Chapter 31 - Investment Property - IAS 40

Question 1

What is investment property?

Answer 1

Investment property is property held for its ability to generate rental income and/or capital appreciation rather than for use within the business.

Investment property is not:
- Held for use in the production or supply of goods or services or for administrative purposes.

• For sale in the ordinary course of business.

Question 2

How is investment property recognized?

Answer 2

Investment property is recognized at cost.

The costs that can be included in the cost of investment property are:
- the purchase price of the property

• directly attributable expenditure

Question 3

What happens if a part of the investment property is used in the production or supply of goods and services or for administration purposes and can be sold or leased out under a finance lease separately?

Answer 3

If this is the case, then only the portion held to earn rental income or capital appreciation shall be accounted for as an investment property.

Question 4

Explain how the fair value model works.

Answer 4

• The fair value model is not the same as the revaluation model under IAS 16. The change in fair value impacts retained earnings, it does not impact the revaluation surplus.
• Changes in the fair value of the property are taken to the SPLOCI (in the profit and loss section). The change is taken to retained earnings in the profit and loss section of the SPLOCI and not to the revaluation surplus account through other comprehensive income.
• Depreciation is not charged on the investment property under the fair value model.

Question 5

IAS 40 sets out rules on the valuation of properties when there is a change in use, for example, from owner-occupied to investment property.

What’s the key rule here?

Answer 5

The intention to change the use of a property is not enough, there must also be evidence of a change in use.

Question 6

DUCK purchased a property called MALLARD.

MALLARD is let to, and occupied by, a subsidiary of DUCK.

Explain this property should be accounted for in the individual and group financial statements of Duck.

Answer 6

MALLARD is let to, and occupied by, a subsidiary of DUCK. From a group perspective, the property is owner-occupied and cannot be accounted for as an investment property in the group accounts. It is therefore accounted for under IAS 16 in the group accounts

Regarding DUCK’s individual financial statements, the property is not owner-occupied. As such, the property may be accounted for as an investment property.