Mark Fielding-Pritchard IAS 40 – INVESTMENT PROPERTY Mark Fielding-Pritchard

IAS 40 – INVESTMENT PROPERTY Investment property (IP): property (land or buildings - or part of a building) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both rather than for: Use in the production or supply of goods or services or for administrative purposes; or Sale in the ordinary course of business Not Biological assets Mineral rights and mineral reserves such as oil, natural gas and similar non regenerative resources

Definition Does not include assets Held for administrative or productive use by owner; or Held for sale Generates cash flows largely independent of other assets

Examples Land held for long-term capital appreciation Land held for undetermined future use Building leased under one or more operating leases Vacant building held to be leased Building under construction or development as investment property

Initial Measurement Measure initially at cost including transaction costs and directly attributable expenditures (rules similar to IAS 16)

Subsequent Measurement Select either fair value or cost model Fair value model: changes in fair value are recognised in the income statement Cost model: but fair value must be disclosed Rebuttable presumption: Fair value can be determined reliably on a continuing basis Valuation by a certified independent valuer with relevant experience is encouraged but not required

Investment Property - Fair Value Price at which the property could be exchanged in an arms-length transaction FV is time specific, dependent upon market conditions at the reporting date Best measure of fair value is the current price in an active market for similar property (same location & condition) FV excludes synergies between the property and other properties

Consistency of Measurement If fair value previously used, must continue until there is a change in use: Owner-occupied, or Development for sale begins If fair value is policy, an individual property can be carried at cost if its fair value cannot be reliably measured Identify at initial recognition

Transfers to or from Investment Property Transfer to, or from, investment property shall be made when, and only when there is a change in use evidenced by: Commencement lend of owner occupation (transfer to or from Property, Plant and Equipment (IAS 16)) Development with view to sale (transfer to Inventories (IAS 2)) Commencing an operating lease to another party (from IAS 2 or IAS 16)

Transfers to or from Investment Property Transfer to owner-occupied property or inventories, use fair value at date of change in use Transfer from owner-occupied property to fair value investment property Apply IAS 16 until change in use Carrying/fair value difference as revaluation per IAS 16 Transfer from inventories to fair value investment property, recognise gain/ loss in profit or loss

Investment Property Held under Operating Lease Property held under operating lease may be investment property of the lessee Must meet the definition Must use fair value model If classified as investment property, lessee must use finance lease accounting

ACCA June 2013 Speculate (i) & (ii) Investment property is held to generate rent or capital gains. Owner occupied is to support normal business operations The accounting treatment is different to reflect the different business reasons why it is held The treatments are similar with (usually annual) revaluations. Under revaluation model the gain is taken to revaluation reserve whereas for investment properties any gains and losses go through the profit and loss Revalued owner occupieds are depreciated, investment properties are not

Speculate (iii) Property A is an office building so owner occupied. Note 6 months. 1/4/12- 1/10/2012 depreciate. 6/12 x 2m/20= 50000 expense From 1/10/12 2340-2300= 40 gain Property B Full year 1.65m- 1.5m= 0.15m gain Other comprehensive income will include revaluation reserve movement

Speculate (iii) Statement of Financial Position 31/3/13 Investment Properties A 2.34m B 1.65m Revaluation reserve A 350 (2300- 2000-50)