Changes of plan NON-CURRENT ASSETS HELD FOR SALE

Chapter 11 Investment Property Page 136

4.2 Measurement after recognition

Following initial measurement at cost, investment properties are either held at cost less accumulated depreciation the cost model or measured at fair value the fair value model. Where the cost model is chosen, the property should be recognised in accordance with IAS 16. [IAS 40.33, 40.56] The chosen accounting policy should generally be consistently applied to all of the entity’s investment properties i.e. it is not permitted to measure one property at cost and another at fair value. There is an assumption that an entity will be able to determine an investment property’s fair value reliably. However, in exceptional cases this may not be possible, so the individual property should be measured at cost even where the entity has an accounting policy of measuring investment properties at fair value. Where an entity has this mixed accounting for investment properties, it should disclose why this has arisen and if possible provide a range of estimates for fair value. [IAS 40.53, 40.78] Where an investment property is measured at fair value, the entity should continue to apply this accounting policy to it. [IAS 40.55]

4.3 The fair value model

Where the fair value model is adopted following the initial recognition of investment properties, the properties should be valued at fair value at the end of each reporting period. Changes in the fair value of investment properties should be recognised directly as part of profit or loss for the period in which the remeasurement occurred. [IAS 40.35] The fair value of an investment property is the price at which the property could be exchanged between knowledgeable and willing parties in an arms length transaction. [IAS 40.5] Fair value should reflect the market conditions at the end of the reporting period. The best evidence of fair value is given by current prices in an active market for similar properties in the same location and condition. It is important to appreciate that fair value is time specific since market conditions change, so the valuation should take place at the end of each reporting period. [IAS 40.38] Illustration 2 An entity owns two investment properties, X and Y, the fair values of which are: At 31 December 2006 At 31 December 2007 CU million CU million Property X 15 20 Property Y 10 8 The original cost of the properties was CU9 million each when they were acquired on 1 January 2005. The entity uses the fair value model to value all its investment properties. The following amounts should be recognised in the financial statements for the year ended 31 December 2007: Statement of comprehensive income CU million Property X income 5 Property Y charge 2 Net credit in year 3 Statement of financial position CU million Chapter 11 – Investment Property Page 137 Property X 20 Property Y 8 Total 28 5 Transfers Following a Change in Usage A change in the use of a property may lead to it no longer being recognised as an investment property. The following table sets out where there might be evidence that a change in use has occurred and how the property should be treated following the change in use. [IAS 40.57] Evidence of change in use Accounting treatment Occupation of the property by the entity itself. The property is now 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, its fair value at the date of change in use should be treated as the deemed cost for future accounting. [IAS 40.60] Development of the property commences, with the intention that it will be sold by the entity. The property is being held for sale in the normal course of business and should therefore be reclassified as inventory and recognised in accordance with IAS 2 Inventories. Where the investment property was measured at fair value, its fair value at the date of change in use should be treated as the deemed cost. [IAS 40.60] Development of the property commences, with the intention that it will continue to be an investment property after completion of the development works. The property should continue to be held as an investment property under IAS 40. A building that was occupied by the entity is vacated so that it can be let to third parties. The property is no longer owner-occupied and therefore should be transferred to investment properties and recognised in accordance with IAS 40. A property that was originally held as inventory has now been let to a third party. 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. Where investment properties are measured at fair value the property should be revalued at the date of change in use and any difference should be recognised directly in profit or loss for the period. [IAS 40.6 3] Chapter 11 Investment Property Page 138 An entity has constructed a property that it now intends to let out to a number of third parties. Whilst the property is being constructed it is accounted for in accordance with IAS 16. However, on completion it should be transferred to investment properties. Where investment properties are measured at fair value the property should be revalued at the date of change in use and any difference should be recognised directly in profit or loss for the period. [IAS 40.65] 6 Disposal of Investment Properties An investment property should be eliminated from the statement of financial position when it is disposed of, either through sale or by entering a finance lease. An investment property which is permanently withdrawn from use and will not generate any future economic benefits, even on its ultimate disposal, should be eliminated from the statement of financial position. [IAS 40.66] When an investment property is disposed of or permanently withdrawn from use and no future benefit will accrue to the entity, a gain or loss should be calculated and recognised directly as part of profit or loss for the period in which the disposal or ‘retirement’ takes place. The gain or loss should normally be determined as the difference between the net disposal proceeds and the carrying amount of the asset. [IAS 40.69] Illustration 3 An entity purchased an investment property on 1 January 2004, for a cost of CU400,000. The property has a useful life of 50 years, with no residual value, and at 31 December 2006 had a fair value of CU560,000. On 1 January 2007 the property was sold for net proceeds of CU540,000. The amount that should be recognised as part of the profit or loss for the year ended 31 December 2007 regarding the disposal of the property is shown below: The cost model CU a Carrying amount 400,000 – 400,000 50 years x 3 = 376,000 Net proceeds 540,000 Profit on sale 164,000 The fair value model b Fair value 560,000 Net proceeds 540,000 Loss on sale 20,000 Chapter 11 – Investment Property Page 139 7 Disclosure The disclosures required in relation to investment properties are in three broad groups:  those applicable to both the fair value model and the cost model;  those applicable only to the fair value model; and  those applicable only to the cost model.

