Investment property

→ If property is held for sale in the ordinary course of business or in the process of
construction / development for sale:
Inventories
→ If property is used in the production or supply of goods / services or for administrative
purposes:
Property, plant and equipment
→ If property is held to earn rentals or for capital appreciation, or both:
Investment property

Classification as investment property

Definition

→ Invest property is property held:

→ To earn rentals; or
→ For capital appreciation; or
→ Both
Generates cash flows that are largely independent of other assets
→ Property includes:
˗ Land; or
˗ Buildings (or part of a building); or
˗ Both land and buildings
Immovable tangible assets

Should be classified as investment property:

→ Property held for long-term capital appreciation

→ A building owned by the entity but leased out under an operating lease
→ A vacant building that is held with the intention to lease it out under an operating lease
→ Property being constructed or developed for future use as an investment property
→ A property that’s being redeveloped for continued use as an investment property
→ Land held for an undetermined future use
˗ Land is regarded as held for capital appreciation

Should not be classified as investment property:

→ Property held for sale in the ordinary course of business or in the process of construction or
development for such sale
→ Owner-occupied property, including:
˗ Property that is owner-occupied
˗ Property held for future use as owner-occupied property
˗ Factory buildings or shops
˗ Property occupied by employees
˗ Administration buildings
Classification of joint use properties

→ Can be sold or leased out separately:

˗ Use split classification
 One portion is classified as investment property; and
 One portion is classified as owner-occupied property
→ Cannot be sold or leased out separately:
˗ Use insignificant portion
Discretion of management
 Entire property is investment property
 Only if owner-occupied portion is insignificant
˗ Used in production or supply of goods/services or for admin

Classification of properties involving ancillary services

(e.g. maintenance or security)

→ If services are insignificant

˗ Investment property
˗ IAS 40
→ If services are significant
˗ Owner-occupied property
˗ IAS 16

Recognition of an investment property

To be recognised as investment property, property must meet the recognition criteria of an asset:

→ Expected inflow of future economic benefits is probable; and

→ Cost is reliably measurable
Consider recognition criteria for initial cost and subsequent costs

Measurement
Initial measurement
Cost:

Purchased property:
Includes:

→ Purchase price
→ Directly attributable expenditure:
˗ Professional fees
˗ Construction costs
˗ Property transfer taxes

Excludes:

→ Start-up costs
→ Operating losses incurred before the property achieves planned level of occupancy
 → Abnormal amounts of wasted material, labour or other resources incurred in constructing or
developing the property

Asset exchange:
Apply the same principles for asset exchanges as IAS 16 (PPE)

Cost will be at fair value (FV), measured as the:

→ Fair value of asset given up; or

→ Fair value of acquired asset if this is more clearly evident; or
→ Carrying amount of asset up if neither fair value is reliably measurable or exchange has no
commercial substance

- Cost incurred to improve investment property – capitalise

- Cost incurred to maintain investment property – expense

Will be measured at either the:

→ Fair value of asset given up
→ Fair value of acquired asset if this is more clearly evident
→ Carrying amount of asset given up if neither fair value is reliably measurable or exchange has
no commercial substance

Subsequent costs

→ Subsequent costs incurred in relation to investment property is only capitalised if ot meets

the recognition criteria of an asset
˗ Capitalised: added to the cost of the asset and not expensed immediately
→ If it does not meet these criteria: expense as repairs and maintenance in profit or loss section
of SPLOCI

Subsequent measurement:

Cost model or fair value model

→ Model chosen should apply to all the entity’s investment property

→ Standard encourages the use of the fair value model (true value of property)
→ There are exceptional circumstances where property would have to be measured at cost even
if fair value was chosen
˗ Not in scope for BAC 200
→ If an entity wants to change to a new model:
˗ Change in accounting policy (IAS 8)
˗ Will only change if this will result in reliable and more relevant information

Cost model:

→ Carrying amount = cost less accumulated depreciation and impairment losses

→ Recognise depreciation / impairment loss
→ The fair value of the investment property will still be disclosed as part of the note (at the
bottom), even if the cost model is used
Fair value model:

