IAS 40 Investment property

Definition & Recognition

 Definitions

Investment property is property held to earn rentals

or for capital appreciation or both, rather than for:
a) Use in the production or supply of goods or
services or for administrative purposes, or
b) Sale in the ordinary course of business
 Ex1
Which of the following properties owned by Scoop Co would be
classified as an investment property?
A. A stately home used for executive training but which is no
longer required and is now being held for resale
B. Purchased land for investment potential. Planning permission
has not been obtained for building construction of any kind
C. A new office building used as its head office, purchased
specifically in order to exploit its capital gains potential
D. A property that has been leased out under a finance lease
 Ex1
Answer B
Asset A would be classed as a non-current asset held for sale under
IFRS 5. Assets C and D would both be classified as Property, Plant
and Equipment per IAS 16.
Measurement
 Initial measurement

An investment property should be measured initially at its cost,

including transaction costs.
 Measurement subsequent to initial recognition

IAS 40 requires an entity to choose between two models.

The fair value model
The cost model
Whatever policy it chooses should be applied to all of its
investment property.
Transfers
 Transfers

Transfers to or from investment property should only be

made when there is a change in use. For example, owner
occupation commences so the investment property will be
treated under IAS 16 as an owner-occupied property.
Conversely, an owner-occupied property may become an
investment property and need to be carried at fair value.
An entity should apply IAS 16 up to the date of change of use.
It should treat any difference at that date between the carrying
amount of the property under IAS 16 and its fair value as a
revaluation under IAS 16.
 Ex2
Smithson Co purchased a new building with a 50 year life for $10
million on 1 January 20X3. On 30 June 20X5, Smithson Co moved
out of the building and rented it out to third parties. Smithson Co
uses the fair value model for investment properties. At 30 June
20X5 the fair value of the property was $11 million and at 31
December 20X5 it was $11.5 million.
What is the total net amount to be recorded in the statement of
profit or loss in respect of the office for the year ended 31
December 20X5?
A. Income $400,000
B. Income $500,000
C. Income $1,900,000
D. Income $2,000,000
 Ex2
Answer A
Six months' depreciation should be accounted for up to 30 June 20X5, which is
$100,000 expense ($10 million/50 years x 6/12).
When the asset is transferred to investment property it should be revalued to the
fair value of $11 million. At the date that the asset's use is changed, this gain
should be recorded in other comprehensive income and in a revaluation surplus,
not in the statement of profit or loss.
From this date, the fair value model is used. No depreciation is accounted for, but
the asset will be revalued to fair value, with gains or losses going through the
statement of profit or loss. As there is a gain of $500,000 from June 20X5 to
December 20X5, this would be included in the statement of profit or loss.
Therefore the total net income will be $400,000, being the $500,000 fair value
gain less the depreciation expense of $100,000 for the first 6 months of the year.
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