Bicol College

Department of Accountancy
Daraga, Albay

International Accounting Standard 40

Investment Property

A Synthesis Paper
Submitted to the Faculty of the College of Accountancy
In Partial Fulfilment of the Requirements in the Course of Bachelor of Science in
Accountancy

Rachelle Ann G. Laurenciana

Bachelor of Science in Accountancy
Fifth Year Block X - A
Introduction
First of all, what is international accounting standard 40? IAS 40 is Investment Property
which applies to the accounting for property (land and/or buildings) held to earn rentals
or for capital appreciation (or both). Investment properties are initially measured at cost
and, with some exceptions. May be subsequently measured using a cost model or fair
value model, with changes in the fair value under the fair value model being recognized
in profit or loss. [IAS 40.5]
The following are the examples of investment property [IAS 40.8]:

 land held for long-term capital appreciation

 land held for a currently undetermined future use
 building leased out under an operating lease
 vacant building held to be leased out under an operating lease
 property that is being constructed or developed for future use as investment
property
IAS 40 was reissued in December 2003 and applies to annual periods beginning on or
after January 1, 2005.
In May 2008, as part of its Annual improvements project, the IASB expanded the scope
of IAS 40 to include property under construction or development for future use as an
investment property. Such property previously fell within the scope of IAS 16.
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: [IAS 40.6]

 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
 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. [IAS 40.10]
Ancillary services - If the entity provides ancillary services to the occupants of a
property held by the entity, 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 entity 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. [IAS 40.13]
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. [IAS
40.15]

Recognition
Investment property should be recognized as an asset when it is probable that the future
economic benefits that are associated with the property will flow to the entity, and the
cost of the property can be reliably measured. [IAS 40.16]

Initial measurement
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. [IAS 40.20 and
40.23]

Measurement subsequent to initial recognition

IAS 40 permits entities to choose between: [IAS 40.30]

 a fair value model, and

 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.
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. [IAS 40.55]

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. [IAS 40.56]

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 one or more of the following: [IAS 40.57 (note that this list was
changed from an exhaustive list to an non-exhaustive list of examples by Transfers of
Investment Property in December 2016 effective 1 January 2018) ]

 commencement of owner-occupation (transfer from investment property to

owner-occupied property)
  commencement of development with a view to sale (transfer from investment
property to inventories)
 end of owner-occupation (transfer from owner-occupied property to investment
property)
 commencement of an operating lease to another party (transfer from inventories
to investment property)
 end of construction or development (transfer from property in the course of
construction/development to investment property
When an entity decides to sell an investment property without development, the property
is not reclassified as inventory but is dealt with as investment property until it is
derecognized. [IAS 40.58]
The following rules apply for accounting for transfers between categories:

 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 [IAS 40.60]
 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 [IAS 40.61]
 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 recognized in profit or loss [IAS 40.63]
 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 of transfer and the previous carrying amount should be recognized in profit
or loss. [IAS 40.65]
When an entity uses the cost model for investment property, transfers between categories
do not change the carrying amount of the property transferred, and they do not change the
cost of the property for measurement or disclosure purposes.
Conclusion
An investment property is measured initially at cost. The cost of an investment property
interest held under a lease is measured in accordance with IAS 17 at the lower of the fair
value of the property interest and the present value of the minimum lease payments.
For subsequent measurement an entity must adopt either the fair value model or the cost
model as its accounting policy for all investment properties. All entities must determine
fair value for measurement (if the entity uses the fair value model) or disclosure (if it uses
the cost model). Fair value reflects market conditions at the end of the reporting period.

Reference

https://www.ifrs.org/issued-standards/list-of-standards/ias-40-investment-property/