INVESTMENT PROPERTYPAS 40

Definition Investment property is property (land or a building or part of a building or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both.

Examples of investment property:

1. Land held for long-term capital appreciation

2. Land held for undecided future use

3. Building leased out under an operating lease

4. Vacant building held to be leased out under an operating lease

The following are not investment property and, therefore, are outside the scope of IAS 40:

1. Property held for use in the production or supply of goods or services or for administrative purposes;

2. Property held for sale in the ordinary course of business or in the process of construction of development for such sale (IAS 2 Inventories);

3. Property being constructed or developed on behalf of third parties (IAS 11 Construction Contracts);

4. Owner-occupied property (IAS 16 Property, Plant and Equipment), including property held for future use as owner-occupied property, property held for future development and subsequent use as owner-occupied property, property occupied by employees and owner-occupied property awaiting disposal;

5. Property that is being constructed of developed for use as an investment property and;

6. Property leased to another entity under an finance lease.

Other Classification Issues Property held under an operating lease. A property interest that is held by a lessee under an operating lease may be classified and accounted for as investment property provided that:

the rest of the definition of investment property is met;

the operating lease is accounted for as if it were a finance lease in accordance with IAS 17 Leases; and

the lessee uses the fair value model set out in this Standard for the asset recognised.

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An entity may make the foregoing classification on a property-by-property basis.

Partial own use. If the owner uses part of the property for its own use, and part to earn rentals or for capital appreciation, and the portions can be sold or leased out separately,they are accounted for separately. Therefore the part that is rented out is investment property. If the portions cannot be sold or leased out separately, the property is investment property only if the owner-occupied portion is insignificant.

Ancillary services. If the enterprise provides ancillary services to the occupants of a property held by the enterprise, the appropriateness of classification as investment property is determined by the significance of the services provided. If those services area relatively insignificant component of the arrangement as a whole (for instance, the building owner supplies security and maintenance services to the lessees), then the enterprise may treat the property as investment property. Where the services provided are more significant (such as in the case of an owner-managed hotel), the property should be classified as owner-occupied.

Intracompany rentals. Property rented to a parent, subsidiary, or fellow subsidiary is not investment property in consolidated financial statements that include both the lessorand the lessee, because the property is owner-occupied from the perspective of the group. However, such property could qualify as investment property in the separate financial statements of the lessor, if the definition of investment property is otherwise met.

Recognition of investment propertyInvestment property should be recognised as an asset when:

1. it is probable that the future economic benefits that are associated with the property will flow to the enterprise, and

2. the cost of the property can be reliably measured.

Initial measurement of investment property

Investment property is initially measured at cost, including transaction costs. Such cost should not include start-up costs, abnormal waste, or initial operating losses incurred before the investment property achieves the planned level of occupancy.

Measurement subsequent to initial recognition IAS 40 permits enterprises to choose between:

1. a fair value model; and

2. a cost model.

One method must be adopted for all of an entity's investment property. Change is permitted only if this results in a more appropriate presentation. IAS 40 notes that this ishighly unlikely for a change from a fair value model to a cost model.

Fair value model

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Investment property is remeasured at fair value

Gains or losses arising from changes in the fair value of investment property must be included in net profit or loss for the period in which it arises.

Where a property has previously been measured at fair value, it should continue to be measured at fair value until disposal, even if comparable market transactions become less frequent or market prices become less readily available.

Cost Model

After initial recognition, investment property is accounted for in accordance with the costmodel as set out in IAS 16, Property, Plant and Equipment – cost less accumulated depreciation and less accumulated impairment losses.

Transfers to or from Investment Property Classification

Transfers to, or from, investment property should only be made when there is a change

in use, evidenced by:

1. commencement of owner-occupation (transfer from investment property to owner-occupied property);

2. commencement of development with a view to sale (transfer from investment property to inventories);

3. end of owner-occupation (transfer from owner-occupied property to investment property);

4. commencement of an operating lease to another party (transfer from inventories to investment property); or

5. end of construction or development (transfer from property in the course of construction/development to investment property.

The following rules apply for accounting for transfers between categories:

1. for a transfer from investment property carried at fair value to owner-occupied property or inventories, the fair value at the change of use is the 'cost' of the property under its new classification;

2. for a transfer from owner-occupied property to investment property carried at fair value, IAS 16 should be applied up to the date of reclassification. Any difference arising between the carrying amount under IAS 16 at that date and the fair value is dealt with as a revaluation under IAS 16;

3. for a transfer from inventories to investment property at fair value, any difference between the fair value at the date of transfer and it previous carrying amount should be recognised in net profit or loss for the period; and

4. when an entity completes construction/development of an investment property that will be carried at fair value, any difference between the fair value at the date

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of transfer and the previous carrying amount should be recognised in net profit orloss for the period.

Disposal

derecognised investment property on disposal or when the investment property ispermanently withdrawn from use and no future economic benefits are expected from its disposal.

gain or loss on disposal should be calculated as the difference between the net disposal proceeds and the carrying amount of the asset and should be recognised as income or expense in the income statement.

