Investment properties
(IAS 40)
Learning outcomes
Explain and apply the scope of IAS 40;
define the key concepts with regard to investment property and apply these in a
practical situation;
correctly account for both initial and subsequent costs of investment property;
measure investment property during the initial recognition thereof and identify the
cost elements;
measure investment property subsequent to the initial recognition according to the
cost model and the fair value model;
calculate depreciation and explain how to determine the most appropriate method
and period;
account for the derecognition of investment property;
account for transfers to and from property, plant and equipment;
present and disclose investment property in the financial statements;
account for the deferred tax implications of all the above; and
integrate any of the above learning outcomes with other learning outcomes in this
module as soon as the latter learning outcomes have been addressed.
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What must you study in order to master this unit?
Recognition • Objective and Scope of IAS 40
• Important definitions of Investment Properties
• Initial recognition (Same as IAS 16/IFRS 16)
• Initial costs of an Investment Property (IAS 16/IFRS 16)
• Ancillary services
• Impact on consolidate financial statements
• Subsequent measurement
Cost model (IAS 16) Fair value model
Initial an Transfers to/from Investment properties
Subsequent
measurement
Derecogniton
Deferred tax implications
Notes to the financial statements and other disclosure
Disclosure requirements
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key definitions
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Investment property is property (land and/or buildings)
held to earn rental income, or for capital appreciation
(increasing value) or both, rather than for use in the
production process or for administrative purposes or for
the sale thereof in the ordinary course of business.
Owner-occupied property is property held for use in
the production process or for administrative purposes.
The treatment of owner-occupied property is
determined by IAS 16 Property, plant and equipment
(PPE).
What is investment property?
Land or buildings or part of a building
held by an owner or lessee as a right of use asset
to earn rentals or for capital appreciation
or both
rather than
for use in the production or supply of goods
and services or for administrative purposes
or sale in the ordinary course of business
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What is investment property?
Property that is currently being constructed for the future use thereof as
investment property is specifically also within the scope of IAS 40
Property leased under an operating lease by the lessor is always investment
property, but not property leased in terms of a finance lease, because the asset
is then derecognised from the records of the lessor
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Investment property-Joint
use
Sometimes a portion of the property is leased out or held
for capital appreciation, whilst another portion is owner-
occupied.
If the portions could be sold individually/ leased out
individually under a finance lease, each portion is
accounted for separately.
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Investment property-Joint
use
If the portions can however not be sold separately or leased, the full property
is accounted for as IP if only an insignificant portion thereof is owner-
occupied.
This Photo by Unknown Author is licensed under CC BY-SA
How will you account property if the
portions can not be sold separately
and a significant portion thereof is
owner-occupied, i.e. an insignificant
portion thereof is IP?
GG example
1 to practice
this
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CLASS QUESTION 1-joint use
property
Stunning owns a two-storey house in Windhoek.
Stunning entire business and one floor is leased to Ditzy under an operating
lease.
A single set of title deeds exists for the house, prohibiting both piecemeal sale of
the house and piecemeal transfer of ownership by way of finance lease
Required:
Determine how this property should be classified according to IAS 40?
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There are two portions within a single property, 11
owner occupied and leased out. This is thus a joint
use property.
The title deeds prevents the building from being
sold in parts and in being leased under a finance
lease.
Thus we should consider if the portion used as
owner occupied property is significant or not.
One floor is owner occupied (PPE) and the other is
leased out under an operating lease (Investment
property) the physical split is 50%- 50% and thus we
can not determine purely on the physical area.
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However since 50% owner occupied portion
houses the entire business, it is submitted
that the owner occupied portion must be
considered significant and thus the entire
building is classified as owner occupied
(PPE-IAS 16)
Conclusion on Class Question
THUS the decision as to whether an owner occupied portion is significant or not
will require professional judgement in some instances
In this regard, an entity is required to develop criteria so that it can exercise its
judgement consistently –see IAS 40.14 and B39.
Reminder again that,IAS 40 does not provide quantitative guidance, ie a
threshold
IAS 40 is also silent on whether significance should be based on a relative
percentage in terms of physical area or relative significance in terms of
monetary terms of the business carried out in each portion or both…..
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CLASSIFICATION FROM A GROUP CONTEXT
Sometimes property is leased to a parent company or
subsidiary.
In such a case, the property is investment property in the
entity’s separate financial statements (because rental income
is earned), but from a group point of view the property is not
leased out to a third party and is therefore owner-occupied
property in the consolidated financial statements.
This means that, for consolidation purposes, pro-forma
journals are processed to reclassify the property and to
change the accounting treatment for group purposes
Lessor: Will classify as IP (as it earns rental income)
Lessee: Right-of-use asset or an expense (if lessee elects
to recognise the lease as an expense according to IFRS
16) 14
Group: PPE (as it is owner occupied)
Ancillary services
1
minute
to think
Company A owns an admin building that it leases out to through
Company B.
It appears to be an investment property as it earns
rental income.
It also however provides security services to Company B.
Does this preclude(prevent) Company A from classifying
the admin building as an investment property?
