Scope of IAS 40
IAS 40 covers recognition, measurement and disclosure of investment property.
Definition of investment property
Investment property is property (land or a building—or part of a building—or both) held to earn rentals or for capital appreciation or both, rather than for use in the production or supply of goods or services or for administrative purposes; or sale in the ordinary course of business. Investment property may be held by the owner or by the lessee as a right-of-use asset (IAS 40.5,7). Examples of investment property are given in paragraph IAS 40.8 and examples of properties that are not investment property can be found in paragraph IAS 40.9. The discussion on distinguishing investment property from owner-occupied property is contained in paragraphs IAS 40.7-15.
Classification of a property as investment or owner-occupied may differ in consolidated and separate financial statements (IAS 40.15).
It is important to note that a property held by any entity, irrespective of its business activities, can fall into the scope of IAS 40 (i.e. this standard is not confined to entities that operate in the real estate sector).
Other assets included within investment property
Although the core definition of investment property covers only lands and buildings, paragraph IAS 40.50 implies that other integral assets (e.g. furniture) can be treated as a part of an investment property.
General recognition criteria
Paragraphs IAS 40.16-29A discuss the criteria for recognition and initial measurement of investment property. In principle, they mirror the recognition criteria for property, plant and equipment discussed in more detail in IAS 16. Recognition of investment property held by a lessee as a right of use asset is governed by IFRS 16.
Acquisition of an investment property vs business combination
Extra care must be taken when an entity acquires an investment property with existing employees and tenants and processes in place, as this should often be treated as a business combination accounted for under IFRS 3.
Variable and contingent consideration
See the discussion on treatment of contingent consideration for assets measured at cost.
Measurement after recognition
Accounting policy choice
IAS 40 allows to make an accounting policy choice between fair value model and cost model, but the model chosen should be applied to all of investment property held by an entity with certain exceptions described in paragraph IAS 40.32A (IAS 40.30). Furthermore, IAS 40 notes that is highly unlikely that a change of policy from the fair value model to the cost model will result in a more relevant presentation (IAS 40.31).
It is also important to note that IAS 40 requires all entities to measure the fair value of investment property, the policy choice relates only to recognition vs. disclosure of that fair value (IAS 40.32,79(e)).
Fair value model
Overview of fair value model
In general, fair value measurements are covered in IFRS 13, IAS 40 gives some specific aspects relating to investment property in paragraphs IAS 40.40-50.
Changes in fair value of investment property are immediately recognised in P/L (IAS 40.35).
Inability to measure fair value reliably
Paragraphs IAS 40.53-55 cover the approach that should be followed when the fair value of an investment property cannot be measured reliably. These requirements relate also to investment property under construction which was included in the scope of IAS 40 some time after its initial publication.
Paragraph IAS 40.50 emphasises that care must be taken not to double count assets or liabilities that are recognised separately from investment property for which the fair value is determined.
Under the cost model, the investment property is measured under provisions of IAS 16, unless it is a right-of-use asset measured under IFRS 16 or an asset held for sale measured under IFRS 5 (IAS 40.56). As noted earlier, fair value of investment property measured at cost should be disclosed (IAS 40.32,79(e)).
Transfers to or from investment property
General requirements for transfers to or from investment property
A property is transferred to or from investment property when, and only when, there is a change in use. A change in management’s intentions does not provide, in isolation, evidence of a change in use (IAS 40.57). Transfers of investment property are usually made to or from inventory or PP&E. Examples of evidence of a change in use include that warrant a transfer a given in paragraph IAS 40.57.
When transferring an investment property to inventory it is important to consider the requirements of IFRS 5 first. When there is no development need for such an investment property, it is most likely that it will fall under IFRS 5 rather than be reclassified to inventory.
Transfers to or from investment property under cost model
When an entity applies cost model to its investment property, a transfer does not change the carrying amount of the property transferred and it does not change the cost of that property for measurement or disclosure purposes (IAS 40.59).
Transfers from investment property under fair value model
When a transfer from investment property carried at fair value to owner-occupied property or inventories occurs, the property’s deemed cost for subsequent accounting in accordance with IAS 16, IFRS 16 or IAS 2 is the property’s fair value at the date of transfer (IAS 40.60).
Transfers to investment property under fair value model
When an owner-occupied property becomes an investment property, IAS 16 or IFRS 16 is applied up to the date of the transfer. Any difference between carrying amount and fair value at the transfer date is treated as a revaluation under IAS 16 so that P/L impact excludes cumulative net increases in fair value that arose before the property became investment property (IAS 40.61-62).
When a property is transferred from inventory to investment property carried at fair value, any difference between the fair value at the transfer date and its previous carrying amount is recognised in P/L (IAS 40.63-64).
When an entity completes the construction or development of a self-constructed 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 is recognised in P/L (IAS 40.65).
Disposals are covered in paragraphs IAS 40.66-73. Gain on disposal is recognised in P/L on a net basis, i.e. as a difference between the net disposal proceeds and the carrying amount of the property (IAS 40.69). The amount of consideration to be included in the gain or loss on disposal is determined under IFRS 15 requirements for transaction price (IAS 40.70).
Disclosure requirements are set out in paragraphs IAS 40.74-79.
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Excerpts from IFRS Standards come from the Official Journal of the European Union (© European Union, https://eur-lex.europa.eu). The information provided on this website does not constitute professional advice and should not be used as a substitute for consultation with a certified accountant.