MCA

FIA212 – FINANCIAL ACCOUNTING

IAS40 - INVESTMENT PROPERTY

Friday Kumitengo
INTRODUCTION

• Land and/or buildings held to earn rentals or for capital

appreciation (or both)

• Not considered to be like most non-current assets as not

acquired for ‘use’ in the traditional sense
IAS 40 INVESTMENT PROPERTY

Definition:
An investment property is property (land or a building – or part
of a building – or both) that meets the following conditions:

(a)the property is held to earn rentals or

(b)for capital appreciation or both
Rather than for:

(i) use in the production or supply of goods or services or for

administrative purposes; or
(ii) sale in the ordinary course of business.
Scope

IAS 40 applies to all investment property including those:

• held by a lessee under a finance lease
• held by a lessee under an operating lease where certain
conditions are met
• held by a lessor and rented out under an operating lease

Objective

• To prescribe the accounting treatment for

investment property and related disclosure
requirements.
When is property investment property?
YES
• Land held for LT capital
appreciation rather than ST
sale in the ordinary course of
business;
• Land held for a currently,
undetermined future use;
• Building owned by the entity
or held by the entity under a
finance lease and leased out
under one or more operating
leases;
• Building that is vacant but is
held to be leased out under
one or more operating leases ;
and
• Property being constructed or
developed for future use as
investment property.
NO
• Property intended for sale in
the ordinary course of
business or in the process of
construction or development
for such sale (IAS 2
Inventories);
• Property being constructed
or developed on behalf of
third parties (IFRS 15 –
Revenue from Contracts with
Customers)
• Owner-occupied property
(IAS 16 Property, Plant and
Equipment);
Initial recognition and measurement

• Investment property should be recognised initially as an

asset when and only when:
 it is probable that the future economic benefits that are
attributable to the investment property will flow to the
entity; and
 the cost of the investment property can be measured
reliably.

• Investment property should initially be measured at cost.

This includes the purchase price and any directly attributable
expenditure (e.g. professional fees and property taxes).
Subsequent Measurement after initial recognition
• An entity has the choice between the:
 Fair value model (not market value as per IAS 16)
 Cost model
• The selected policy should be applied to all investment
properties
• Fair value model
 Price at which the property could be exchanged between
knowledgeable willing parties in an arm’s length
transaction
 No depreciation
 Gains or losses should be recognised in the Profit and
Loss account in arriving at profit or loss

• Cost model
 At cost less accumulated depreciation less any
accumulated impairment losses
Change in Fair Value - Gains and Losses

• A gain or loss arising from a change in the

fair value of an investment property should
be recognised in net profit or loss for the
period in which it arises.
Example: Applying the fair value model

Floyd Limited commenced trading on 1 January 2012 and its non current
assets at 31 December 2012 include two investment properties, Gilmore and
Waters, that are let on an arm’s length basis to a third party. Floyd Limited
applies the fair value model in accounting for investment properties, which
are professionally valued for the first time on 31 December 2012. The
valuation details are as follows:

Property Cost Fair value Increase /

Km Km (Decrease) Km
Gilmore 210 345 135
Waters 390 280 (110)

Requirement
Explain and set out the journal entries necessary to record the movements
between cost and far value in respect of each of the properties for the period
ended 31 December 2012.
Solution
Suggested Solution:
Under the fair value model, changes in valuation are taken to
the Statement of profit or loss and other comprehensive income
– profit or loss:

Gilmore
DR Investment Property K135m
CR SPLOCI – P/L Gain on Investment Property K135m

Waters
DR SPLOCI – P/L Loss on Investment Property K110m
CR Investment Property K110m
Example. Applying the cost and fair value models

ABC, a manufacturing company, purchases a property for K1m

on 1 January 2012 for its investment potential. The land
element of the cost is believed to be K400,000 and the
buildings element is expected to have a useful life of 50 years.
At 31 December 2012, local property indices suggest that the
fair value of the property has risen to K1.1m.

