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IAS 40 – Investment Property
Investment property is different from property plant and equipment we account for under IAS16
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Rather than for a) use in the production or supply of goods or services or administrative purposes,
or b) sale in the ordinary course of the business
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We are
using the building so as to produce for ex shoes
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The property is being indirectly used to generate income
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I
am keeping such property to lease it out to third parties so that I would earn rental income
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So the property is kept for value appreciation only
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The standard clearly excludes property used in production, or administration cannot be considered as
investment property
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Your normal activity is to sell property that the company who owns that property is a property dealing
company
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Property in this case would be their
inventories
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Inventory can only be measured at lower cost or NRV and cannot be
measured at fair value
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However,
property under IAS16 if measured at fair value, the movement in fair value will go to a revaluation
reserve in equity
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However, any
movement in fair value will not go to a revaluation reserve in Equity but will go directly to the Income
Statement as income or expense
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IAS40 states that any movement in fair value should go directly to the income statement, because if I am
keeping the property for rental income/capital appreciation I would be incurring cost to maintain it at a
top level
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I want to see the value of such property increasing
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The management intention has to be to
keep it for long term appreciation
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3) A building that is vacant but management

intention is to lease it to one or more third parties even though the building right now is vacant
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Paragraph 9 deals with type of land and buildings that does not classify
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2) Property being constructed on behalf of third parties – the
building that I am constructing on behalf of someone else does not classify
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Case study 1
a) Management does not know what to do with the property, so currently we are holding land for
an undetermined future use
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b) Farming land for capital appreciation does not have capital appreciation, but if it is management
intention to lease this land out to third parties and we will earn rental income, then we could
classify such farming land as investment property
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c) It is not our property, falls under IAS11
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a
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Ias 16 because it will be used for our own factory
c
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I have to show the users that I am going to
dispose of such property
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IAS16 as it is used for admin purposes
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Paragraph 20 of the standard
Once we decide to recognise, we need to measure such recognition
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Cost as defined in paragraph 21 have to
be included in the value of investment property
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Once you initially measure property, in subsequent years, you need to continue measuring such
property at each and every financial year; you need to measure such property
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Or else, it can make use of the cost model where the company will show it at cost
and depreciate such investment property if it is not land over the useful life of such investment
property
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With
such purchase price, all other expenses incurred during the purchase of such purchase property have to
be added to such cost
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At the end of each year, we need to re-measure such investment property (paragraph 30) and we can
use the cost model or the fair value model (to show it at market value)
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I cannot have 2 investment property measured at fair value and
the other one measured at cost model, so if the company decided to use the fair value model, it will do
so for all investment properties
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Paragraph 35 –any gain or loss arising from a change in the fair value of the investment property, shall
be recognise din the PL for the year in which it arises
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An increase in FV
Dr Investment Property
Cr Other income
Decrease in FV
DR Other expenses
CR Investment property
Paragraph 56 – deals with the cost model
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The value of investment property will most probably comprise of land and buildings
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Don’t depreciate land, only depreciate buildings!
Example 3
 8000 depreciated per year
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Netbook value is 400,000 – 24000 = 376,000
 540,000 – 376,000 = 164,000 a profit of disposal
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164,000 – 24000 = 140,000 is my net effect on my PL over 3 years (positive)
 I need to show my investment property at 560,000
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 Loss on disposal of 20,000 so my carrying amount on the face of the BS is 560,000 and I have to
remove it
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The effect on the PL is the same for
both models so both will lead to the same answer
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Case study 1 (Last year’s question 3)
C) Balance brought forward was 400,000
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Dr Investment property 10,000
CR Bank 10,000
DR Investment Property 14,000
CR Bank 14,000
DR Investment Property 6,000
CR Bank 6,000
Dr Investment property 65000 (the movement in fair value)
CR Other income 65000
Any additions or disposals have to be taken into consideration, before deciding the movement in fair
value
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So I have to continue using the fair value model
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Decrease in fair value will have to go to the PL and have a
negative impact to the PL
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However, you can switch from cost model to fair
value, but all investment properties must go through this, and not just one particular property
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It can also occur if property was in inventory, and transfer of Investment property which will
now be used for admin purposes
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A property that has been previously classified as investment property, but now management
intention has changed, and such property will be used for admin purposes
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This property will no longer fall under IAS40 but will now fall under IAS16
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Paragraph 60
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From
1st Jan 2016 this property was no longer held by the company for investment, but it will
be used as an office for admin purposes
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In such cases, the amount at
which such property will be transferred form investment property to PPE, such amount
should be equivalent to the fair value of such property
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Irrespective of the model of the model I am using under
IAS16 (Even if under IAS16 I still need to transfer that property a fair value, I would then
need to calculate the useful life of such asset and start depreciating that asset over the
useful life of such property, from the day it was transferred)
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A property that was used for admin purposes will be rented out and we will earn rental income
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There has to be transfer from PPE to investment property
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I need to continue deprecating my property up until 1st October before such
transfer takes place
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On 1st October, depreciation
up until October was 125,000 (as 250,000 x 6 months)
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The
company’s policy for investment property is to value it at fair value
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So from
4,875,000 it has risen to 5,400,000 giving a difference 525,000
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DR Investment property 5,400,000
CR Revaluation Reserve 525,000
CR PPE 4,875,000
From this point onwards, now that it is classified as investment property, any
movement in fair value will go to the PL
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That movement will go to the PL
DR Investment property 100,000
CR Other Income 100,000
Paragraph 10 if IAS 40 ; some properties might comprise portion that is used to earn rental income for
capital appreciation and there might be another portion in the same building that will be used for
administration purposes or will be used in the supply of goods and services
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The same paragraph provides us with guidance on how to go treat this
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If the property can easily be subdivided and sold separately, then apportion them according to the value
of each property
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In such
cases, if an insignificant portion is held for use for the production of goods and services, it is to be
classified as Investment Property
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SO
Determine whether the property can be sold separately, if yes there is no problem, if not you have to
determine whether the portion that is being used for admin purposes is significant or not
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If the portion used for admin
purposes is deemed to be significant, you cannot classify such property as investment property
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A hotel is not investment property, as it provides a service, so it has to be classified as Property, Plant
and Equipment
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Let’s say I own a hotel but I am not actively managing it, there is a third party who is managing such
hotel
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Case study 1;
The Casino falls under IAS16, while the restaurants, bars and the souvenir shop (20/1500 = 1% which
means that it is an insignificant portion of the hotel) fall under IAS40

Examples



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