7.1 Applicable to both the fair value model and the cost model

An entity should disclose which measurement basis it uses for its investment properties, so whether it uses the cost model or fair value model. When it has been particularly difficult to establish whether the property is an investment property or an owner-occupied property, the entity should set out the criteria that it considered in making its decision. [IAS 40.75] An entity should separately identify the amount of rental income recognised in the period along with any related operating expenses attributable to the rentals. If restrictions exist on the realisation of income, either through rentals or sale proceeds, or if the entity has a contractual obligation to purchase or construct an investment property, these facts should be disclosed.

7.2 The fair value model

Where an entity applies the fair value model it should present a detailed reconciliation, showing all movements, between the carrying amount of investment property at the beginning and the end of the period. [IAS 40.76] An entity should disclose the methods and significant assumptions made, including whether there was market evidence or not, in determining the fair value of investment property, and whether the valuation was carried out by an independent qualified valuer. [IAS 40.75] It is possible that significant fixtures, such as lifts and office furniture, within an investment property have been separately recognised in the financial statement as property, plant and equipment under IAS 16. A property will generally be valued as a whole and therefore the valuation will include such fixtures. To avoid the double counting of these items, the fair value of the property should be adjusted. Where such an adjustment has been made, this fact should be disclosed. [IAS 40.77]

