IAS 40 Investment Property

Investment Property Definition Investment property is property (land or a building – or part of a building – or both) held (by the owner or by the lessee under a finance lease) 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 IAS 40 lists the following as examples of investment property: Land held for long-term capital appreciation rather than short-term sale Land held for a currently undetermined future use A building owned by the entity (or held under a finance lease) and leased to a third party under an operating lease A building which is vacant but is held to be leased out under an operating lease.

Investment Property It also provides examples of items that are not investment property and are therefore outside the scope of IAS 40. These include the following: Type of property Applicable IAS Property intended for sale in the ordinary course of business IAS 2 Inventories Property being constructed or developed on behalf of third parties IAS 11 Construction Contracts Owner-occupied property IAS 16 Property, Plant and Equipment Property leased to another entity under a finance lease IAS 17 Leases

Owner-occupied property Definition Owner-occupied property is property held (by the owner or by the lessee under a finance lease) for use in the production or supply of goods or services or for administrative purposes.

Owner-occupied property In some cases it may be possible to treat part of a property as an investment property. For example

Investment properties in group accounts Where an entity owns property that is leased to, and occupied by, its parent or another subsidiary, the property is treated as an investment property in the entity’s own accounts. However, the property does not qualify as investment property in the consolidated financial statements as it is owner-occupied from the group perspective.

Initial recognition An investment property should be initially measured at cost. Cost includes: Fair value of the purchase price Directly attributable costs, for example transaction costs (professional fees, property transfer taxes)

Measurement after recognition After initial measurement at cost, IAS 40 requires an entity to choose between two models COST MODEL FAIR VALUE MODEL The policy chosen should be applied consistently to all of the entity’s investment property The policy chosen should be disclosed in the financial statements

Cost model If the cost model is adopted, the property should be accounted for in accordance with IAS 16 i.e. Investment property should be measured at cost, less accumulated depreciation and impairment losses Even if this model is adopted, the fair value of the investment property should be disclosed in financial statements

Fair value model If this model is selected, all investment properties should be measured at fair value at the end of each reporting period, provided fair value can be measured reliably. Changes in fair value, whether gains of losses, should be recognised in profit of loss for the period in which they arise. A consequence of adopting this measurement basis is that no depreciation is ever recognised. IAS 40 encourages the assessment of fair value by independent, appropriately qualified and experienced professionals, but does not require it.

Fair value Definition Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction The fair value of investment property should reflect market conditions at the end of the reporting period. The best evidence of fair value is given by current prices in an active market for similar property in the same location and condition. Where the entity cannot determine reliably the fair value of an investment property, the cost model in IAS 16 must be applied to this particular investment property until it is disposed of.

Change in use Evidence of change in use Accounting treatment Occupation of an investment property by the entity itself. The property is now owner occupied and should be recognised in accordance with IAS 16. Where the investment property was measured at fair value, its fair value at the date of change of use should be treated as the deemed cost for future accounting. Development of an investment property commences with the intention that on completion of the development works it will be sold by the entity. The property is to be sold in the normal course of business and should therefore be reclassified as inventory and accounted for in accordance with IAS 2 Inventories. Where the investment property was measured at fair value, its fair value at the date of change in use should be treated as the deemed cost. Development of an investment property commences with the intention that it will be let after completion of the development works. The property should continue to be held as an investment property under IAS 40.

Change in use (cont’d) Evidence of change in use Accounting treatment A building that was occupied by the entity is vacated so that it can be let to third parties. The property is no longer owner-occupied and therefore should be transferred to investment properties and accounted for in accordance with IAS 40. Where investment properties are measured at fair value the property should be revalued at the date of change of use and any difference should be recognised in other comprehensive income as a revaluation under IAS 16. A property that was originally held as inventory has now been let to a third party. The property is no longer held for resale and is instead held to generate future rental income and therefore should be transferred to investment properties in accordance with IAS 40. Where investment properties are measured at fair value the property should be revalued at the date of change of use and any difference should be recognised immediately in profit or loss.

Example An entity owns two investment properties A and B. The entity measures its investment properties using the fair value model. Fair values have been assessed as follows: 31 December 2011 31 December 2012 €m €m Property A 20 25 Property B 10 8 Requirement For the year ended 31 December 2012 show the amounts which should be recognised in the financial statements.

Solution Statement of comprehensive income €m Statement of financial position €m

Disposal An investment property should be derecognised when: It is disposed of, or It is permanently withdrawn from use and will not generate any future economic benefits, even on its ultimate disposal. Any gain or loss should normally be determined as the difference between the net disposal proceeds (if any) and the carrying amount of the asset and recognised directly in profit or loss in the period in which the disposal takes place.

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