IAS 40 Investment Property
Investment property is a property (land or building) which is held for the purpose of earning rentals or capital appreciation or both. IAS 40 prescribes the accounting treatment for investment property. However, it does not apply to biological assets and mineral reserves.
Classification: investment property vs owner-managed property
An investment property is required to be classified separately from owner-occupied property because its cash flows characteristics are different from cash flow characteristics of other assets of an entity. Example of investment property include land held for capital appreciation, a building rented out under an operating lease, etc.
If an asset has a component which is held for earning rentals or capital appreciation and a component which is to be used in production, etc., it accounts for the components separately if those components can be sold separately. If not, the whole asset is classified as an investment property only if the production component is insignificant. If an entity provides ancillary services related to a property which are insignificant, the property may be treated as an investment property else it must be classified as an owner-managed property.
Recognition and measurement
An investment property is recognized only when it is probable that economic benefits will flow to the entity and the costs can be measured reliability.
An owned investment property is measured initially at cost (which includes the initial transaction costs) while an investment property obtained as a right-of-use asset is accounted for under IFRS 16.
Costs do not include start-up costs (unless they are integral to readying the asset for its use), operating losses, abnormal wastage, interest cost due to deferred payment, etc.
When an investment property is acquired in an exchange transaction which does not lack commercial substance and where the fair value can be determined, an asset is recognized at the fair value. If the fair values of both the asset given up and the asset acquired can be determined, the fair value of the asset given up is preferred.
After initial recognition, an entity must choose either the cost model or the fair value model and apply it to all of its investment properties. However, an entity can make the choice between cost model and fair value model for liability-linked investment property independent of all other investment properties.
Fair value model vs cost model
If an entity elects the fair value model after initial recognition, it applies it all its investment properties except for assets for which it can conclude (at the initial recognition) that the fair value cannot be determined reliably. Under the fair value model, any change in fair value is reflected in profit or loss. A lessee measures the fair value of the right of use asset, and not the underlying asset.
If an entity elects the cost model, it measures the investment property in accordance with IAS 16 (if it is owned), IFRS 16 (if it is leased) or IFRS 5 (if it meets the recognition criteria for held for sale assets).
Transfers between investment property, owner-occupied property and inventories
An entity transfers an item to or from investment property only if there is a change in use (not just a change in management intentions).
In case of the cost model, there is no change in the carrying amount of an item if the transfer is made between investment property, owner-occupied property and inventories. However, in case of the fair value model when a transfer is made from:
- Investment property to owner-occupied property or inventories, the closing fair value becomes the deemed cost of the item.
- Owner-occupied property accounted for under IAS 16 or IFRS 16, any depreciation and impairment losses are recognized and revaluation model under IAS 16 is applied to account for difference between carrying amount and transfer date fair value.
- Inventories to investment property, any difference between carrying amount and fair value is recognized in profit or loss.
Disposals of investment property
An investment property is derecognized when it is disposed or permanently withdrawn from use. Any gain or loss arising on derecognition is recognized in profit or loss (unless in a sale-and-lease-back transaction under IFRS 16). Any claims received from third-parties related to an impaired or lost investment property are recognized in profit or loss.
The standard stipulates extensive disclosure requirements for investment properties depending on whether the cost model or the fair value model is applied. Even though the disclosure requirements are similar to those required in case of owner-occupied properties, these differ significantly.