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IAS 40 - IAS 40
Investment Property
Financial reporting (Association of Chartered Certified Accountants)

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FINANCIAL REPORTING
by Faizan Farooq

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 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.
 Examples of investment property:
Investment  land held for long-term capital appreciation
Property  land held for a currently undetermined future use
(IAS 40)  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

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 The following are not investment property and, therefore, are

outside the scope of IAS 40:
 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
Investment 2 Inventories)
Property  property being constructed or developed on behalf of third parties
(IAS 40) (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 leas
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 Recognition
Investment  Investment property should be recognised as an asset when it is
Property probable that the future economic benefits that are associated
(IAS 40) with the property will flow to the entity, and the cost of the
property can be reliably measured.

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 Initial measurement
Investment  Investment property is initially measured at cost, including
Property transaction costs. Such cost should not include start-up costs,
(IAS 40) abnormal waste, or initial operating losses incurred before the
investment property achieves the planned level of occupancy.

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 Measurement subsequent to initial recognition

Investment  IAS 40 permits entities to choose between: [IAS 40.30]
Property
 a fair value model, and
(IAS 40)
 a cost model.

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 Cost model Under the cost model the asset should be accounted
for in line with the cost model laid out in IAS 16.
 Fair value model Under the fair value model:
 • the asset is revalued to fair value at the end of each year
Investment  • the gain or loss is shown directly in the statement of profit or loss
Property (not other comprehensive income)
(IAS 40)  • no depreciation is charged on the asset.

 Fair value is normally established by reference to current prices on

an active market for properties in the same location and condition.

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 Cost model Under the cost model the asset should be accounted
for in line with the cost model laid out in IAS 16.
 Fair value model Under the fair value model:
 • the asset is revalued to fair value at the end of each year
Investment  • the gain or loss is shown directly in the statement of profit or loss
Property (not other comprehensive income)
(IAS 40)  • no depreciation is charged on the asset.

 Fair value is normally established by reference to current prices on

an active market for properties in the same location and condition.

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Farooqtola@gmail.com
03343440590

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 QUESTION
 Celine, a manufacturing entity, purchases a property for $1 million
on 1 January 20X1 for its investment potential. The land element of
the cost is believed to be $400,000, and the buildings element is
expected to have a useful life of 50 years. At 31 December 20X1,
EXAM TYPE local property indices suggest that the fair value of the property
has risen to $1.1 million.
QUESTIONS  Required:
 Show how the property would be presented in the financial
statements as at 31 December 20X1 if Celine adopts:
 (a) the cost model
 (b) the fair value model.

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 POINTS TO BE REMEMBERED
 If an asset is transferred from property, plant and equipment to
investment property and the fair value model for investment property
is used:
 The asset must first be revalued per IAS 16 (creating a revaluation surplus
in equity) and then transferred into investment property at fair value.
 If the cost model is used for investment properties:
Investment  The asset is transferred into investment properties at the current carrying
amount and continues to be depreciated.
Property
 If an asset is transferred from investment property to property, plant
(IAS 40) and equipment and the fair value model for investment property is
used:
 Revalue the property first per IAS 40 (taking the gain or loss to the
statement of profit or loss) and then transfer to property, plant and
equipment at fair value.
 If the cost model is used for investment properties:
 The asset is transferred into property, plant and equipment at the current
carrying amount and continues to be depreciated.

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Farooqtola@gmail.com
03343440590

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 QUESTION
 Kyle Co purchased an investment property some year ago and
carries it under the fair value model. At 1 January 20X1, the
EXAM TYPE property had a fair value in Kyle Co's financial statements of $12
million. On 1 July 20X1 Kyle Co decided to move into the property
QUESTIONS and use it for its own business. At this date the asset had a fair
value of $14 million and a remaining useful life of 14 years.
 What amount should be recorded in Kyle Co's statement of profit
or loss for the year ended 31 December 20X1?

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 Disposal
 An investment property should be derecognised on disposal or
when the investment property is permanently withdrawn from use
and no future economic benefits are expected from its disposal.
Investment
Property  The gain or loss on disposal should be calculated as the difference
between the net disposal proceeds and the carrying amount of the
(IAS 40) asset and should be recognised as income or expense in the
income statement.
 Compensation from third parties is recognised when it becomes
receivable.

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03343440590

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 QUESTION
 Which of the following would be recognised as an investment
property under IAS 40 Investment Property in the consolidated
financial statements of Build Co?
EXAM TYPE  A A property intended for sale in the ordinary course of business
QUESTIONS  B A property being constructed for a customer
 C A property held by Build Co as a right-of-use asset and leased out
under a six-month lease.
 D A property owned by Build Co and leased out to a subsidiary

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 QUESTION
 Identify whether the following statements are true or false in
accordance with IAS 40 Investment Property?
 Following initial recognition, investment property can be held at
either cost or fair value. True False
EXAM TYPE  If an investment property is held at fair value, this must be applied
QUESTIONS to all of the entity's investment properties. True False
 An investment property is initially measured at cost, including
transaction costs. True False
 A gain or loss arising from a change in the fair value of an
investment property should be recognised in the revaluation
surplus. True False

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 QUESTION
 Addlington owns a property that it is using as its head office. At 1
January 2015, its carrying value was $20 million and its remaining
useful life was 20 years. On 1 July 2015 the business was
reorganised cheaper premises were found for use as a head office.
EXAM TYPE It was therefore decided to lease the property under an operating
lease.
QUESTIONS  The property was valued by a qualified professional, who assessed
the property’s value as $21 million on 1 July and $21.6 million on
31 December 2015.
 Explain the accounting treatment of the property in the financial
statements for the year-ended 31 December 2015.

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