INVESTMENT PROPERTY

PAS 40
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.
Examples of investment property:
1. Land held for long-term capital appreciation
2. Land held for undecided future use
3. Building leased out under an operating lease
4. Vacant building held to be leased out under an operating lease
The following are not investment property and, therefore, are outside the scope of IAS
40:
1. Property held for use in the production or supply of goods or services or for
administrative purposes;
2. Property held for sale in the ordinary course of business or in the process of
construction of development for such sale (IAS 2 Inventories);
3. Property being constructed or developed on behalf of third parties (IAS 11
Construction Contracts);
4. Owner-occupied property (IAS 16 Property, Plant and Equipment), including
property held for future use as owner-occupied property, property held for future
development and subsequent use as owner-occupied property, property
occupied by employees and owner-occupied property awaiting disposal;
5. Property that is being constructed of developed for use as an investment
property and;
6. Property leased to another entity under an finance lease.

Other Classification Issues

Property held under an operating lease. A property interest that is held by a lessee
under an operating lease may be classified and accounted for as investment property
provided that:

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the rest of the definition of investment property is met;

the operating lease is accounted for as if it were a finance lease in

accordance with IAS 17 Leases; and

the lessee uses the fair value model set out in this Standard for the asset
recognised.

An entity may make the foregoing classification on a property-by-property basis.

Partial own use. If the owner uses part of the property for its own use, and part to earn
rentals or for capital appreciation, and the portions can be sold or leased out separately,
they are accounted for separately. Therefore the part that is rented out is investment
property. If the portions cannot be sold or leased out separately, the property is
investment property only if the owner-occupied portion is insignificant.
Ancillary services. If the enterprise provides ancillary services to the occupants of a
property held by the enterprise, the appropriateness of classification as investment
property is determined by the significance of the services provided. If those services are
a relatively insignificant component of the arrangement as a whole (for instance, the
building owner supplies security and maintenance services to the lessees), then the
enterprise may treat the property as investment property. Where the services provided
are more significant (such as in the case of an owner-managed hotel), the property
should be classified as owner-occupied.
Intracompany rentals. Property rented to a parent, subsidiary, or fellow subsidiary is
not investment property in consolidated financial statements that include both the lessor
and the lessee, because the property is owner-occupied from the perspective of the
group. However, such property could qualify as investment property in the separate
financial statements of the lessor, if the definition of investment property is otherwise
met.

Recognition of investment property

Investment property should be recognised as an asset when:
1. it is probable that the future economic benefits that are associated with the
property will flow to the enterprise, and
2. the cost of the property can be reliably measured.

Initial measurement of investment property

Investment property is initially measured at cost, including transaction costs. Such cost
should not include start-up costs, abnormal waste, or initial operating losses incurred
before the investment property achieves the planned level of occupancy.

Measurement subsequent to initial recognition

IAS 40 permits enterprises to choose between:
1. a fair value model; and
2. a cost model.
One method must be adopted for all of an entity's investment property. Change is
permitted only if this results in a more appropriate presentation. IAS 40 notes that this is
highly unlikely for a change from a fair value model to a cost model.
Fair value model

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Investment property is remeasured at fair value

Gains or losses arising from changes in the fair value of investment property
must be included in net profit or loss for the period in which it arises.

Where a property has previously been measured at fair value, it should continue to
be measured at fair value until disposal, even if comparable market transactions
become less frequent or market prices become less readily available.
Cost Model

After initial recognition, investment property is accounted for in accordance with the cost
model as set out in IAS 16, Property, Plant and Equipment cost less accumulated
depreciation and less accumulated impairment losses.

Transfers to or from Investment Property Classification

Transfers to, or from, investment property should only be made when there is a change
in use, evidenced by:
1. commencement of owner-occupation (transfer from investment property to
owner-occupied property);
2. commencement of development with a view to sale (transfer from investment
property to inventories);
3. end of owner-occupation (transfer from owner-occupied property to investment
property);
4. commencement of an operating lease to another party (transfer from inventories
to investment property); or
5. end of construction or development (transfer from property in the course of
construction/development to investment property.
The following rules apply for accounting for transfers between categories:
1. for a transfer from investment property carried at fair value to owner-occupied
property or inventories, the fair value at the change of use is the 'cost' of the
property under its new classification;
2. for a transfer from owner-occupied property to investment property carried at fair
value, IAS 16 should be applied up to the date of reclassification. Any difference
arising between the carrying amount under IAS 16 at that date and the fair value
is dealt with as a revaluation under IAS 16;
3. for a transfer from inventories to investment property at fair value, any difference
between the fair value at the date of transfer and it previous carrying amount
should be recognised in net profit or loss for the period; and
4. when an entity completes construction/development of an investment property
that will be carried at fair value, any difference between the fair value at the date
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of transfer and the previous carrying amount should be recognised in net profit or
loss for the period.

Disposal

derecognised investment property on disposal or when the investment property is

permanently withdrawn from use and no future economic benefits are expected
from its disposal.

gain or loss on disposal should be calculated as the difference between the net
disposal proceeds and the carrying amount of the asset and should be
recognised as income or expense in the income statement.

