Non-current assets

IAS 40 Investment Property

By. Vicky Xu
Definition

Property (land or a building or part of a building or both) held (by

the owner or by the lessee) to earn rentals or for capital appreciation
or both.
Definition

Include:
• Land held for long-term capital appreciation;
• Land held for undeterminate future use;
• Building leased out under an operating lease;
• Vacant building held to be leased out under an operating lease
Property being constructed/developed for future use as
investment property.
Definition

Exclude:
• Property held for use in the production or supply of goods or
services or for administrative purposes (IAS 16);
• Property held for sale in the ordinary course of business or in the
process of construction or development for such sale (IAS 2);
• Property being constructed or developed on behalf of third
parties (IFRS 15);
• Owner-occupied property (IAS 16).
Recognition

Investment property is recognised as an asset when it is probable

that the future economic benefits that are associated with the
property will flow to the enterprise, and the cost of the property can
be reliably measured.
Initial measurement

• Investment property is initially measured at cost, including

transaction costs.
• Cost does not include start-up costs, abnormal waste, or initial
operating losses incurred before the investment property
achieves the planned level of occupancy.
Subsequent measurement

Cost model Fair value model

Investment property is (next page)
measured in accordance with
requirements set out for that
model in IAS 16.

An entity can choose between the fair value and the

cost model. The accounting policy choice must be
applied to all investment property.
Fair value model

• Investment properties are measured at fair value, which is the

price that would be received to sell the investment property in
an orderly transaction between market participants at the
measurement date (IFRS 13 Fair Value Measurement).
• Gains or losses arising from changes in the fair value of
investment property must be included in profit or loss for the
period in which it arises.
• In rare exceptional circumstances if fair value cannot be
determined, the cost model in IAS 16 is used to measure the
investment property.
Transfers to or from investment property

Transfers to or from investment property can be made only when

there has been a change in the use of the property.

1) 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.

IP PPE
FV 120

Dr PPE 120
Cr IP 120
Transfers to or from investment property
2) 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.

1/7 PPE IP 1/7 PPE IP

CV 100 FV 120 CV 100 FV 70

Dr PPE 20 Dr P/L 30
Dr IP 120 Cr PPE 30 Dr IP 70
Cr OCI 20
Cr PPE 100 Dr IP 70 Dr P/L 30
Dr IP 120
Cr OCI 20 Cr PPE 70 Cr PPE 100
Cr PPE 120

31/12 IP, FV 150 31/12 IP, FV 150

Dr IP 30 Dr IP 80
Cr P/L 30 Cr P/L 80
Accounting for transfers between categories

3) 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 recognized in profit or
loss.
补充习题 AAA - 2019/9&12 Q2a ii
Lifeson Co owns a building which it has used as a warehouse to
store inventory. On 1 April 20X4 the building, which had not
suffered any historic impairments, had a carrying amount based on
depreciated historic cost of $323,000 and a fair value of $348,000.
On this date, Lifeson Co vacated the building and moved the
inventory to new larger premises. Management decided to keep the
building in order to rent it out as a storage facility to local
businesses and to benefit from any increases in property valuations.
补充习题 AAA - 2019/9&12 Q2a ii
On 31 March 20X5, the building had not been let and it had a fair
value, according to an external valuer, of $353,000. The draft
financial statements for the current year recognise the building as an
investment property at a carrying amount of $353,000 and include a
fair value gain of $30,000 in profit before tax for the year. Since
reclassification as an investment property, depreciation has not been
charged in relation to the building. (6 marks)
补充习题 AAA - 2019/9&12 Q2a ii
Suggested answer:
According to IAS 40, IP are land and/or buildings held to earn rentals or
for capital appreciation, or both. At 1/4/20X4, Lifeson warehouse
qualifies as IP, since mgt decided to keep the building in order to rent it
out as a storage facility to local businesses and to benefit from any
increases in property valuations. The fact that the property has not yet
been let by the reporting date does not impact on this classification.

