Last update: July 2023
Many accountants falsely believe that there’s only one standard that deals with long-term tangible assets: IAS 16 Property, Plant and Equipment.
While it’s true that you need to apply IAS 16 for most of your long-term tangible assets, it’s not the one ruling all. I tried to falsify this myth some time ago here.
Except for IAS 16, we have a few other standards arranging the long term assets. IAS 40 Investment Property is one of them.
In today’s article, you’ll learn:
- What the investment property is,
- How you should account for it initially and subsequently,
- You’ll also learn that the fair value model is NOT the same as the revaluation model, and
- The video is waiting for you in the end.
Here’s a little bonus for you:
Before we dive in IAS 40, my good friend Professor Robin Joyce wrote a wonderful piece that teaches you accounting for IAS 40 in 40 seconds. Hope you’ll enjoy!
Accounting for IAS 40 in 40 seconds
The accounting for IAS 40 Investment Property is identical to that of IAS 16 (Property, Plant and Equipment),
EXCEPT
that IAS 40 revaluations (both positive and negative) go to the income statement (not revaluation reserve)
AND
there is no depreciation if revaluations are carried out every year.
DONE!
Any remaining seconds should be spent on learning the classifications and rules of IAS 40 Investment Property.
Now, let’s take Robin’s advice and spend the remaining seconds for learning the rest.
Objective of IAS 40
IAS 40 Investment Property prescribes the accounting treatment and disclosure with respect to investment property.
But, what is investment property?
The investment property is a land, a building (or a part of it), or both, held for the following specific purposes:
- To earn rentals;
- For capital appreciation; or
- Both. (IAS 40.5)
Here, the strong impact in on purpose. If you hold a building or a land for any of the following purposes, then it cannot be classified as investment property:
- For production or supply of goods or services,
- For administrative purposes, or
- For sale in ordinary course of business.
If you’re using your building or land for the first 2 purposes, then you should apply IAS 16; and the standard IAS 2 Inventories fits when you use them for the sale in ordinary course of business.
Examples of investment property
What specifically can be classified as investment property?
Here is a couple of examples (refer to IAS 40.8):
- Land held as an investment for long-term capital appreciation, or for future undetermined use (i.e. you don’t know yet what you’ll use it for).
However, if you buy a land and you intend to build some production hall for your own purposes sometime in the future, then this land is NOT an investment property. - A building owned by the entity and leased out under one or more operating leases. This includes a building that is still vacant, but you plan to lease it out.
- Any property that you actually construct or develop for future use as investment property.
Be careful here again, because when you construct a building for some third party, this is NOT an investment property, but you should apply IFRS 15 Revenue from Contracts with Customers.
When to Recognize investment property
The rules for recognition of investment property are essentially the same as stated in IAS 16 for property, plant and equipment, i.e. you recognize an investment property as an asset only if 2 conditions are met:
- It is probable that future economic benefits associated with the item will flow to the entity; and
- The cost of the item can be measured reliably.
How to measure investment property initially
Investment property shall be initially measured at cost, including the transaction cost.
The cost of investment property includes:
- Its purchase price and
- Any directly attributable expenditure, such as legal fees or professional fees, property taxes, etc.
You should NOT include:
- Start-up expenses whatsoever.
However, if these start-up expenses are directly attributable to the item of investment property, then you can include them. But do NOT include any general start-up expenses. - Operating losses that you incur before planned occupancy level is achieved, and
- Abnormal waste of material, labor or other resources incurred at construction.
When payment for investment property is deferred, then you need to discount it to its present value in order to set the cash price equivalent.
Let me just mention that actually, you can classify assets held under the lease as investment property and in this case, it’s initial cost is calculated in line with IFRS 16 Leases.
Subsequent measurement of investment property
After initial recognition, you have 2 choices for measuring your investment property (IAS 40.30 and following).
Once you make your choice, you should stick to it and measure all of your investment property using the same model (there are actually exceptions from that rule).
Option 1: Fair value model
Under fair value model, an investment property is carried at fair value at the reporting date. (IAS 40.33)
The fair value is determined in line with the standard IFRS 13 Fair Value Measurement.
A gain or loss from re-measurement to fair value shall be recognized in profit or loss.
Sometimes, the fair value cannot be reliably measurable after initial recognition. This can happen in absolutely rare circumstances (e.g. active marked ceased existing) and in this case, IAS 40 prescribes (IAS 40.53):
- To measure your investment property at cost, if it’s not yet completed and is under construction; or
- To measure your investment property using cost model, if it’s completed.
Option 2: Cost model
The second choice for subsequent measurement of investment property is a cost model.
Here, IAS 40 does not describe it in details, but refers to the standard IAS 16 Property, Plant and Equipment. It means you need to take the same methodology as in IAS 16.
Switching the models
Can you actually switch from cost model to fair value model or vice versa from fair value model to cost model?
The answer is YES, but only if the change results in the financial statements providing better, more reliable information about company’s financial position, results and other events.
What does it mean in practice?
Switching from cost model to fair value model would probably meet the condition and therefore, you can do it whenever you’re sure that you’ll be able to determine the fair value regularly and the fair value model fits better.
However, the opposite change – switch from fair value model to cost model – is highly unlikely to result in more reliable presentation. Therefore, you should not really do it, and if – rarely and for good reasons.
Transfers from and to investment property
When we speak about transfers related to investment property, we mean the change of classification, for example, you classify a building previously held as property, plant and equipment under IAS 16 to investment property under IAS 40.
The transfers are possible, but only when there’s a change in use or asset’s purpose, for example (refer to IAS 40.57):
- You start renting out the property that you previously used as your headquarters (transfer to investment property from owner-occupied property under IAS 16)
- You stop renting out the building and start using it for yourself
- You held a land for undefined purpose and recently, you decided to construct an apartment house to sell apartments when they are built (transfer from investment property to inventories).
What’s the accounting treatment in this case?
It depends on the type of a transfer and the accounting choice for your investment property.
If you opted to account for your investment property at cost model, then there’s no problem with the transfers, you simply continue with what you did.
However, if you picked up a fair value model, then it’s a bit more complicated:
- When you transfer to investment property, then the deemed cost is a fair value at the date of transfer. Difference between asset’s carrying amount and its fair value is treated in the same way as revaluations under IAS 16.
- When you transfer from investment property, then the deemed cost is also fair value at the date of transfer.
Derecognition of investment property
The derecognition rules (=when you can remove your investment property from your books) in IAS 40 are similar to the rules in IAS 16.
You can derecognize your investment property in two circumstances (IAS 40.66):
- On disposal, or
- When the investment property is permanently withdrawn from use and no future economic benefits are expected.
You need to calculate gain or loss on disposal (IAS 40.69) as a difference between:
- Net disposal proceeds, and
- Asset’s carrying amount.
Gain or loss on disposal is recognized in profit or loss.
Disclosures
IAS 40 Investment property prescribes a lot of disclosures to be presented in the financial statements, including the description of selected model, how the fair value was derived, what the classification criteria for investment property are, movements in investment property during the reporting period (please refer to IAS 40.74 and following for more information).
Please watch the following video with a summary of IAS 40 Investment property:
