2. Learning outcomes:
Explain and apply the scope of IAS 40;
define the key concepts with regard to investment property and apply these
in a practical situation;
correctly account for both initial and subsequent costs of investment
property;
measure investment property during the initial recognition thereof and
identify the cost elements;
measure investment property subsequent to the initial recognition according
to the cost model and the fair value model;
calculate depreciation and explain how to determine the most appropriate
method and period;
account for the derecognition of investment property;
account for transfers to and from property, plant and equipment;
present and disclose investment property in the financial statements;
3. What is investment property?
Investment property = is property (land and/or buildings) held to earn rental
income, or for capital appreciation (increasing value) or both, RATHER than
for use in the production process, for administrative purposes or for the sale
thereof in the ordinary course of business.
It also INcludes:
Property under construction for future use as investment property; AND
Property leased under an OPERATING LEASE by the lessor.
What is owner-occupied property?
Owner-occupied property= is property held for use in the production
process or for administrative purposes.
The treatment of owner-occupied property is determined by IAS 16 Property,
plant and equipment .
4. Examples
Land held for long-term capital appreciation
Land for which future use has not been determined
Building leased out by owner or lesee
Building that is vacant but is held to be leased under an
operating lease
Property under construction or dvpt for future use as IP
5. Examples of Property that is not IP
-Property held for future use owner occupied
-Property held for future development and subsequent use as owner occupied
-Property occupied by th employees of of an entity, whether or not the
employees pay rent at market rate. e.g. a house owned by entity currently
occupied by the Managing Director who pays rental at fair value.
-Property that is leased to another entity under a finance lease (this is because
the property leased under a finance lease is derecognized from the lessor’s
books)
6. What is the classification of vacant
land of which future use is…
a) Unknown?
b) Owner-occupied?
c ) Held for capital appreciation?
F4T
7. Jointly used properties
Sometimes a portion of the property is leased out or held for capital appreciation, whilst another
portion is owner-occupied. If the portions could be sold individually, each portion is accounted for
separately.
If the portions can however not be sold separately, the full property is accounted for as IP if only an
insignificant portion thereof is owner-occupied.
How will you account for property if the portions can not be sold separately and a significant portion
thereof is owner-occupied, i.e. an insignificant portion thereof is IP?
The WHOLE property is accounted for as owner-occupied (IAS 16).
EXAMPLE
An entity owns an office buildings with 100 offices. Five of these offices are occupied by the entity itself
while the other 95 offices are occupied by tenants. These offices cannot be sold separately (and also can not
be leased out separately under finance leases), as they share certain facilities such as bathrooms and
kitchen utilities.
Required : classify the property.
Solution : The offices cannot be sold separately, so it is not possible to account for the portions of the
buildings separately. The entire building should therefore be classified as either IP or Owner occupied. The
entity uses only 5% of the building for own purposes, which may be regarded insignificant, hence the entire
building should be accounted for as an Investment property
8. Example 2
An entity owns a block of flats consisting of 10 units. Two of
these units are occupied by employees of the entity, while
the remaining are leased out to tenants that are not
employees.
Solution: The two flats occupied by the employees qualify as
owner occupied property, while the other eight flats qualify as
IP. Flats can be sold separately in terms of the sectional title act,
these flats should be accounted for separately. 2 flats should
therefore be accounted for as owner occupied ( in terms of IAS
16) while the remaining eight flats should be accounted for as
Investment property (in terms of IAS 40).
9. Provision of Ancillary services
IAS 40 states that if a company provides ancillary services to the
occupants of a property it holds , the property will qualify as an
investment property only if the services are insignificant to the
arrangement.
Example
Company A owns an admin building that it leases out to Company B. It
appears to be an IP as it earns rental income.
It also however provides security services to Company B as part of the
agreement.
Does this prevent Company A from classifying the admin building (in
totality) as an IP?
NO, the security services are insignificant to the total arrangement.
10. Ancillary (additional) services
Ancillary services may be provided to the lessee without
tainting the classification as IP as long as these services are
insignificant relative to the rental agreement.
What is another example of an INSIGNIFICANT service that
would not preclude (prevent) the property from being
classified as an IP?
