11.4.1 An investment property is recognized as an asset if
■ it is probable that the future economic benefits attributable to the asset will flow to the entity; and
■ the cost of the asset can be reliably measured.
11.4.2 A property interest that is held by a lessee under an operating lease may be accounted for as an investment property if the property would otherwise meet the definition of an investment property and the fair value model is applied to the leased property interest.
This classification is available on a property-by-property basis, but once the election has been made then all other property classified as investment property must be accounted for in terms of the fair value model.
Initial Measurement
11.4.3 On initial recognition, investment property is recognized at its cost. Total cost com-prises the purchase price and any directly attributable transaction costs (for example, legal services, transfer taxes, and other transaction costs). However, general administrative ex-penses as well as start-up costs are excluded. Cost is determined the same way as for other property (see IAS 16, chapter 10). For investment property acquired under a finance lease, the asset and liability should be measured at the lower of fair value and the present value of future minimum lease payments.
Subsequent Measurement
11.4.4 An entity might choose to subsequently measure all of its investment property, using either of the following:
■ Cost model. Measures investment property at cost less accumulated depreciation and impairment losses. Under the cost model the requirements of IAS 16 are applied to the measurement of investment property.
■ Fair value model. Measures investment properties at fair value. Gains and losses from changes in the fair value are recognized in profit or loss as they arise. Fair value is defined as the amount at which an asset could be exchanged between knowledgeable, willing parties in an arm’s-length transaction.
11.4.5 The following principles are applied to determine the fair value for investment property:
■ The fair value of an investment property shall reflect market conditions at the end of the reporting period.
■ The fair value of investment property reflects rental income from current leases and reasonable, supportable assumptions that represent what knowledgeable, willing par-ties would assume about rental income from future leases in light of current conditions.
■ The best evidence of fair value is given by current prices in an active market for similar property in the same location and condition and subject to similar lease and other con-tracts. An entity must identify differences in the nature, condition, and location of the properties and amend the valuation where necessary.
■ In the absence of current prices in an active market an entity may look to an active market for properties of a similar nature, recent prices of similar properties in a less active market, or discounted cash flow projections based on reliable estimates of future cash flows.
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■ There is a rebuttable presumption that an entity can reliably determine the fair value of an investment property. However, in exceptional circumstances it may happen that it is clear when the investment property is first acquired or classified as such that the entity will not be able to determine its fair value on a continuing basis. In such circumstances the property is measured using the benchmark treatment in IAS 16 until its disposal date. The entity measures all of its other investment property for which fair value is determinable at fair value.
11.4.6 Transfers to or from investment property should be made when there is a change in use. Special provisions apply for determining the carrying value at the date of such transfers.
11.4.7 An investment property should be derecognized on disposal or when the investment property is permanently withdrawn from use and no future economic benefits are expected from its disposal. Gains or losses arising from the retirement or disposal of an investment property shall be recognized in profit or loss, unless another standard provides for different treatment. For example, IAS 17 has specific rules for the recognition of gains or losses arising from sale and leaseback transactions.
11.5 PRESENTATION AND DISCLOSURE
11.5.1 Accounting policies should specify the following:
■ whether the entity applies the fair value or cost model to investment properties;
■ if the fair value model is applied then under what circumstances property interests under operating leases are classified as investment property; and
■ the criteria used to distinguish investment property from owner-occupied property.
11.5.2 The following disclosures relating to significant estimates and assumptions should be provided:
■ methods and significant assumptions applied in determining fair value;
■ the extent to which the fair value has been determined by an external, independent valuer;
■ measurement bases, depreciation methods, and rates for investment property valued according to the cost model;
■ the existence and amounts of restrictions on the investment property; and
■ material contractual obligations to purchase, construct, or develop investment property or for repairs or enhancement to the property.
11.5.3 The Statement of Comprehensive Income and notes should include the following:
■ rental income from investment property;
■ direct operating expenses arising from an investment property that generated rental income; and
■ direct operating expenses from an investment property that did not generate rental income.
11.5.4 The Statement of Financial Position and notes should include the following:
■ When an entity applies the fair value model:
– A detailed reconciliation of movements in the carrying amount during the period should be provided.
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– In exceptional cases when an investment property cannot be measured at fair value (because of a lack of fair value), the reconciliation above should be separately dis-closed from other investment property shown at fair value. In addition, a description of the property should be provided as well as an explanation of why fair value can-not be determined and the range of possible estimates within which fair value is likely to lie.
■ When an entity applies the cost model:
– All the disclosure requirements of IAS 16 should be furnished.
– The fair value of investment property is disclosed by way of a note.
Decision Tree
Figure 11.1 summarizes the classification, recognition, and measurement issues of an invest-ment property. The diagram is adapted from a decision tree in IAS 40.
Is the property held for sale in the
ordinary course of business?
Is the property owner occupied?
Is the property being constructed on behalf of a third
party?
The property is an investment property
Does the property meet the recognition requirements?
Initially measure the property at cost
and subsequently elect the fair value
model
Use IAS 2
Use IAS 16
Use IAS 11
IAS 40 Defer recognition Yes
Yes Yes
Yes
No No
No
FIGURE 11.1 Decision Tree
Chapter 11 Investment Property (IAS 40) 127
11.6 FINANCIAL ANALYSIS AND INTERPRETATION
Investment properties generate cash flows differently from properties used to house the entity’s operating activities. By presenting investment properties separately from owner-occupied properties, users of the financial statements are able to distinguish between these two types of properties and obtain an understanding of the amount, timing, and nature of expected future cash flows.
11.7 COMMENTARY
11.7.1 While the application of the standard is relatively straightforward, there are some complications around the accounting for deferred tax on investment properties. The general principles relating to deferred tax are that deferred tax is provided at the rate that is expected to apply when the carrying amount of the asset is recovered. The tax laws and rates that are substantively enacted at the balance sheet date are used as an indicator of the laws and rates that will apply on realization of the asset. Per the definition of investment properties, the realization of the asset will happen either through rental income or sale. Therefore, the tax laws applicable to either rental income or capital sale will be applied on the realization of the asset. In many jurisdictions the tax rates applicable to capital sales differ from the tax rates applicable to rental income. In this case there is uncertainty about which rate should be used to determine the deferred tax applicable to the investment property. Some believe that a blended rate should be used that incorporates both rentals and the eventual sale of the prop-erty; others believe that only the rate applicable to the sale should be used. Yet others believe that the rate applicable to the rental income is appropriate.
11.7.2 There is a proposal in the IASB 2009 Annual Improvements project to remove the requirement to account for investment properties held for sale as inventory and instead account for such properties as noncurrent assets held for sale in terms of IFRS 5. There are no other significant future developments being proposed or considered for IAS 40. It is expected that the deferred tax complications described above will be considered by the IASB as part of their project on income taxes rather than as a project dealing with investment properties.
11.8 IMPLEMENTATION DECISIONS
The following table sets out some of the strategic and tactical decisions that should be con-sidered when applying IAS 40.
Strategic decisions Tactical decisions Problems to overcome
The accounting policy, either cost model or revaluation model, should be decided on.
The methodologies to be used to determine fair value should be decided on.
It is generally difficult to determine the fair value of properties.
From time to time management may make a strategic decision that results in a change in the classification of investment property.
Changes in the classification of investment properties should be accounted for as transfers to or from investment property. Once the change has been decided on, the most appropriate classification should be confirmed.
These changes are expected to be infrequent and not result in significant problems in accounting for investment properties.
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