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Recognition of investment property
An investment property should only be recognised
as an asset when the anticipated future flow of
economic benefits is probable and its cost can be
measured reliably [IAS40R.16].
Recognition occurs when the risks and rewards related
to the property have passed to the entity.
Initial measurement
Investment property is initially measured at cost
[IAS40R.20]. Cost is the fair value of the consideration
given to acquire the property [F100(a)]. Cost of
a purchased property includes transaction costs
such as legal fees and taxes on the purchase of
the property [IAS40R.21].
The cost of a self-constructed asset should include
all directly attributable costs required to bring
the property to its required working condition.
The criteria for initial measurement of investment
property are consistent with those for PPE .
Leased assets
Buildings held by a lessee under a finance lease
or under operating lease (and then leased to a third
party) may be classified as investment property.
Land which is normally classified as an operating
lease [IAS17R.14] may also be classified as investment
property when it is subsequently leased to a third
party. A property interest that is held by a lessee
under an operating lease may be classified as investment
property only if the lessee uses the fair value
model for investment property (see 'Fair Value model - introduction') and the
rest of the definition of investment property is
met [IAS40R.6] .
A lessee recognises investment property under a
finance lease at the lower of the present value
of the minimum lease payments and the fair value
of the asset [IAS17R.12]. A lessee that classifies
a property interest held under an operating lease
as investment property shall account for that property
interest as if it were a finance lease [IAS40R.IN5].
Subsequent expenditure
The costs of the day-to-day servicing of the investment
property are repairs and maintenance, and are expensed
[IAS40R.12].
The costs of parts of the investment property acquired
through replacement shall be recognised in the carrying
amount of the investment property at the time those
costs are incurred if the recognition criteria (discussed
in section 'Recognition of investment property') are met [IAS40R.19].
Measurement subsequent to initial recognition
Subsequent to initial recognition, an entity should
either carry investment property at fair value or
at depreciated historical cost [IAS40R.30]. The
choice of valuation model should be applied consistently
to all of the entity's investment property [IAS40R.30]
. A change from one model to the
other should only be made if it will result in a
more appropriate presentation. A change from fair
value to historical cost is not likely to give a
more appropriate presentation [IAS8R.14] [IAS40R.31].
There is a rebuttable presumption that an entity
will be able to determine the fair value of an investment
property reliably on a continuing basis. Management
may rebut the presumption that reliable fair values
are available for an individual property in exceptional
cases . Properties for which the
presumption is rebutted cannot be subsequently measured
at fair value, even if a reliable measure of fair
value later becomes available [IAS40R.53].
Fair value model - introduction
All investment property is measured at fair value,
with gains and losses arising from changes in the
fair value recognised in the income statement, as
part of operating profit [IAS40R.33,35]. Fair value
is defined as the amount for which an asset could
be exchanged between knowledgeable, willing parties
in an arms' length transaction [IAS40R.5].
There is no requirement for fair values to be determined
by an external independent valuer. Independent valuation,
however, enhances the perceived reliability of the
fair values reported [IAS40R.32]. The use of external
independent valuers is also encouraged by the International
Standards on Auditing, which suggest that the use
of in-house experts increases the risk that objectivity
is impaired [ISA620.10].
Fair value model - use basis for fair value
Fair value is the market value of the property where
there is a market for the investment property [IAS40R.36,45-46].
The preferred market value is "highest and
best-use" value. Highest and best-use market
value is the highest value determined from market
evidence, by considering any use that is financially
feasible, justifiable and reasonably probable [IAS40R.B43]
.
The highest and best-use value may result in a
property's fair value being determined on the basis
of redevelopment of the site. The fair value of
the property should be attributed only to the land
element if redevelopment requires demolition of
existing buildings .
Fair value model - valuation methods
Management should consider the guidance provided
by International Valuation Standards (IVS) issued
by the International Valuation Standards Committee.
The valuation methods recognised by IVS include
the sales comparison [IAS40R.B52] approach, the
income capitalisation approach and the cost approach
.