At 31/3/20X5, the warehouse is recognised at FV 353,000 and the fair

value model is acceptable provided the treatment of any other IP held by
Lifeson is consistent.
补充习题 AAA - 2019/9&12 Q2a ii
On transfer of an owner-occupied property recognised at depreciated
historical cost, which has not been previously impaired, to investment
property carried at fair value, IAS 40 requires that any resulting increase
in the carrying amount should be recognised in other comprehensive
income as a revaluation surplus within equity. Thereafter, any further
increase in fair value is recognised in profit or loss for the year.

At 1/4/20X4 At 31 March20X5
Transferat FV Stateat FV
Any differencetreatedas revaluation Any differencegoes to P/L
Dr IP 348,000 Dr IP 5,000
Cr PPE 323,000 Cr P/L 5,000
Cr OCI 25,000
De-recognition

• An investment property should be de-recognised on disposal or

when the investment property is permanently withdrawn from
use and no future economic benefits are expected from its
disposal.
• The gain or loss on disposal should be calculated as the
difference between the net disposal proceeds and the carrying
amount of the asset and should be recognised as income or
expense in the statement of comprehensive income.
Disclosure

IAS 40 says that an entity must disclose:

• whether the cost or fair value model is used;
• amounts recognised in profit or loss for the period;
• a reconciliation between the carrying amounts of investment
property at the beginning and end of the period;
• the fair value of investment property if the entity uses the cost
model.
Specimen2 Q4b Kiki

As a result of rising property prices, Kiki purchased five buildings

during the current period in order to benefit from further capital
appreciation. Kiki has never owned an investment property before.
In accordance with IAS 40 Investment Property, the directors are
aware that they can measure the buildings using either the fair value
model or the cost model. However, they are concerned about the
impact that this choice will have on the analysis of Kiki’s financial
performance, position and cash flows by current and potential
investors.
Specimen2 Q4b Kiki

Required:
Discuss the potential impact which this choice in accounting policy
will have on investors’ analysis of Kiki’s financial statements. Your
answer should refer to key financial performance ratios. (11 marks)

Professional marks will be awarded in part (b) for clarity and

quality of presentation. (2 marks)
Re-cap

Profitability 盈利能力指标
GPM = Gross profit/Sales
OPM = Operating profit (PBIT)/Sales
ROCE = PBIT/TALCL (Total asset less current liability)
ROCE = OPM * Asset turnover
ROE = PAT & PD (Profit after tax and preference dividend)/Equity
Re-cap

Short-term Liquidity 短期流动性指标

Current ratio = CA/CL 最好大于2
Quick ratio = (CA-Inventory)/CL 最好大于1
Inventory holding period = Inventory/COS x 365
TR collecting period = TR/Credit sales or Sales x 365
TP payment period = TP/Credit purchase or COS x 365
Working capital cycle = Inventory date + TR date - TP date
Asset turnover = Sales/TALCL
Re-cap

Long-term solvency 长期流动性指标

Gearing = (Interest bearing) Debt/Equity
Gearing = Debt/(Debt+Equity) 最好小于50%
Interest cover = PBIT/FC 必须大于1

Investor ratio 投资者指标

PE ratio = Share price/EPS
Dividend cover = EPS/DPS
Dividend yield = DPS/Share price
Specimen2 Q4b Kiki

Suggested answer:
Assume property value increases by 5
Cost model FV model
Reported asset - Asset 5
Increase in value - PL 5 → RE 5
Depreciation (PL) -
DT effect - (PL)

SOFP
- Cost model will reduce CV of the asset slightly due to deprecation.
- FV model will lead to an increase in reported assets.
- FV model will also increase equity, as such, it may lead to Kiki
reporting a more optimistic gearing ratio.
Specimen2 Q4b Kiki

Suggested answer:
SOPL
- Under FV model, earnings will be higher. Consequently, EPS will
also be higher. However, if property prices decline, FV model will
result in losses. As such, reported profits are subject to more
volatility. This may increase stakeholders’ perception of risk.
SOCF
Accounting policy choices have no impact on the operating,
investing or financing cash flows reported.
Specimen2 Q4b Kiki

Suggested answer:
Disclosure
It should be noted that entities using the cost model are required to
disclose the fair value. Such disclosures enable better comparisons
to be drawn between entities which account for the investment
property under different model.
Thank You
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