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Ancillary services
Ancillary services may be provided to lessee without tainting the classification as
investment property as long as these services are insignificant relative to the
rental agreement.
What is another example of an INSIGNIFICANT service that would not
preclude(prevent) the property from being classified as an investment property?
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Ancillary (additional) services
If the owner of an office building provides maintenance
or cleaning services to the lessees who occupy the
building would this taint the classification?
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Vacant land
What can you tell me?
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Vacant land
Land whose use is undecided (i.e. IAS 40 states must
assume that the land is held for capital appreciation).
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Property that IS NOT investment property (IAS 40.9) i.e Property that is
owner-occupied or held with the intention of being owner-occupied
(Covered in IAS 16 PPE or IFRS 16 Leases );
Property held for sale in the ordinary course of business (IAS 2 Inventory).
Property that is leased out to someone under a finance lease (IFRS 16
Leases).
(IAS 40.9)
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Initial recognition and
measurement
Principles are largely the same as those applied for PPE
(see IAS 16 already covered)
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Recognition of Investment
Property
Recognise IP when:
It is probable that future economic benefits will flow to the entity; and
the cost of the IP can be measured reliably.
And meets the definition of Asset
And meets the definition of investment property
Before we can recognise any cost as IP, we must always consider if whether it
meets the recognition criteria both on initial costs and subsequent costs
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INITIAL MEASUREMENT
Owned IP: Cost + directly attributable costs
Directly attributable costs- transaction costs such as legal
services and property transfer taxes.
If payment is deferred: cost = cash price equivalent (PV).
Excluding:
start-up costs unless they are necessary to bring the
property to its working condition in order to be operated in
the manner intended by management,
initial operating losses incurred before the investment
achieved planned level of occupancy, or example
abnormal wasted material or unproductive labour costs.
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Initial recognition
and measurement
LEASED IP: : IP held by a lessee as a Right of Use asset shall
be recognised and initially measurement in terms of IFRS 16,
INITIALLY measured at IFRS 16 “cost” on commencement
date BUT PRESENTED AND DISCLOSED AS INVESTMENT
Property (IAS 40.19A&29A)
Exchange of investment property 25
The same as that used for PPE, intangible assets
etc
Cost price of the item acquired is measured at
fair value.
When the fair values of both assets (acquired
and given up) can be determined reliably, the
fair value of the asset given up (similar to cash
they would’ve given up) will be used as the
cost of the asset acquired, unless the fair value
of the asset acquired is more evident, in which
case that value may be used.
A gain or loss is recognised as the difference
between the fair value and the CA of the asset
given up.
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2 exceptions:
Exchange the exchange transaction lacks
of commercial substance or
the fair values of both the asset that
investment
is acquired and the asset that is given
up cannot be estimated reliably.
property
Then the asset that is acquired is
measured at the CA of the asset given
up, and no gain or loss is recognised.
Subsequent measurement of investment
property
IAS A company chooses one of 2 acc policies:
40.56
c
OR FAIR VALUE
COST MODEL
MODEL
Owned IP-Exactly the
same for owned Under
property as IAS 16 leased IP
they are
differences
to take
note off
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Fair value model-highlights of IAS 40
Investment property-(owned property) is carried at fair value
The investment property is not depreciated!
No impairment testing as investment property at FV is
excluded from the scope of IAS 36
Investment property under FV may be classified for as held
for sale , but it will not be measured in terms of IFRS 5
A gain/loss on the re-measurement of investment property to
fair value is recognised in p/l.
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Subsequent measurement of investment
property
IFRS 16.34: If a lessee applies the FV model in IAS 40
to its IP, the FV model should also be used
SUBSEQUENTLY for RoU assets that meet the def. of IP,
i.e. RoU assets subleased.
Thus, remeasure from its IFRS 16 cost (initially) to its
fair value.
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Fair value model-highlights of
IAS 40-continued
Ip held under a lease-and recognized as ROU – we
measure fair value of ROU instead of the property.
IAS 40.40A and IAS 40 A: Use fair value of RoU asset
and NOT the fair value of the underlying property.
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Subsequent measurement (cont.)
IAS 40 requires that fair value needs to be determined
regardless of which model is chosen: if the fair value
model is chosen, the fair value has to be determined
for measurement purposes; if the cost model is
chosen, the fair value has to be determined for
disclosure purposes.
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Subsequent measurement of investment
property
Be careful of double-counting (IAS 40.50):
Ensure A&L recognised separately are not double-counted in the fair value of
IP, e.g:
Lifts and air-conditioning = integral part of a building and generally included
in the fair value of IP.
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Subsequent measurement of investment
property-FAIR VALUE
Be careful of double-counting (IAS 40.50) (continue):
If the building is leased out by the lessor under an
operating lease, the lessor may have recognized lease
income received in advance (LIRA) (cr) or income
receivable (dr) as a result of straight-lining the
operating lease income.
To avoid double-counting: increase FV with INCOME
RECEIVED IN ADVANCE or decrease with receivable
amount
(however, watch out for what is given IN QUESTIONS!!!
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Extract from RD Question-Double
counting
The fair value of the mall (i.e. the entire property) amounted to R26 500 000
(including an operating lease accrued lease income asset amounting to R1 100
000).
