8.2 IAS 40 Investment Property

Question 1

What is the argument for the fair value method under IAS 40 Investment Property

Answer 1

• As investment properties are held for their investment potential and not for use within the business. (not helping to generate sales)
• As such, it could be argued that it is not appropriate to depreciate them

Question 2

What is an investment property

Answer 2

Land or buildings held to earn rental income and/or capital appreciation

Question 3

What must and investment property not be

Answer 3

Used in normal operating activities
Held for sale

Question 4

Where does investment property sit on the SFP

Answer 4

Both PPE and IP are NCA on the balance sheet just different lines

Question 5

How does IAS 40 Investment Property deal with mixed use properties

Answer 5

If two floors are rented out and the others are used in normal operations the building must be split and the different floors treated separately

Question 6

What is the accounting treatment for Investment Properties under IAS 40

Answer 6

• IP should initially be measured at cost
• IAS 40 then allows choice for subsequent measurements
  1. Fair value method
  2. Cost model

Question 7

Does IAS 40 Investment Property allow you to change between the Fair Value Method and the Cost Model

Answer 7

No, the methods must be congruent across all properties

Question 8

What is the accounting treatment for Investment Properties under IAS 40 using the Fair Value Method

Answer 8

• IP shown in SFP @ FV
• Recognise changes in FV (gain/loss) in SP/L.
  o In strong property markets is good as gain goes to bottom line profits but can be reversed
  o This does mean unrealised profits end up on P/L
  o No depreciation charged

Question 9

What is the accounting treatment for Investment Properties under IAS 40 using the Cost Model

Answer 9

• Apply same principle as IAS 16
  o (i.e. capitalise and depreciate)
• Disclose FV as a note to the accounts.
  o This means no matter what has to be professionally valued each year

Question 10

What is Fair Value

Answer 10

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date

Question 11

Will land ever be depreciated under IAS 40 Investment Property

Answer 11

NEVER!!!

Question 12

How do you change the use of PPE to IP using the fair value method

Answer 12

If an asset is transferred from being used as PPE to an investment property and the fair value model is used:
* The asset must first be revalued as per IAS 16 (creating a revaluation surplus in equity)
* and then transferred into investment property at FV.

Question 13

How do you change the use of PPE to IP using the cost model

Answer 13

If an asset is transferred from being used as PPE to an investment property and the cost model is used:
* The asset is transferred into investment property at the current carrying amount and continues to be depreciated.

Question 14

How do you change the use of IP to PPE using the fair value method

Answer 14

If an asset is transferred from being used as an investment property to PPE and the fair value model is used:
* The asset must first be revalued as per IAS 40 (taking the gain/loss to SP/L)
* Then transferred into PPE at FV.

Question 15

How do you change the use of IP to PPE using the cost model

Answer 15

If an asset is transferred from being used as an investment property to PPE and the cost model is used:
* The asset is transferred into PPE at the current carrying amount and continues to be depreciated
o i.e. no change in method.

Question 16

How is IAS 40 investment property treated in consolidated accounts when the sub rents

Answer 16

• If a building is rented by a subsidiary of the group, then the building will be:
  o Classed as an investment property in the entity accounts
  o Will be classed as PPE (per IAS 16) in the CFS.
• This is because the asset will be used by the group, so must be accounted for in accordance with IAS 16.

Question 17

What are the disclosure requirements for IAS 40 Investment Property

Answer 17

• Whether the entity has adopted the fair value model or the cost model
• The extent to which fair values have been determined by an independent valuer who holds a recognised and relevant professional qualification
• The amounts of any rental income from IP and related expenses that have been recognised when calculating the entity’s profit/loss for the period.