IAS 40 governs investment property, defining it as land, a building, or part of a building (or a combination of these) held to earn rental income, capital appreciation, or both. This contrasts with property used for producing or supplying goods and services, administrative purposes, or those intended for sale in the ordinary course of business. Notably, IAS 40 is applicable to all investment properties regardless of the nature of an entity’s business, meaning it isn’t restricted to entities within the real estate sector.
On initial recognition, investment properties are measured at cost. Thereafter, entities can choose between the cost model or the fair value model for valuing these assets. The fair value is determined in line with IFRS 13, and any revaluation gains or losses are recognised in profit or loss.
Let’s delve deeper.
Identifying investment property
An investment property generates cash flows independent of an entity’s other assets, setting it apart from owner-occupied property. The latter, used in the production or supply of goods or services, generates cash flows that aren’t solely attributable to the property but also to other assets involved in the process. For owner-occupied properties, IAS 16 is applicable to those owned outright, while IFRS 16 is relevant for leased properties held as a right-of-use asset.
Investment property can be (IAS 40.8):
- Land reserved for long-term capital appreciation.
- Land whose future use hasn’t been decided. If it’s not earmarked for immediate business use or sale in the ordinary course of business, it’s considered held for capital appreciation.
- A building owned by an entity (or held as a right-of-use asset) and leased out under operating leases.
- An unoccupied building intended to be leased out.
- Property under construction or development for future use as investment property.
In contrast, properties that don’t fall under investment property include (IAS 40.9):
- Properties intended for sale in the ordinary course of business or currently being developed for such sales, classified as inventory under IAS 2.
- Owner-occupied properties, which can range from those awaiting use or sale to those inhabited by employees.
- Properties leased to another entity under a finance lease.
When a property serves multiple purposes, such as rental income, capital growth, or business operations, distinct sections of it may be treated separately for accounting purposes. If a property is predominantly used for business, it’s not deemed an investment property unless a minor part of it is for business use.
The type of auxiliary services offered to property occupants can also influence classification. For instance, a building with security and maintenance services is typically considered an investment property. But an owner-managed hotel offering comprehensive services to guests would be classified as owner-occupied property. Determining property classification can sometimes be nuanced, especially when additional services are provided. Hence, entities should establish clear criteria that align with the definition of investment property.
Properties leased and used by an entity’s parent or subsidiary don’t qualify as investment properties in consolidated statements but might in separate financial statements (IAS 40.7-15).
--Are you tired of the constant stream of IFRS updates? I know it's tough! That's why I created Reporting Period – a once-a-month summary for professional accountants. It consolidates all essential IFRS developments and Big 4 insights into one readable email. I personally curate every issue to ensure it's packed with the most relevant information, delivered straight to your inbox. It's free, with no spam, and you can unsubscribe with just one click. Ready to give it a try?
Initial recognition
The criteria for recognition and initial measurement of investment property are set out in IAS 40.16-29A. Essentially, these criteria mirror the principles of recognising property, plant, and equipment detailed in IAS 16. For investment properties held by a lessee as a right-of-use asset, IFRS 16 applies.
When an entity acquires investment property that already has employees, tenants, and processes, it’s crucial to consider whether this constitutes a business combination as per IFRS 3.
Subsequent measurement
Accounting policy choice
IAS 40.30 permits an accounting policy choice between the fair value model and the cost model. However, the selected model should be consistently applied across all investment properties owned by an entity, with a few exceptions mentioned in IAS 40.32A.
IAS 40.31 also highlights that switching from the fair value model to the cost model will rarely lead to a more relevant outcome. Importantly, IAS 40 mandates the determination of an investment property’s fair value, while the accounting policy choice lies in recognising vs disclosing this value (IAS 40.32,79(e)).
Fair value model
Any changes in the fair value of an investment property are immediately recognised in profit or loss (IAS 40.35). When determining the property’s fair value as per IFRS 13, entities must consider rental income from current leases and other market-related assumptions. If a lessee opts for the fair value model for a right-of-use asset, the measurement applies to the RoU asset and not the underlying property (IAS 40.40-40A).
When calculating the carrying amount of investment property using the fair value model, entities must avoid double-counting assets or liabilities recognised separately. For instance:
- Integral equipment like lifts in a building typically form part of the building’s fair value and aren’t recognised separately (IAS 40.50).
- A furnished office’s fair value often covers the furniture’s value too, given the rental income pertains to the furnished space. Thus, the furniture isn’t recognised as a separate asset.
- Prepaid or accrued lease income isn’t part of the property’s fair value as it’s recognised separately.
- For properties held by a lessee as a right-of-use asset, the fair value considers expected cash flows (including variable lease payments). If a valuation is net of expected payments, any recognised lease liability must be added back to determine the property’s carrying amount under the fair value model.
When adding a replacement part to the carrying amount of an investment property, the carrying amount of the replaced part should be derecognised. With the fair value model, the investment property’s valuation might already factor in the reduction in value of the part set to be replaced. However, in some instances, it may be challenging to ascertain the precise fair value movement due to the replacement. If this is the case, a viable approach is to add the cost of the replacement to the asset’s carrying amount. Subsequently, the property’s fair value should be re-evaluated, similar to processes for additions that don’t involve replacements (IAS 40.68).
In situations where a property’s fair value can’t be reliably measured, the approach is described in IAS 40.53-55.
Cost model
With the cost model, investment properties are measured as per IAS 16 provisions. Exceptions are right-of-use assets governed by IFRS 16 or assets held for sale accounted for under IFRS 5 (IAS 40.56). Notably, even if an investment property is measured at cost, its fair value still needs to be determined for disclosure purposes (IAS 40.32,79(e)).
Transfers to or from investment property
Criteria for transfer
A property is only transferred into or out of an investment property upon a change in its use. A mere shift in management’s intentions, on its own, doesn’t constitute evidence of a change in use (IAS 40.57). Such transfers typically involve moving the investment property to or from inventory or PP&E. IAS 40.57 provides examples to help determine what constitutes evidence of a change in use.
Before transferring an investment property to inventory, one must first consider the requirements of IFRS 5 relating to assets held for sale. If the property doesn’t require development, it’s more likely to be governed by IFRS 5 rather than being reclassified to inventory.
Transfers under the cost model
For entities employing the cost model for their investment property, any transfer neither impacts the property’s carrying amount nor its cost for measurement or disclosure purposes (IAS 40.59).
Transfers from investment property under fair value model
If an investment property, carried at fair value, is transferred to owner-occupied property or inventories, the property’s deemed cost for subsequent accounting in accordance with IAS 16, IFRS 16 or IAS 2 is its fair value at the date of transfer (IAS 40.60).
Transfers to investment property under fair value model
When an owner-occupied property transitions into an investment property, IAS 16 or IFRS 16 applies until the transfer date. Any difference between the carrying amount and fair value at the time of transfer is treated as a revaluation in line with IAS 16. Consequently, the P/L impact doesn’t include cumulative net fair value increases from before the classification as investment property (IAS 40.61-62).
If a property moves from inventory to investment property carried at fair value, any difference between the fair value on the transfer date and its previous carrying amount is recognised in profit or loss (IAS 40.63-64).
Upon finishing the construction or development of a self-built investment property that will be carried at fair value, any difference between its fair value at transfer date and its previous carrying amount is also recognised in profit or loss (IAS 40.65).
Disposals
An investment property should be derecognised when it is disposed of or when it’s permanently taken out of use with no anticipated future economic benefits from its sale. The disposal can be through sale or via a finance lease. The exact date of disposal for a sold investment property is when the recipient gains control as specified in IFRS 15, whereas IFRS 16 addresses disposals through finance leases and sale and leasebacks.
Profits or losses from the retirement or disposal of such properties are calculated by comparing the net disposal proceeds with the asset’s carrying amount. These are recognised in profit or loss, although exceptions may apply as per IFRS 16 in the case of sale and leasebacks.
The transaction price factored into the gain or loss from the derecognition of an investment property is determined under IFRS 15. Any subsequent revisions to this estimated consideration are handled based on IFRS 15’s provisions for changes in transaction price. Separately, impairments losses, compensation claims or payments from third parties, and the acquisition or building of replacement assets are accounted for as distinct economic events in accordance with applicable IFRSs (IAS 40.66-73).
Disclosure
IAS 40.74-79 detail the disclosure requirements. As previously stated, disclosing the fair value of investment property is mandatory, even when employing the cost model (IAS 40.79(e)).