→ Carrying amount = fair value

→ Recognise fair value adjustment
˗ In profit or loss section of SPLOCI
→ No depreciation or impairment is calculated when the fair value model is used

Fair value:

→ The price that would be received to sell the property in an orderly transaction
→ Between market participants
→ At the measurement date

The fair value is a market-based value which must reflect:

→ Rental income from current leases; and

→ Other assumptions that market participants would use when pricing investment property under
current market conditions

Derecognition
Derecognition (elimination from statement of financial position) takes place:

→ On disposal of property; or
→ When property is permanently withdrawn from use and no future economic benefits are
expected at disposal

Date on which disposal must be recorded:

→ Date on which the recipient obtains control of investment property (IFRS 15)

Profit or loss on disposal

→ Difference between net disposal proceeds and carrying amount of asset

→ Recognised in profit or loss section of SPLOCI

Relevant journal entries:

Fair value model:

Recognition of investment property:

Investment property (SFP)
Bank/Liability (SFP)

Recognition of improvements:
Investment property (SFP)
Bank/Liability (SFP)
Recognition of maintenance as an expense:
Repairs and maintenance (P/L)
Bank (SFP)

Recognition of rental income received:

Bank (SFP)
Rental income (P/L)

Remeasurement of investment property at fair value:

Investment property (SFP)
Fair value adjustment (P/L)

Derecognition:
Bank (SFP) (selling price)
Investment property (SFP) (FV)
Profit on sale of investment property (SPLOCI)(balancing amount)

Cost Model:

Recognition of investment property:

Investment property – Land (SFP)
Investment property – Buildings (SFP)
Bank/Liability (SFP)

Recognition of improvements:
Investment property (SFP)
Bank/Liability (SFP)

Recognition of maintenance as an expense:

Repairs and maintenance (P/L)
Bank (SFP)

Recognition of rental income received:

Bank (SFP)
Rental income (P/L)

Provide depreciation:
Depreciation (P/L)
Accumulated depreciation and
Impairment loss: Investment property (buildings) (SFP)
Disclosure:
An entity shall disclose the following for investment property:

Accounting policy note:

→ Whether the fair value model or cost model is used

→ Where difficult to decide, disclose the criteria that entity used to determine whether
property was an investment property, owner-occupied property or inventory
→ Depreciation methods and rates / useful lives
˗ Only for cost model

Investment property note:

→ Whether fair value was measured by an independent, suitably qualified valuer with relevant
experience in location and type of property
→ Any restrictions on property
→ A note that shows opening balance reconciled to closing balance

→ Fair value model: Land and buildings in one column

→ Cost model: Land and buildings in separate columns
˗ As in PPE

Profit before tax note:

→ Rental income earned from investment property

→ Fair value adjustments
→ Direct operating expenses from investment property generating rental income
→ Direct operating expenses from investment property not generating rental income

Correct wording:

→ Rental income from investment property

→ Direct operating expenses
˗ Investment property that generates rental income
→ Direct operating expenses
˗ Investment property that does not generate rental income

Contractual obligations note:

→ Related to capital expenditure

˗ E.g. purchase
→ General expenditure
˗ E.g. repairs and maintenance
An entity shall also disclose the following for investment property measured according to the
fair value model:

→ Reconciliation between the opening and closing balance of investment property, showing the
following:
˗ Additions, disclosing separately those resulting from:
 Acquisitions
 Subsequent expenditure capitalised
˗ Disposals
˗ Gains or losses arising from fair value adjustments
˗ Any other movements
→ Disclose how fair value was measured
˗ Valuation techniques and inputs

An entity shall also disclose the following for investment property measured according to the
cost model:

→ Reconciliation between the opening and closing balance of investment property, showing the
following:
˗ Gross carrying amount and accumulated depreciation
 Beginning and end
˗ Additions, disclosing separately those resulting from:
 Acquisitions
 Subsequent expenditure capitalised
˗ Disposals
˗ Depreciation for current year
˗ Impairment losses or reversal of impairment losses
˗ Any other movements
→ The fair values of the property
˗ Disclose how fair value was measured