CH 4. NCA - Investment Properties IAS 40

Question 1

What types of assets does Investment property (IAS 40) apply to?

What is excluded?

Answer 1

IAS 40 Investment Property relates to:

‘property (land or buildings) held (by the owner or by the lessee as a right-of-use asset) to earn rentals or for capital appreciation or both’

Examples of investment property are:

• land held for capital appreciation
• land held for undecided future use
• buildings leased out under an operating lease
• vacant buildings held to be leased out under an operating lease​

The following are not investment property:

• Property used for supply of goods or services or for administrative (IAS 16 applies)
• Owner-occupied, or held for future use as owner-occupied property (IAS 16 applies) - *renting to staff is owner-occupied
• Being constructed for use as an investment property (IAS 16 applies until the property is ready)
• Held or constructed for sale as a Business Model (IAS 2 applies)
• Being constructed on behalf of third parties (IFRS 15 applies)
• Leased to another entity under a finance lease (IFRS 16 applies).

Question 2

When is an investment property Recognised?

Answer 2

Investment property is recognised when:

• It is probable that future economic benefits will flow to the entity and
• The cost can be measured reliably.

Question 3

How are investment properties initially measured?

Answer 3

Investment property should be measured initially:

• Cost to purchase the asset
• Including directly attributable expenditure
• Transaction costs

Question 4

How are Investment properties, Subsequently Measured after recognition?

Answer 4

After recognition an entity may choose either:

• Cost Model - Held at Cost Less accumulated depreciation (same as IAS 16)​
  
  • ​Unless held for sale or leased (IFRS 5 is applied)
• Fair Value Model
  
  • ​No annual depreciation
  • Fair Value changes via the P/L

The policy chosen must be applied to all investment properties.

Question 5

How do you identify changes in the use of investment property?

and

How are assets transferred to or from investment property accounted for?

Types of transfers:

• 1. Investment property to Owner Occupied (IAS 40 —> IAS 16).
• 2. Investment property to inventory (IAS 40 —> IAS 2).
• 3. Owner-occupied property to investment property carried at F.V (IAS 16 —> IAS 40 f.v model)
• 4. Inventories to investment property carried at F.V (IAS 2 —> IAS 40 f.v model)

Answer 5

If there is a change in use and the asset ceases to meet IAS 40, there must be evidence of the change in use.

Note. a change in management’s intentions for the use of a property does not provide
evidence of a change in use.

1. Investment property to Owner Occupied (IAS 40 —> IAS 16).

• Revalued to Fair value at the date of the change, and is used as the NBV for accounting under IAS 16 and charge depreciation annually.

2. Investment property to inventory (IAS 40 —> IAS 2).

• Revalued to Fair value at the date of the change, and follow IAS 2

3. Owner-occupied property to investment property carried at F.V (IAS 16 —> IAS 40 f.v model)

• Use IAS 16 Revaluation model on the date of transfer, any gains go to OCI,
• Subsequently, F.V changes go through P.L (normal IAS 40)

4. Inventories to investment property carried at F.V (IAS 2 —> IAS 40 f.v model)

• Any changes to the Carrying amount is recognised in P.L

Question 6

How are Disposals of investment properties treated?

Answer 6

Any gain or loss on disposal is the difference between the:

Net disposal proceeds
(Less) carrying amount of the asset
= Gain or Loss

Gain or Loss recognised as income or expense in P.L

Question 7

What are the disclosure requirements of IAS 40?

Answer 7

IAS 40 says that an entity must disclose:

• Whether the cost model or fair value model is used
• Amounts recognised in profit or loss for the period
• A reconciliation between the carrying amounts of investment property at
  
  • The beginning and end of the period
  • The fair value of investment property if the entity uses the cost model.