If the owner of an office building provides maintenance or
cleaning services to the lessees who occupy the building
11. Impact on consolidated F/S
Sometimes property is leased to a parent company or
subsidiary. In such a case, the property is IP in the entity’s
separate financial statements (because rental income is
earned), but from a group point of view the property is not
leased out to a third party and is therefore owner-occupied
property in the consolidated financial statements.
This means that, for consolidation purposes, pro forma
journals are processed to reclassify the property and to
change the accounting treatment for group purposes.
12. Recognition & initial
measurement
Asset when asset criteria are met & costs reliably measurable
Initial measurement:
Owned IP: Cost + transaction costs such as legal services and property transfer taxes.
If payment is deferred: cost = cash price equivalent (PV).
Right of use asset IP
Recognised in accordance of the principles in IFRS16, i.e. recognised at cost at the commencement
date.(cost as determined in IFRS 16)
IFRS 16.83: The lessor shall add IDC in obtaining operating leases to the CA of the underlying asset
and expense such cost over the lease term.
Exclude
start-up costs unless they are necessary to bring the property to its working condition in order to
be operated in the manner intended by management,
initial operating losses incurred before the investment achieved planned level of occupancy, or
abnormal wasted material or unproductive labour costs.
13. Exchange of investment
property
The same as that used for PPE.
Cost price of the item acquired is measured at fair value.
When the fair values of both assets (acquired and given up)
can be determined reliably, the fair value of the asset given
up (similar to cash they would’ve given up) will be used as
the cost of the asset acquired, unless the fair value of the
asset acquired is more evident, in which case that value may
be used.
A gain or loss is recognised as the difference between the
fair value and the CA of the asset given up.
14. Exchange of investment
property
2 exceptions:
the exchange transaction lacks commercial substance or
the fair values of both the asset that is acquired and the
asset that is given up cannot be estimated reliably.
Then the asset that is acquired is measured at the CA of the
asset given up, and no gain or loss is recognised
15. Subsequent measurement
A company chooses one of 2 acc policies:
COST MODEL
Exactly the same as
IAS 16
FAIR VALUE
MODEL
OR
16. Leased asset
- leased asset – lower of FV & PV of future
minimum lease payments (FMLP)
17. FV model
Measure all IP under this model
IFRS 13 provides guidance on how to determine fair value (market,
cost or income approach) – given for your purposes.
IP carried at fair value is not depreciated.
A gain/loss on the re-measurement of IP to fair value is recognised in
p/l.
Be careful of double-counting (IAS 40.50):
Ensure A & L recognised separately are not double-counted in the fair
value of IP, e.g:
The fair value of an office leased on a furnished basis includes the fair
value of the furniture, if so, the furniture is not recognised separately as
PPE.
Lifts and air-conditioning = integral part of a building and generally
included in the fair value of IP.
18. Be careful of double
accounting
If the building is leased out by the lessor under an
operating lease, the lessor may have recognised lease
income received in advance (LIRA) (cr) or income receivable
(dr) as a result of straight-lining the operating lease income.
To avoid double-counting: increase FV with LIRA or
decrease with receivable amount (however, watch out for
what is given).
19. Class question
Co A uses the income approach to determine the FV of its IP. Co
A expects that the EUL of the building is 4 years after which it
will be scrapped for a negligent amount. Co A has a 4-year
lease (lease PMTs received annually in arrears). In terms of the
lease agreement, the lessee pays R0 in Y1, R100K in Y2 and
then there is an annual increase of 10% p.a. for Y3 and Y4
(assume PMTS are market related and an appropriate annual
market discount rate of 10%).
Required:
a) Determine the FV of the IP;
b) Write the journal entry to record the straight-lined lease
income for Y1.
20. solution
a) CF0 = 0 (PMT’s made in arrears), CF1 = 0, CF2 = 100, CF3 =
110 and CF4 = 121; I = 10%
.: PV = R247 934 = FV/(1+i)
b) 0 + 100 000 + 110 000 + 121 000 = 331 000/4 =
R82 720
Dr Bank (SFP) R0 (NOT REQUIRED, only for
illustrative purposes)
Dr Lease receivable (SFP) 82 750
Cr Operating lease income (P/L) 82 750
What is the FV of the IP? Remember don’t double count.