Disclosure

Both Fair Value Model and Cost Model

1. whether the fair value or the cost model is used; 2. if the fair value model is used, whether property interests held under operating

leases are classified and accounted for as investment property; 3. if classification is difficult, the criteria to distinguish investment property from

owner-occupied property and from property held for sale. 4. the methods and significant assumptions applied in determining the fair value of

investment property. 5. the extent to which the fair value of investment property is based on a valuation

by a qualified independent valuer; if there has been no such valuation, that fact must be disclosed.

6. the amounts recognised in profit or loss for: a. rental income from investment property; b. direct operating expenses (including repairs and maintenance) arising

from investment property that generated rental income during the period; and

c. direct operating expenses (including repairs and maintenance) arising from investment property that did not generate rental income during the period.

7. restrictions on the realisability of investment property or the remittance of income and proceeds of disposal.

8. contractual obligations to purchase, construct, or develop investment property or for repairs, maintenance or enhancements.

Additional Disclosures for the Fair Value Model

1. a reconciliation between the carrying amounts of investment property at the beginning and end of the period, showing additions, disposals, fair value

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adjustments, net foreign exchange differences, transfers to and from inventories and owner-occupied property, and other changes.

2. significant adjustments to an outside valuation (if any) 3. if an entity that otherwise uses the fair value model measures an item of

investment property using the cost model, certain additional disclosures are required.

Additional Disclosures for the Cost Model

1. the depreciation methods used; 2. the useful lives or the depreciation rates used; 3. the gross carrying amount and the accumulated depreciation (aggregated with

accumulated impairment losses) at the beginning and end of the period; 4. a reconciliation of the carrying amount of investment property at the beginning

and end of the period, showing additions, disposals, depreciation, impairment recognised or reversed, foreign exchange differences, transfers to and from inventories and owner-occupied property, and other changes;

5. the fair value of investment property. If the fair value of an item of investment property cannot be measured reliably, additional disclosures are required, including, if possible, the range of estimates within which fair value is highly likelyto lie.

PRO-FORMA ENTRIES

Measurement after initial recognition:

Cost Model:

DepreciationDepreciation expense - building held as investment property

xxx

Accumulated depreciation - building held as investment property

xxx

Impairment Impairment loss - building held as investment property xxxAccumulated impairment loss - building held as investment property

xxx

Fair Value Model Land/Building held as investment property xxx Fair value gain on investment property xxx

ORFair value loss on investment property xxx Land/Building held as investment property xxx

Transfers from investment property to owner occupied property:

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Cost Model Land xxx Land held as investment property xxx

Building xxxAccumulated depreciation - building held as investment property

xxx

Building held as investment property xxx Accumulated depreciation – building xxx

Fair Value Model Land/Building held as investment property xxx Fair vaue gain on investment property xxx

ORFair value loss on investment property xxx Land/Building held as investment property xxx

Land/Building xxx Land/Building held as investment property xxx

Transfers from investment property to inventory:

Cost Model Inventory xxx Land/Building held as investment property xxx

Fair Value Model Land/Building held as investment property xxx Fair vaue gain on investment property xxx

ORFair value loss on investment property xxx Land/Building held as investment property xxx

Inventory xxx Land/Building held as investment property xxx

Building previously constructed is completed and transferred to investment property

Cost Model Building held as investment property xxx Building in progress xxx

Fair Value Model Building held as investment property xxx Building in progress xxx Fair value gain on investment property xxx

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Inventory item of land or building is reclassified as investment property

Cost Model Land/Building held as investment property xxx Inventory xxx

Fair Value Model Land/Building held as investment property xxx Inventory xxx

Fair Value Gain on transfer of inventory to investment property xxx

Transfers from owner occupied property to investment property

Cost Model Land held as investment property xxx Land xxx Building held as investment property xxxAccumulated depreciation - building xxx

Accumulated depreciation - building held as investment property xxx

Building xxx

Fair Value Model When FV > CV Land held as investment property xxx

Land xxx Revaluation reserve xxx

Building held as investment property xxxAccumulated depreciation - building xxx Building xxx Revaluation reserve xxx

When FV < CVLand held as investment property xxxRevaluation reserves xxxImpairment loss xxx Land xxx

Building held as investment property xxxAccumulated depreciation - building xxxRevaluation reserve xxxImpairment loss xxx

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Building xxx

Note: When reclassification is made from owner occupied property to investmentproperty that will be carried at fair value, any excess of the previous carrying amountover the fair value at the date of transfer is charged to Revaluation reserve, any furtherexcess is charged to a loss taken to profit or loss.

FINANCIAL STATEMENT PRESENTATION

Land held as investment property Investment property, noncurrent assetBuilding held as investment property Investment property, noncurrent assetAccumulated depreciation - building held as investment property

Contra-asset account, deducted from investment property

Accumulated impairment loss - building held as investment property

Contra-asset account, deducted from investment property

Building in progress Noncurrent assetFair value gain on investment property Other operating incomeFair value loss on investment property Other operating expensesFair value gain on transfer of inventory to investment property Other operating incomeFair value loss on transfer of inventory to investment property Other operating expenses

May 2009

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