The fair value was determined by Mr F Value who has the necessary qualifications.
Before 31 December 2019, Mr F Value was not able to reliably determine the fair
value of the mall on a continuing basis since comparable market transactions are
infrequent and alternative reliable estimates of fair value were not available.
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Subsequent costs
Same rules as IAS 16 PPE, capitalize if we can satisfy the
recognition criteria
Probable future economic benefits
Costs reliably measurable
As such expense day to day servicing and immaterial repairs
Capitalise items to investment property if it will lead to increased
rentals/capital appreciation (i.e and increase in fair value)- proof
of probable future economic benefit
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Disposal (derecognition)
The principles for the derecognition of investment
properties and the treatment of compensation received
from third parties for investment properties that were
impaired, lost or given up are the same as for PPE (refer
to
IAS 16 already covered)
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Disclosure
Acc policy note to disclose
• FV or cost model
• Criteria used to classify inv prop, where it was
difficult
• Investment property note
• FV methods/assumptions
• Independent valuer….
• If valuation had adjustments
• Restrictions on title
• Reconciliation of opening to closing balance
• Same disclosures as IAS 16 if cost model is used
• Disclose FV even if Cost model is used
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Disclosure
Profit before tax note
• Rental income earned on inv prop
• Direct operating expenses related to inv
prop(split property earning rentals and not)
• Profit/loss on sale
• Gains or losses from FV adjustments (FV
model)
• Depreciation and impairments & reversals
(cost model) 38
Deferred Tax Implications-
Cost Model
If investment property is carried under the Cost Model
DT implications are similar to PPE cost model
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Deferred Tax Implications-
Fair Value Model PRESUMED
INTENTIONS
AND
REBUTTABLE
If on the fair value model it is assumed that the investment ASSUMPTION
property will be recovered through sale except if
The investment property is a depreciable asset e.g buildings and
it is held within a business model with the intention of utilizing
the economic benefits over time from using the investment
property rather to sell it
IAS 12 paragraph 51
C
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CURRENT TAX- IMPLICATIONS
The FV gains and losses recognised in P/L are not taxable for income tax purposes
until they are actually realised through a sale.
Therefore, when converting profit before tax to taxable profits, unrealized FV
adjustments must be reversed.
Revision SU 1 – 20% will be permanent and 80% under temporary differences in
certain circumstances
Depreciation on a building would also be ignored for tax purposes and would be
replaced by the actual tax deduction granted, if any.
Thus, when converting profit before tax to taxable profits, you add back the
depreciation and subtract any tax deduction (wear&tear)
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CLASS EXAMPLES 1-DEFFERED
TAX
Refer to CLASS HANDOUT
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Transfers
Transfers between IP and other asset categories shall only be made when there is a
change in use.
A change in use occurs when the property meets, or ceases to meet, the def. of IP
AND there is evidence of the change in use.
(In isolation, a change in management’s intentions is not sufficient. Management
must have taken observable actions to support the change.)
Apply judgement.-Your questions will be very clear when there is a change in
intention
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A change in use is evidenced by the following (IAS 40.57):
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the commencement of owner-occupation or of development with a view to
owner-occupation (transfer from IP to PPE);
the commencement of development with a view to sell (transfer from IP to
inventories);
Transfers
the end of owner-occupation (transfer from owner-occupied to IP); or
the commencement of an operating lease to another party (from inventories or PPE
to IP).
What if you have an
investment property
and decide to sell –
without developing it?
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How are transfers FROM and TO investment property accounted for?
If on the cost model to account for investment property, a transfer will not affect the CA of the affected asset.
What is the effect on the CA if the asset is carried on the fair value model?
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Transfers to or from investment property
If the cost model is used to account for the investment property, a transfer
will not affect the carrying amount of the asset on date of transfer.
The table below contains the principles to account for a transfer if the fair
value model is used for investment property.
Type of transfer Treatment
Inventory → Investment property On the date of change in use, the inventory is valued
at its CA. (NB-Standard is silent on what to do
whether to fv as inventory first or not) but for AFI3710
On the date of change in use, the inventory is
revalued to fair value and the revaluation is
recognized in p/l.
Investment Property to Inventory On the date of change in use, the inventory is first
revalued to Fair Value and the revaluation is
recognised in p/l.
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Transfers to or from investment property
The table below contains the principles to account for a transfer if the
fair value model is used for investment property.
Type of transfer Treatment
Investment property → Owner- The property’s deemed cost for its future accounting
occupied or inventory treatment is the fair value on the date of change in
use. Fair value adjustments- Profit and Loss
Owner-occupied → Investment IAS 16 is applied up until the date of change in use.
property On this date the asset is revalued from the carrying
amount to its fair value and the revaluation is
accounted for in accordance with IAS 16 (it is
therefore revalued one last time with e.g. a
revaluation surplus recognised in OCI).
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IAS 40.61-
IAS 40.62
Class example 2-Change in
Intention-Deferred Tax
See Handout
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Homework – IP
Work through GG chapter 10 and do the questions in the question pack
Tutorial Questions- W AND B
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Questions
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