IAS 40 - Investment Property

Question 0

What are examples of Investment Property?

Answer 0

Examples include -
> Land held for long-term capital appreciation rather than short term sale.
> Land held for a currently undetermined future use
> A building owned by the entity & leased to a third party under an operating lease
> Property being constructed or developed for future use as an investment property.

Question 1

What is the definition of an Investment Property?

Answer 1

Property held to earn rentals or for capital appreciation or both.

Investment Property is NOT property for use in the production or supply of goods or for sale in the ordinary course of business.

Question 2

What examples CANNOT be classified as investment property?

Answer 2

> Property intended for sale in the ordinary course of business
Property being constructed or developed on behalf of third parties
Owner occupied property
Property leased to another entity under a finance lease

Question 3

What is the definition of Owner Occupied Property?

Answer 3

A property held for use in the production or supply of goods or services or for admin purposes.

Question 4

Is it possible to treat part of a property as an Investment Property?

Answer 4

In some cases it may be possible for example an entity may use a number of floors of a building as its head office and let out the rest. IF these different parts can be sold or leased SEPARATELY the relevant section can be treated as an investment property.

Question 5

What happens where an entity owns property that is leased to, and occupied by its parent or another subsidiary?

Answer 5

The property should be treated as an Investment Property is the entity’s own accounts however, the property does NOT qualify as an Investment Property in the consolidated financial statements as it is owner occupied from the group perspective.

Question 6

When should an Investment Property be recognised?

Answer 6

An Investment Property should be recognised when :
> It is probable that the future economic benefits associated with the investment property will flow to the entity
> The cost of the investment property can be measured reliably

Question 7

How should an Investment Property initially be measured?

Answer 7

An Investment Property should initially be measured at cost. Cost includes - purchase price, directly attributable costs.

Cost does not include - start up costs.

Question 8

Where a property held under a lease is classified as an Investment Property how should the property be measured & recognised?

Answer 8

At the lower of fair value and the present value of the minimum lease payments

Question 9

After initial recognition how is an Investment Property measured?

Answer 9

After initial measurement at cost lAS 40 requires an entity to CHOOSE between :
> The IAS 16 cost model
> The fair value model

The policy should be applied consistently to all of the entity’s investment property and disclosed in the financial statements

Question 10

Where an entity chooses to classify a property held under an operating lease as an investment property which model should it be measured on after recognition?

Answer 10

Where an entity chooses to classify a property held under an operating lease as an investment property there is no choice of model. The fair value model must be adopted.

Question 11

What happens if the cost model is adopted as measurement after recognition for an Investment Property?

Answer 11

If the cost model is adopted the property should be accounted for in accordance with IAS 16. The investment property should be measured at cost, less accumulated depreciation and impairment losses.

Even if the cost model is adopted, the fair value of the investment property should be disclosed in the financial statements. This allows users to understand the current value of the investment property and aids comparability between entities adopting the two different measurement approaches.

Question 12

What happens if the fair value model is adopted as measurement after recognition for an Investment Property?

Answer 12

If the fair value model is adopted, the accounting treatment of investment properties will be as follows : -
> All investment properties should be measured at fair value at the end of each reporting period provided fair value can be measured reliably.
> Changes in fair value whether gains or losses, should be recognised in profit or loss for the period in which they arise

A consequence of adopting this measurement basis is that no depreciation is ever recognsied

Question 13

How does IAS 40 encourage the fair value to be determined?

Answer 13

IAS 40 encourages the assessment of fair value by independent, appropriately qualified and experienced professionals but DOES NOT require it.
This allows the potential for bias.
Financial statements must disclose the methods and significant assumptions applied in measuring fair value.

Question 14

What is the definition of fair value?

Answer 14

Fair value is the amount for which an asset could be exchanged between knowledgable, willing parties in an arms length transaction.

• The fair value of investment property should reflect market conditions at the end of the reporting period. Fair value is time specific, so the valuations should be at the end of the reporting period.
  The best evidence of fair value is given by current prices in an active market for similar property in the same location and condition.

Question 15

What happens where there is evidence of occupation of an investment property by the entity itself?

Answer 15

The property is now classed as OWNER-OCCUPIED and should therefore be recognised as a property in use by the entity in accordance with IAS 16.
Where the investment property was measured at fair value, the cost of the property is the fair value at the date of the transfer.

Question 16

What happens where there is evidence that the development of an investment property commenced with the intention that on completion of the development works it would be sold by the entity?

Answer 16

The property is to be sold in the normal course of business and should therefore be reclassified as inventory and accounted for in accordance with IAS 2 Inventories.
Where the Investment Property was measured at fair value the cost of the property is the fair value at the date of transfer

Question 17

What happens if there is evidence that development of an investment property commences with the intention that it will be let after completion of the development works.

Answer 17

The property should continue to be held as an Investment Property under IAS 40

Question 18

What happens where there is evidence that a building that was occupied by the entity is vacated so that it can be let to third parties ?

Answer 18

The property is no longer owner-occupied and therefore should be transferred to investment properties and accounted for in accordance with IAS 40

Question 19

What happens where there is evidence that a property that was originally held as inventory has now been let to a third party

Answer 19

The property is no longer held for resale and is instead held to generate future rental income and therefore should be transferred to investment properties in accordance with IAS 40

Question 20

What happens where there is change of classification of an Investment Property and the property is measured using the cost model?

Answer 20

Where the cost model is used to measure investment properties, a change in classification will NOT lead to a change in measurement. The carrying amount at the date of change will be used as the initial measurement under the new classification.

Question 21

When should an Investment Property be de-recognised and how are any gains or losses dealt with?

Answer 21

An investment property should be de-recognised when :
> It is disposed of, either through sale or by entering a finance lease
> It is permanently withdrawn from use and will not generate any future economic benefits, even on its ultimate disposal

Any gain or loss should normally be determined as the DIFFERENCE between the net disposal proceeds and the carrying amount of the asset and recognised directly in the profit or loss in the period in which the disposal takes place.

Question 22

What disclosures are required under IAS 40?

Answer 22

Disclosures include : -
> The measurement model used
> The schedule of movements in carrying amount over the year
> The amounts recognised in the profit or loss for rental income from investment property & direct operating expenses (inc repairs & maintenance) arising from investment property.

Question 23

What are the judgements required with IAS 40?

Answer 23

Judgements include : -
> Management makes the decision as to the model used to measure the investment property.
> Accounting for Investment Property involves a significant level of professional judgement re identifying the investment property, choosing the appropriate accounting policy and obtaining reliable measures of fair value.

Question 24

What are the comparison for IAS 40 & SSAP 19 under UK GAAP?

Answer 24

UNDER IAS 40 : -
A choice is allowed between the cost model and the fair value model

UNDER SSAP 19 : - Investment property should be measured at open market