Fair value should be estimated as the present value
of future cash flows to be generated from the property,
where there is no active market. Cash flows should
be based on existing lease and other contracts and
by external evidence of market rents for similar
properties [IAS40R.46] . Cash flow
estimates should consider the property in its current
condition and should not include future expenditure
or associated inflows [IAS40R.51].
The use of depreciated replacement cost to determine
fair value is not appropriate for investment property.
The cash flows from an investment property are largely
independent of the cost of the asset, as they arise
from rental income or capital appreciation [IAS40R.B44].
Movements in the property market directly influence
the cash flows an investment property generates,
so fair value should be primarily determined by
reference to the market.
Fair value model - frequency of valuations
An investment property's fair value should reflect
the actual market state and circumstances at the
balance sheet date [IAS40R.38]. Annual revaluation,
although not mandated, is likely because market
and circumstances will change from one year-end
to the next.
Fair value model - valuation of a property
portfolio
Some revenue-producing properties can achieve a
higher or lower value when considered as a group,
such as a chain of fast-food restaurants, hotels
or multiple retail outlets, rather than on an individual
basis. The fair value assessment should be performed
on an individual basis and should not reflect additional
value derived from the creation of a portfolio of
property in different locations [IAS40R.49(a)].
This is consistent with the guidance provided by
IVS, that revenue-producing properties are usually
valued on the basis of individual asset disposition
pursuant to an orderly disposition plan.
Fair value model - transfers to investment
property
An owner-occupied property may be re-classified
as investment property. The gain or loss arising
from measuring the property at fair value should
be accounted for as a revaluation under IAS 16 [IAS40R.61]
. This treatment prevents cumulative
net increases in fair value that arose before the
current period from being reflected in the income
statement. The revaluation surplus that results
from such transfers remains in equity, and is transferred
to retained earnings only on subsequent disposal
of the investment property [IAS16R.41].
However, fair value gains or losses arising from
transfers of self-constructed property that has
not been owner-occupied, or from transfers of inventories
to investment property, should be recognised in
the income statement. This treatment provides a
more relevant and transparent view of the property's
financial performance [IAS40R.63,65].
An investment property held for sale is transferred
from inventories to investment property only when
it is used as investment property.
Fair value model - implications for deferred tax
The fair value adjustments are likely to generate
a deferred tax asset or liability, resulting from
the difference between the property's carrying amount
and its tax basis. SIC-21 applies to the land element
of the investment property, and requires that any
deferred tax asset or liability should be calculated
at the tax rate applicable to the future sale of
the land [SIC-21.5].
Cost model - introduction
Investment property is recognised at cost less depreciation
less impairment losses under the cost model. Entities
using the cost model follow the principles set out
in IAS 16 for assets carried at depreciated historical
cost [IAS40R.56]. The revaluation model under IAS
16 of recognising revaluation differences in equity
is not permitted. Entities adopting the cost model,
however, are required to determine the fair value
of all investment property and disclose it in the
financial statements.
Cost model - transfers to investment property
Transfers to investment property do not result in
any gain or loss to be recognised in the financial
statements if the entity adopts the cost model.
There is no change in the carrying amount or cost
of the property for measurement or disclosure purposes
[IAS40R.59].
Derecognition
Derecognition of an investment property will be
triggered by a change in use [IAS40R.57] or by sale
or disposal [IAS40R.66] .
A property is transferred from investment property
to PPE only when the entity occupies it [IAS40R.57].
A decision to sell a property is not enough to
trigger a transfer from investment property to inventories.
The property is accounted for as an investment property
up to the date of disposal or until the entity begins
redeveloping it with a view to selling it [IAS40R.58].
When an investment property is disposed of, it
should be eliminated from the balance sheet. Disposal
of an investment property also occurs when it is
leased under a finance lease to a third party. Derecognition
is also required when the property is permanently
withdrawn from use and has no future economic value
[IAS40R.66].
Redevelopment of investment property
When an existing investment property is redeveloped
for continued future use as investment property,
it is not reclassified as owner-occupied property
during the redevelopment period [IAS40R.58] .