Requirement
Show how the property would be presented in the financial
statements as at 31 December 2012 if ABC adopts the:
(i) Cost model; and
(ii) Fair value model.
Solution: Applying the cost and fair value models

Suggested Solution:
(i) Cost model
Depreciation in the year is K600,000 = K12,000
50
SPLOCI – P/L = depreciation charge of K12,000; and
SFP = property shown at NBV of K1,000,000 – K12,000 =
K988,000.

(ii) Fair value model

SFP = property shown at fair value of K1.1m; and
SPLOCI – P/L = gain of K0.1m representing the fair value
adjustment.
Changing models
• Once the entity has chosen the fair value or cost
model, it should apply it to all its investment property.
It should not change from one model to the other
unless the change will result in a more
appropriate presentation. IAS 40 states that it is
highly unlikely that a change from the fair value model
to the cost model will result in a more appropriate
presentation.
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.
• When there is a transfer from investment property
carried at fair value to owner-occupied property or
inventories, the property's cost for subsequent
accounting under IAS 16 or IAS 2 should be its fair
value at the date of change of use.
• 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.
Example: Transfer to investment property

A business owns a building which it has been using as a head

office. In order to reduce costs, on 30 June 20X9 it moved its
head office functions to one of its production centres and is
now letting out its head office. Company policy is to use the
fair value model for investment property.
The building had an original cost on 1 January 20X0 of
$250,000 and was being depreciated over 50 years. At 31
December 20X9 its fair value was judged to be $350,000.
How will this appear in the financial statements at 31
December 20X9?
Solution
The building will be depreciated up to 30 June 20X9.

Original cost 250,000

Depreciation 1.1.X0 – 1.1.X9 (250/50 X 9) (45,000)

Depreciation to 30.6.X9 (250/50 X 6/12) (2,500)

Carrying amount at 30.6.X9 202,500

Revaluation surplus 147,500

Fair value at 30.6.X9 350,000

The difference between the carrying amount and fair value is taken to a
revaluation surplus in accordance with IAS 16.

However the building will be subjected to a fair value exercise at each

year end and these gains or losses will go to profit or loss. If at the end of
the following year the fair value of the building is found to be $380,000,
$30,000 will be credited to profit or loss.
Disposals

• Derecognise (eliminate from the statement of financial

position) an investment property on disposal or when it is
permanently withdrawn from use and no future economic
benefits are expected from its disposal.
• Any gain or loss on disposal is the difference between the
net disposal proceeds and the carrying amount of the
asset. It should generally be recognised as income or
expense in profit or loss.
Disclosure requirements
These relate to:
• Choice of fair value model or cost model
• Whether property interests held as operating leases are
included in investment property
• Criteria for classification as investment property
• Assumptions in determining fair value
• Use of independent professional valuer (encouraged but
not required)
• Rental income and expenses
• Any restrictions or obligations
Additional disclosures
Fair value model
• An entity that adopts this must also disclose a
reconciliation of the carrying amount of the
investment property at the beginning and end of the
period.

Cost model
• These relate mainly to the depreciation method. In
addition, an entity which adopts the cost model must
disclose the fair value of the investment property.
COMPARING IAS 16 AND IAS 40
IAS 16
• Cost or Revauation (Market
Value) Models
• Different recognition rules
for ‘first’ and ‘subsequent’
gains and losses
• Depreciation – both cost
and revaluation models
IAS 40
• Cost or Fair Value Models
• All gains and losses
recognised in SPLOCI in
arriving at operating profit
no RR
• Depreciation – cost model
only (No depreciation for
FV model)
Practice

• A company has purchased a building for investment purposes

on 1st Jan 2010. The building cost a total of $1.5m with the
land element being estimated at $500,000.
• The building has a useful life of 20 years. At the 31st
December 2010 the fair value of the Investment Property was
$2m.
• Show the treatment of the property for the two methods
possible under IAS 40.