• Investment property is land or buildings held to earn rentals, for capital appreciation, or both.
• Investment property is measured initially at cost. Cost includes any directly attributable expenses.
• In subsequent accounting periods, it is revalued to fair value through profit or loss, unless fair value cannot be measured reliably without undue cost or effort on an ongoing basis. In such cases, the investment property is accounted for as property, plant and equipment under Section 17 Property, plant and equipment.
125
| Cutting through UK GAAP
vs previous UK GAAP
Applicable standard: SSAP 19
pUK16.1 There are differences in the definition of an investment property. Under SSAP 19: • any rental income is negotiated on an arm’s length basis;
• construction and development work is completed before a property is classified as an investment property; • a property leased within a group is not an investment property in either the individual entity or group accounts; • there is no concept of not being able to measure an investment property reliably.
pUK16.2 Under SSAP 19, investment property is carried at open market value. Changes in value, other than permanent diminutions, are charged or credited through the statement of total recognised gains and losses (STRGL) to an investment revaluation reserve within shareholders’ funds. Permanent diminutions are charged through the profit and loss account. Insurance companies take investment property revaluations through the profit and loss account. pUK16.3 Fair value is defined in FRS 102 as ‘the amount for which an asset could be exchanged, a liability settled, or an
equity instrument granted could be exchanged, between knowledgeable, willing parties in an arm’s length
transaction.’ The term ‘open market value’ for the valuation of investment properties is not defined in SSAP 19 but is defined in FRS 15 as having ‘the same meaning as in the Appraisal and Valuation Manual published by the RICS’, and is reproduced in Appendix 1 to FRS 15. Only an open market value without further qualification of any sort complies with the valuation requirements of SSAP 19. In practice, fair value and open market value seem likely to be the same for investment property.
pUK16.4 Similarly to FRS 102, freehold investment properties generally are not depreciated under SSAP 19. However, under SSAP 19 investment properties held on leases may be depreciated and are required to be depreciated if the unexpired term of the lease is 20 years or less.
pUK16.5 Neither FRS 102 nor SSAP 19 requires valuations to be carried out by qualified or independent valuers. However, when a major entity holds significant levels of investment property, SSAP 19 suggests that the properties would normally be revalued annually by persons holding a recognised professional qualification and at least every five years by an external valuer.
vs EU-IFRS
Applicable standard: IAS 40
IFRS16.1 IAS 40 requires an entity to choose either the fair value model or the cost model. The chosen policy applies to all of an entity’s investment property. There is a limited exemption from fair value accounting, which is available only on initial recognition on a property-by-property basis when fair values cannot be established reliably on an ongoing basis.
IFRS16.2 IAS 40 requires an entity that has chosen the cost model to disclose the fair value of investment property, with limited exceptions that apply only if fair value was not readily determinable on initial recognition.
IFRS16.3 Under IAS 40, there is more detailed guidance regarding dual-use properties. A portion of a dual-use property is either capable of separate disposal, or leased out separately under a finance lease to be classified as an investment property.
IFRS16.4 There is an explicit test in IAS 40 as to whether a property can be an investment property if the lessor provides some ancillary services.
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16 Investment property |
126FRS 102
Section 16
Definition and recognition
16.1 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, rather than for:
(a) use in the production or supply of goods or services or for administrative purposes; or (b) sale in the ordinary course of business. [FRS102.16.2]
16.2 There is a classification option, available on a property-by-property basis, for property interests held by a lessee under an operating lease to be accounted for as investment property. This can be applied when the property would otherwise meet the definition of an investment property, i.e. the leased property is held for capital appreciation or rental income and the lessee can measure the fair value of the property interest without undue cost or effort on an ongoing basis. [FRS102.16.3]
16.3 When a property’s primary purpose is the provision of social benefits e.g. social housing, it is not classed as investment property and is accounted for under Section 17 Property, plant and equipment. [FRS102.16.3A] 16.4 When a property has a mixed use its classification is split between investment property and property, plant and
equipment. However, if the fair value of the investment property component cannot be measured reliably without undue cost or effort, the entire property is accounted for as property, plant and equipment in accordance with Section 17. [FRS102.16.4]
Measurement
16.5 Investment property is measured on initial recognition at its cost. Cost comprises its purchase price and any directly attributable expenditure such as legal and brokerage fees, property transfer taxes and other transaction costs. [FRS102.16.5] When payment is deferred beyond normal credit terms, the cost is calculated as the present value of all future payments. The cost of a self-constructed investment property is calculated in accordance with Section 17. 16.6 Investment property whose fair value can be measured reliably without undue cost or effort is measured at fair value at
each reporting date, with changes in fair value recognised in profit or loss. If a property interest held under a lease is classified as investment property, the item accounted for at fair value is that interest and not the underlying property. Investment properties are not depreciated. The Companies Act requires that all tangible fixed assets are depreciated; therefore, compliance with the non-depreciation requirements of FRS 102 will require the true and fair override provisions of the Act to be invoked. FRS 102.3.5 indicates that it is possible to depart from the requirements of legislation when compliance with those requirements would be misleading. The entity is required to provide particulars of that departure, the reasons for it and its effect in the notes to the accounts. See paragraph 3.55 of this publication. 16.7 All other investment property is accounted for as property, plant and equipment using the cost model under Section
17, which requires depreciation of the property. [FRS102.16.7]
16.8 In practice it is unlikely that investment property in the UK would be difficult to measure at fair value. What level of cost or effort is regarded as ‘undue’ will be a judgement depending on the facts. See paragraph 11.25 of this publication for guidance on fair value.
Transfers
16.9 If a reliable measure of fair value is no longer available without undue cost or effort for an item of investment property measured using the fair value model, the entity then accounts for that item as property, plant and equipment in accordance with Section 17 until a reliable measure of fair value becomes available. The carrying amount of the investment property on that date becomes its cost under Section 17. Disclosure is made of this change, which is a change of circumstances and not a change in accounting policy. [FRS102.16.8]
16.10 Other than as required by paragraph 16.9 of this publication, transfers of property to, or from, investment property are permitted only when the property first meets, or ceases to meet, the definition of investment property. [FRS102.16.9]