Investment property vs Inventory

[Hussein]

Hi

There is a company which has villas. The main purpose is to sell them in the ordinary course of business. However, finding a client for the villa takes time and therefore the client rents the villas in the meantime. It actively markets the villas for sales even when it is renting them.

How should the company classify the villas - as inventory or investment property?

I'm a bit confused between the 2 following paragraph:

IAS 2.6 states that:

"Inventories are assets:
(a) held for sale in the ordinary course of business"

IAS 40.57 states that:

"An entity shall transfer a property to, or from, investment property when, and only when, there is a change in use. A change in use occurs when the property meets, or ceases to meet, the definition of investment property and there is evidence of the change in use. In isolation, a change in management’s intentions for the use of a property does not provide evidence of a change in use. Examples of evidence of a change in use include:

(d) inception of an operating lease to another party, for a transfer from inventories to investment property."

Grateful if you could kindly advise.

[JRSB]

I don't think it's a change in use/intention just because it happens to be rented out. All about intention so inventory for me. Presumably rented on very short term basis, (or it'll be sold with the tenant in it), eg you're not actively removing the ability to sell by signing up 2 year leases etc

[Marek Muc]

I agree with JRSB

IAS 40.14 acknowledges that the classification may not be clear cut:

Judgement is needed to determine whether a property qualifies as investment property. An entity develops criteria so that it can exercise that judgement consistently in accordance with the definition of investment property and with the related guidance in paragraphs 7–13. Paragraph 75(c) requires an entity to disclose these criteria when classification is difficult.

[Hussein]

Thanks a lot JRSB and Marek