Calculation of gain/loss on derecognition
The gain or loss arising on disposal is calculated
as the difference between any disposal proceeds
and the carrying amount, and is recognised in the
income statement [IAS40R.69]. Any existing revaluation
surplus related to the relevant property should
be transferred to retained earnings without affecting
the income statement [IAS40R.62(b)].
Transfers from investment property to another balance
sheet category do not result in a gain or loss if
the entity adopts the cost model. There is no change
in the carrying amount or cost of the property for
measurement or disclosure purposes [IAS40R.59].
Impairment
An investment property carried at cost, less any
accumulated depreciation and any accumulated impairment,
is impaired if its carrying amount exceeds its recoverable
amount [IAS36.8]. The recoverable
amount of an investment property will often be the
same as its fair value; however, there are some
circumstances when this will not be the case. This
is because market values consider only external
factors, whereas value in use also takes account
of entity-specific factors such as tax exemptions
granted to the owner of the property.
Investment properties carried at cost, less any
accumulated depreciation and any accumulated impairment,
should be assessed for impairment in accordance
with the provisions of IAS 36, Impairment of assets
. Properties
carried at fair value are excluded from the scope
of IAS 36 [IAS36.2].
Where an impairment of an investment property is
identified, the carrying value should be written
down to the recoverable amount [IAS36.59]. The impairment
should be charged to the income statement.
Presentation and disclosure
The comprehensive disclosure requirements are set
out in paragraphs 75 to 79 of IAS 40R. The disclosures
common to both the fair value and cost model include
[IAS40R.75]:
| a) |
whether the entity
applies the fair value model or the cost model; |
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| b) |
rental income generated from investment property;
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| c) |
direct operating expenses incurred
on investment property that generated and that
did not generate income, separately; and |
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| d) |
the methods and assumptions
used in determining the property's fair value,
including an indication of whether fair value
is directly supported by market evidence or,
when comparable market data is unavailable,
other information such as future cash flows
projections. |
The additional disclosures required for assets
accounted for under the fair value model include
[IAS40R.75,76]:
| a) |
in what circumstances
property interest held under operating lease
are classified and accounted for as investment
property; |
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| b) |
a reconciliation of the carrying amount
of investment property at the beginning and
end of the period, including fair value gains
and losses [IAS40R.76]; and |
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| c) |
whether or not (and to what
extent) an external independent valuer is used
[IAS40R.75]. |
For investment property not measured at fair value
because the fair value is not reliable, extensive
information is required, including [IAS40R.78,79]:
| a) |
a separate reconciliation of
carrying amounts; |
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| b) |
a description of the property and an explanation
of why fair value cannot be determined; and |
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| c) |
a range of fair value estimates within
which fair value of the property is likely to
lie. |
The additional disclosures required under the cost
model include [IAS40R.79]:
| a) |
a reconciliation of the carrying
amount of investment property at the beginning
and end of the period (but not for the previous
period); and |
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| b) |
the fair value of investment property
[IAS40R.79(e)]. |
Additional disclosures for lessees required
in respect of investment properties held under finance
leases
A lessee of an investment property leased under
a finance lease should provide additional disclosures,
including [IAS17R.31]:
| a) |
the net carrying
amount of investment properties held under finance
lease; |
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| b) |
a reconciliation between the total minimum
lease payments at the balance sheet date and
their present value; |
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| c) |
the present value of minimum
lease payments (in aggregate and analysed by
maturity); |
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| d) |
the contingent rents recognised
in the period; |
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| e) |
a general description of the
entity's significant leasing arrangements; and |
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| f) |
disclosure of any sub leases. |
These disclosures would be in addition to the requirements
of IAS 32R.
Additional disclosures for lessors in respect
of owned investment properties leased out under
operating leases
A lessor of an investment property leased under
an operating lease should provide additional disclosures,
including [IAS17R.56]:
| a) |
the future minimum
lease payments under non-cancellable operating
leases (in aggregate and analysed by maturity); |
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| b) |
the total contingent rents recognised
in income; and |
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| c) |
a general description of significant
leasing arrangements [IAS17R.56]. |
These disclosures would be in addition to the requirements
of IAS 32R.
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