7.3 The cost model

An entity that applies the cost model should disclose the depreciation methods and rates, or useful life, used. A detailed reconciliation should be presented for the gross cost of investment properties and the related accumulated depreciation showing all movements during the year. The carrying amount i.e. the cost less the accumulated depreciation should be clearly disclosed for both the beginning and end of the period. In addition an entity is required to disclose the fair value of investment properties where possible. If it is not possible, this fact should be explained and a range of estimates should be provided instead. [IAS 40.79] Chapter 11 Investment Property Page 140 8 Chapter Review This chapter has been concerned with the accounting for investment properties. A key issue is the identification of properties that should be treated as investment properties. Once identified as an investment property the entity should address recognition and measurement issues. These include: i initial recognition, ii ongoing measurement and iii on disposal. This chapter has covered:  the nature of investment properties and the scope of IAS 40;  recognition and measurement criteria for investment properties, including the fair value model and the cost model;  treatment on the change in use of an investment property;  treatment on the disposal of an investment property; and  the disclosure requirements of IAS 40. Chapter 11 – Investment Property Page 141 9 Self Test Questions Chapter 11 1. Which TWO of the following statements best describe owner-occupied property, according to IAS40 Investment property? A Property held for sale in the ordinary course of business B Property held for use in the production and supply of goods or services C Property held to earn rentals D Property held for administrative purposes 2. Which ONE of the following terms best describes property held to earn rentals or for capital appreciation? A Freehold property B Leasehold property C Owner-occupied property D Investment property 3. Under IAS40 Investment property, which ONE of the following additional disclosures must be made when an entity chooses the cost model as its accounting policy for investment property? A The fair value of the property B The present value of the property C The value in use of the property D The net realisable value of the property 4. IAS40 Investment property gives a choice between two different models as the accounting policy to be used in relation to investment property. Which ONE of the following disclosures should be made when the fair value model has been adopted? A Depreciation methods used B The amount of impairment losses recognised C Useful lives or depreciation rates used D Net gains or losses from fair value adjustments Chapter 11 Investment Property Page 142 5. Which TWO of the following properties fall under the definition of investment property and therefore within the scope of IAS40 Investment property? A Land held for long-term capital appreciation B Property occupied by an employee paying market rent C Property being constructed on behalf of third parties D A building owned by an entity and leased out under an operating lease 6. The Bentham Company purchased an investment property on 1 January 20X5 for a cost of CU220,000. The property had a useful life of 40 years and at 31 December 20X7 had a fair value of CU300,000. On 1 January 20X8 the property was sold for net proceeds of CU290,000. Bentham uses the cost model to account for investment properties. What is the gain or loss to be recognised in profit or loss for the year ended 31 December 20X8 regarding the disposal of the property, according to IAS40 Investment property? A CU86,500 gain B CU81,000 gain C CU10,000 loss D CU70,000 gain 7. The Niagara Company owns three properties which are classified as investment properties according to IAS40 Investment property. Details of the properties are given below: Initial cost Fair value at 31 Dec 20X7 Fair value at 31 Dec 20X8 CU000 CU000 CU000 Property 1 270 320 350 Property 2 345 305 285 Property 3 330 385 360 Each property was acquired in 20X4 with a useful life of 50 years. The companys accounting policy is to use the fair value model for investment properties. What is the gain or loss to be recognised in Niagaras profit or loss for the year ending 31 December 20X8? A CU18,900 loss B CU15,000 loss C CU30,000 gain D CU45,000 loss Chapter 11 – Investment Property Page 143 8. The Micro Company acquired a building on 1 January 20X7 for CU900,000. At that date the building had a useful life of 30 years. At 31 December 20X7 the fair value of the building was CU960,000. The building was classified as an investment property and accounted for under the cost model. According to IAS40 Investment property, what amounts should be carried in the statement of financial position and recognised in profit or loss? Carrying amount in Recognised in statement of profit or loss financial position A CU960,000 No gainloss B CU900,000 No gainloss C CU960,000 Gain of CU60,000 D CU870,000 Expense of CU30,000 9. The Lancer Company has a single investment property which had originally cost CU580,000 on 1 January 20X4. At 31 December 20X6 its fair value was CU600,000 and at 31 December 20X7 it had a fair value of CU590,000. On acquisition the property had a useful life of 40 years. According to IAS40 Investment property, what should be the expense recognised in Lancers profit or loss for the year ending 31 December 20X7 under each of the fair value model and the cost model? Fair value model Cost model A CU14,750 CU14,500 B CU10,000 CU14,500 C CU14,500 CU10,000 D CU10,000 CU14,750 10. The Paradise Companys accounting policy with respect to investment properties is to measure them at fair value at the end of each reporting period. One of its investment properties was measured at CU800,000 on 31 December 20X7. The property had been acquired on 1 January 20X7 for a total of CU760,000, made up of CU690,000 paid to the vendor, CU30,000 paid to the local authority as a property transfer tax and CU40,000 paid to professional advisers. In accordance with IAS40 Investment property, the amount of the gain to be recognised in profit or loss in the year ended 31 December 20X4 in respect of the investment property is A CU40,000 B CU70,000 C CU80,000 D CU110,000