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