Disclosure
Both Fair Value Model and Cost Model
1. whether the fair value or the cost model is used;
2. if the fair value model is used, whether property interests held under operating
leases are classified and accounted for as investment property;
3. if classification is difficult, the criteria to distinguish investment property from
owner-occupied property and from property held for sale.
4. the methods and significant assumptions applied in determining the fair value of
investment property.
5. the extent to which the fair value of investment property is based on a valuation
by a qualified independent valuer; if there has been no such valuation, that fact
must be disclosed.
6. the amounts recognised in profit or loss for:
a. rental income from investment property;
b. direct operating expenses (including repairs and maintenance) arising
from investment property that generated rental income during the period;
and
c. direct operating expenses (including repairs and maintenance) arising
from investment property that did not generate rental income during the
period.
7. restrictions on the realisability of investment property or the remittance of income
and proceeds of disposal.
8. contractual obligations to purchase, construct, or develop investment property or
for repairs, maintenance or enhancements.
Additional Disclosures for the Fair Value Model
1. a reconciliation between the carrying amounts of investment property at the
beginning and end of the period, showing additions, disposals, fair value

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adjustments, net foreign exchange differences, transfers to and from inventories

and owner-occupied property, and other changes.
2. significant adjustments to an outside valuation (if any)
3. if an entity that otherwise uses the fair value model measures an item of
investment property using the cost model, certain additional disclosures are
required.

Additional Disclosures for the Cost Model

1. the depreciation methods used;
2. the useful lives or the depreciation rates used;
3. the gross carrying amount and the accumulated depreciation (aggregated with
accumulated impairment losses) at the beginning and end of the period;
4. a reconciliation of the carrying amount of investment property at the beginning
and end of the period, showing additions, disposals, depreciation, impairment
recognised or reversed, foreign exchange differences, transfers to and from
inventories and owner-occupied property, and other changes;
5. the fair value of investment property. If the fair value of an item of investment
property cannot be measured reliably, additional disclosures are required,
including, if possible, the range of estimates within which fair value is highly likely
to lie.

PRO-FORMA ENTRIES
Measurement after initial recognition:
Cost Model:
Depreciation

Impairment

Depreciation expense - building held as investment

property
Accumulated depreciation - building held as investment
property
Impairment loss - building held as investment property
Accumulated impairment loss - building held as
investment property

Fair Value Model Land/Building held as investment property

Fair value gain on investment property
OR
Fair value loss on investment property
Land/Building held as investment property
Transfers from investment property to owner occupied property:
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xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx

Cost Model

Land
Land held as investment property

xxx

Building
Accumulated depreciation - building held as investment
property
Building held as investment property
Accumulated depreciation building

xxx

xxx

xxx
xxx
xxx

Fair Value Model Land/Building held as investment property

Fair vaue gain on investment property
OR
Fair value loss on investment property
Land/Building held as investment property

xxx

Land/Building
Land/Building held as investment property

xxx

xxx
xxx
xxx

xxx

Transfers from investment property to inventory:

Cost Model

Inventory
Land/Building held as investment property

xxx

Fair Value Model Land/Building held as investment property

Fair vaue gain on investment property
OR
Fair value loss on investment property
Land/Building held as investment property

xxx

Inventory
Land/Building held as investment property

xxx

xxx

xxx
xxx
xxx

xxx

Building previously constructed is completed and transferred to investment

property
Cost Model

Building held as investment property

Building in progress

Fair Value Model Building held as investment property

Building in progress
Fair value gain on investment property
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xxx
xxx
xxx
xxx
xxx

Inventory item of land or building is reclassified as investment property

Cost Model

Land/Building held as investment property

Inventory

Fair Value Model Land/Building held as investment property

Inventory
Fair Value Gain on transfer of inventory to investment
property

xxx
xxx
xxx
xxx
xxx

Transfers from owner occupied property to investment property

Cost Model

Fair Value
Model
When FV >
CV

Land held as investment property

Land

xxx

Building held as investment property

Accumulated depreciation - building
Accumulated depreciation - building held as investment
property
Building

xxx
xxx

Land held as investment property

Land
Revaluation reserve

xxx

Building held as investment property

Accumulated depreciation - building
Building
Revaluation reserve

xxx
xxx

When FV < CVLand held as investment property

Revaluation reserves
Impairment loss
Land
Building held as investment property
Accumulated depreciation - building
Revaluation reserve
Impairment loss
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xxx

xxx
xxx

xxx
xxx

xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx

Building

xxx

Note: When reclassification is made from owner occupied property to investment

property that will be carried at fair value, any excess of the previous carrying amount
over the fair value at the date of transfer is charged to Revaluation reserve, any further
excess is charged to a loss taken to profit or loss.

FINANCIAL STATEMENT PRESENTATION

Land held as investment property
Building held as investment
property
Accumulated depreciation building held as investment
property
Accumulated impairment loss building held as investment
property
Building in progress
Fair value gain on investment
property
Fair value loss on investment
property
Fair value gain on transfer of
inventory to investment property
Fair value loss on transfer of
inventory to investment property

May 2009

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Investment property, noncurrent asset

Investment property, noncurrent asset
Contra-asset account, deducted from investment
property
Contra-asset account, deducted from investment
property
Noncurrent asset
Other operating income
Other operating expenses
Other operating income
Other operating expenses