size).

IAS 40 75(e),

IAS 16 77(a),(b)

Valuation processes

The group engages external, independent and qualified valuers to determine the fair value of the group’s investment properties at the end of every financial year, and for other land and buildings at least every three years. As at 31 December 2019, the fair values of the investment properties have been determined by ABC Property Surveyors Limited. A directors’ valuation has been performed for the land and buildings classified as property, plant and equipment as at 31 December 2019. The last independent valuation of these land and buildings was performed as at 31 December 2018.

The main level 3 inputs used by the group are derived and evaluated as follows:

  • Leased office buildings – discount rates, terminal yields, expected vacancy rates and rental growth rates are estimated by ABC Property Surveyors Limited or management based on comparable transactions and industry data.
  • Office building under redevelopment – costs to completion and profit margin are estimated by ABC Property Surveyors Limited based on market conditions as at 31 December 2019. The estimates are consistent with the budgets developed internally by the group based on management’s experience and knowledge of market conditions.

Changes in level 2 and level 3 fair values are analysed at each reporting date during the half-yearly valuation discussion between the CFO, AC and the valuation team. As part of this discussion, the team presents a report that explains the reason for the fair value movements

IAS 40 75(h)

Repairs and maintenance: investment properties

Contractual obligations for future repairs and maintenance – not recognised as a liability need to be disclosed as commitments. These are contractual obligations to purchase, construct or develop investment property or for repairs, maintenance or enhancements.

IAS 40 75(g)

Non-current assets pledged as security

Investment properties pledged as security by the group need to be disclosed.

IAS 40 75(c)

Classification as investment properties is difficult

Disclose criteria used to distinguish investment property from owner-occupied property and property held for sale in the ordinary course of business.

IAS 40 77

Adjustments made to valuations

Disclose reconciliation between valuation obtained and the adjusted valuation.

IAS 40 75(f)

Sale of investment properties between pools of assets measured using different methods (IAS 40 32C)

Disclose cumulative change in fair value recognised in profit or loss.

IFRS 16 90(b)

Contingent rents recognised as income in the period

Disclose amounts where applicable.

IAS 40 75(b)

Operating leases classified as investment property

Explain circumstances of classification as investment property and whether the fair value model is applied.

IAS 40 78

Investment properties cannot be reliably measured at fair value on a continuing basis

Disclose amounts separately and provide additional information about the property.

IAS 40 79

Entity has elected to use the cost model for measuring its investment property

Disclose additional information such as depreciation methods, useful lives etc.

What to buy

  • Attractive features – Look for investment properties that will appeal to as many people as possible, like a second bathroom, lock up garage or nearby shops, schools and transport.
  • Wide appeal – Find a property that will attract more than one segment of the rental market such as singles, couples, young families or retirees.
  • Low maintenance – Keeping costs down is important, older homes or those with features such as a pool or extensive landscaping may cost more to maintain.
  • Property type – Units can be easier to maintain than houses, although you will have to pay body corporate fees.

Investment property

Investment property

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