21. Class ex 2
BoY1
CP of IP = R5 000 000
Transaction cost incurred = R50 000
Lease term = 4 years; PMTs are received in arrears as follow:
R250 000 (Y1), R200 000 (Y2), R150 000 (Y3) and R 0 (Y4)
Value of IP EoY1 = R5 500 000 (including accrued or receivable
operating lease income as applicable)
22. Class example 2 suggested
solution
Dr Bank 250 000
Cr Lease income received in advance (SFP) 100 000
Cr Lease income (P/L) *150 000
*R250 000 + R200 000 + R150 000 + 0 = R600 000/4 =
R150 000 (straight-lined) p.a.
FV = R5 500 000 + R100 000 (IAS 40.50(c)
R5 600 000 – (R5 000 000 + R50 000)
R550 000 FV adjustment in P/L
23. Inability to measure FV
Evidence at time of acquisition that FV will not be
measurable on a continuing basis, use cost model
No active market and no alternative measurement basis
Continue applying IAS 16 until disposal
24. Inability to measure FV
During construction FV difficult to measure, but expects to
be able to measure it after construction- measure at cost &
change to FV when it become available
Diff bwtn FV & cost will be recognised in P/L
FV not measurable later on continue measuring at FV
25. Property held under an
operating lease
Recognise as IP subject to:
- meets definition of IP
- lessee uses FV model on its investment properties
27. Transfers
Transfers between IP and other asset categories shall only be made when there is a change in
use.
A change in use occurs when the property meets, or ceases to meet, the def. of IP AND there
is evidence of the change in use. (In isolation, a change in management’s intentions is not
sufficient. Management must have taken observable actions to support the change.)
A change in use is evidenced by the following (IAS 40.57):
the commencement of owner-occupation or of development with a view to owner-
occupation (transfer from IP to PPE);
the commencement of development with a view to sell (transfer from IP to inventories);
the end of owner-occupation (transfer from owner-occupied to IP); or
the commencement of an operating lease to another party (from inventories or PPE to
IP).
Apply judgement.
Example 24.7
Example 24.8
28. Transfers summary
Investment property → Owner-occupied or inventory (par 60)
On the date of change in use, the asset is fair valued from its CA to its fair
value and the adjustment is recognised in p/l. The property’s deemed cost for
its future accounting treatment is the fair value on the date of change in use.
Owner-occupied → Investment property (par 61)
IAS 16 is applied up until the date of change in use. On this date the asset is
revalued from the carrying amount to its fair value and the revaluation is
accounted for in accordance with IAS 16 (it is therefore revalued one last time
with e.g. a revaluation surplus recognised in OCI).
Inventory → Investment property (par 63)
On the date of change in use, the inventory is revalued to fair value and the
revaluation is recognised in p/l.
Self-constructed investment property → Investment property (par 65)
On the date of change in use, the property is revalued to fair value and the
revaluation is recognised in p/l.
• The principles to account for a transfer if the fair value model is used for IP.
29. Disposals
Derecognise on disposal or when no benefits are expected
Calculate gain or loss on derecognition
Replacement part capitalized- derecognize replaced part
IPs are derecognised when they have either been disposed
of or when the IP is permanently withdrawn from use and
no future economic benefit is expected from its
disposal.
Compensation from third parties for IP that was
impaired, lost or given up shall be recognised in P/L
when the compensation becomes receivable.
30. Disclosures
Extent to which FV of IP is based on a valuation by an
independent valuer who holds a recognized & relevant
professional qualification & who has recent experience or
fact that no such valuation was done
The amounts recognized in P/L
- rental income from IP
- direct operating expenses from IP that generated
rental income
- direct operating expenses from IP that did not
generate rental income
31. Disclosures- FV model
Reconciliation showing:
Additions
Net gains or losses from FV remeasurements
Transfers to and from inventories to IP & owner occupied
Other movements
32. Disclosures- cost model
Dpn methods
Useful lives
Reconciliation showing:
- additions
- depreciations
- impairment losses
- transfers to and from inventories & owner occupied
property
The FV of IP
