Quiz 10A (Finals) - Investment Property

1. Property being constructed on behalf of third parties is an investment property under IAS
40 – Investment Property until the contract is complete.
Answer: False

2. Which of the following is not an example of investment property?

a. Land held for undetermined future use
b. Property leased to another entity under a finance lease
c. Property leased to another entity under an operating lease
d. Property being constructed for future use as an investment property

Explanation/Verification:

For 1 &2:

Summary of IAS 40
Definition of investment property
Investment property is property (land or a building or part of a building or both) held (by the
owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both.
[IAS 40.5]
Examples of investment property: [IAS 40.8]
● land held for long-term capital appreciation
● land held for a currently undetermined future use
● building leased out under an operating lease
● vacant building held to be leased out under an operating lease
● property that is being constructed or developed for future use as investment property
The following are not investment property and, therefore, are outside the scope of IAS 40: [IAS
40.5 and 40.9]
● property held for use in the production or supply of goods or services or for
administrative purposes
● property held for sale in the ordinary course of business or in the process of
construction of development for such sale (IAS 2 Inventories)
● property being constructed or developed on behalf of third parties (IAS 11 Construction
Contracts)
 ● owner-occupied property (IAS 16 Property, Plant and Equipment), including property
held for future use as owner-occupied property, property held for future development
and subsequent use as owner-occupied property, property occupied by employees and
owner-occupied property awaiting disposal
● property leased to another entity under a finance lease
In May 2008, as part of its Annual improvements project, the IASB expanded the scope of IAS
40 to include property under construction or development for future use as an investment
property. Such property previously fell within the scope of IAS 16.

https://www.iasplus.com/en/standards/ias/ias40
Exam

Operating lease
An operating lease is the rental of an asset from a lessor, but not under terms that transfer
ownership of the asset to the lessee.

https://www.accountingtools.com › articles › operating-lease

Finance Lease:  The Finance Lease or Capital Lease refers to the agreement wherein the lessee
gets the ownership of the asset before the lease expires. Simply, the finance lease is the type of
lease wherein the lessor transfers all the risks and rewards associated with the asset to the
lessee before the lease agreement expires.

https://businessjargons.com/finance-lease-and-operating-lease.html

3. Which of the following is not a transfer from or to investment property under IAS 40?
a. Commencement of owner occupation
b. Transfer from undetermined use to an operating lease
c. Commencement of development with a view to sale
d. End of construction of development

Explanation/Verification:

Transfers to or from investment property classification

Transfers to, or from, investment property should only be made when there is a change in use,
evidenced by one or more of the following: [IAS 40.57 (note that this list was changed from an
exhaustive list to an non-exhaustive list of examples by Transfers of Investment Property in
December 2016 effective 1 January 2018) ]
● commencement of owner-occupation (transfer from investment property to owner-
occupied property)
● commencement of development with a view to sale (transfer from investment property
to inventories)
● end of owner-occupation (transfer from owner-occupied property to investment
property)
● commencement of an operating lease to another party (transfer from inventories to
investment property)
● end of construction or development (transfer from property in the course of
construction/development to investment property
When an entity decides to sell an investment property without development, the property is
not reclassified as inventory but is dealt with as investment property until it is derecognised.
[IAS 40.58]
The following rules apply for accounting for transfers between categories:
● for a transfer from investment property carried at fair value to owner-occupied
property or inventories, the fair value at the change of use is the 'cost' of the property
under its new classification [IAS 40.60]
● for a transfer from owner-occupied property to investment property carried at fair
value, IAS 16 should be applied up to the date of reclassification. Any difference arising
between the carrying amount under IAS 16 at that date and the fair value is dealt with
as a revaluation under IAS 16 [IAS 40.61]
● for a transfer from inventories to investment property at fair value, any difference
between the fair value at the date of transfer and it previous carrying amount should be
recognised in profit or loss [IAS 40.63]
● when an entity completes construction/development of an investment property that
will be carried at fair value, any difference between the fair value at the date of transfer
and the previous carrying amount should be recognised in profit or loss. [IAS 40.65]
When an entity uses the cost model for investment property, transfers between categories do
not change the carrying amount of the property transferred, and they do not change the cost of
the property for measurement or disclosure purposes.
https://www.iasplus.com/en/standards/ias/ias40