Tangible Non-Current 


IAS 16 Property, Plant and Equipment
Depreciation accounting

Assets 

IAS 40 Investment Property
IAS 23 Borrowing Costs
IAS 40 Investment Property 1
Definition
• Property (land or buildings – 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, rather than for:
– Use in the production or supply of goods or services or for
administrative purposes; or
– Sale in the ordinary course of business.
IAS 40 Investment Property 2
Recognition
• An investment property is recognised when and only when:
– It is probable that the future economic benefits associated
with the investment property will flow to the entity
– The cost of the investment property can be measured
reliably
IAS 40 Investment Property 3
Measurement at recognition
• The investment property is initially recognised at cost.
• Cost comprises:
– Purchase price plus
– Any directly attributable expenditure (for example
professional fees)
• For self-constructed investment properties, cost is the cost at
the date when the construction/development is complete.
IAS 40 Investment Property 4
Measurement after recognition
There is a choice of accounting policy which must be applied to
all investment properties held by the entity.
• Cost model:
– The investment property is carried in the financial
statements at cost less accumulated depreciation and
impairment losses, ie it is treated as a non-current asset
under IAS 16.
IAS 40 Investment Property 5
Measurement after recognition (continued)
• Fair value model:
– The investment property is measured at fair value at the
end of each reporting period.
– Any gain or loss on remeasurement is included in profit or
loss for the period.
– The investment property is not depreciated.
Question: Propex Co
Propex Co has the following properties but is unsure how to account
for them:
(1) Tennant House which cost $150,000 five years ago. The property
is freehold and is let out to private individuals for six monthly
periods. The current market value of the property is $175,000.
(2) Stowe Place which cost $75,000. This is used by Propex Co as its
headquarters. The building was acquired ten years ago.
(3) Crocket Square is a recently started development which is two
thirds complete. Propex Co intends to let this out to a company
called Speedex Co in which it has a controlling interest.
Propex Co depreciates its buildings at 2% per annum on cost.
Required
Describe the most appropriate accounting treatment for each of
these
properties.
Answer: Propex Co
(1) Tennant House
• Held for its investment potential and not for use by
Propex Co
• Treat as investment property in accordance with IAS 40
• Rental income to profit or loss
• If following fair value model – revalue to market value of
$175,000. The difference of $25,000 credited to profit or
loss
• If following cost model – depreciate based on cost and
do not revalue. Depreciation for current period is $3,000
and carrying amount is $135,000 (150,000 – (5  3,000)).
• Need to be consistent and use either fair value or cost
model for all investment properties
Answer: Propex Co (cont'd)
(2) Stowe Place
• Held for use by Propex Co therefore cannot be
an investment property
• Depreciate over useful life $75,000  2% =
$1,500 per annum – charge as an expense to
profit or loss
• Carrying amount of $75,000 – ($1,500  10) =
$60,000 to be shown in statement of financial
position
Answer: Propex Co (cont'd)
(3) Crocket Square
• Not yet complete so accounting treatment relates to the cost
incurred to date.
• Propex Co does not wish to sell the property so no need to treat it
as inventories or work in progress.
• Costs should be capitalised and disclosed under 'Assets in course of
construction' until construction is complete.
• Intention to rent the property out to a group company and so will
not be treated as an investment property in the group financial
statements as it is owner-occupied. However, in the separate
financial statements of Propex Co the property can be classified as
investment property when construction is complete.
• In the group financial statements, it will be depreciated as soon as it
comes into use. This will also apply in Propex Co's separate financial
statements if the cost model of IAS 40 is used.