Chapter Six: Investment property

This chapter covers the nature of investment property, its initial and subsequent recognition and measurement, and
presentation and disclosure requirements. The discussion is presented based on IAS 40.

Do you think an investment property is different from plant assets?

6.1. Nature of Investment property

An investment property is defined in IAS 40 as property (land or a building – or part of a building – or both) held by
the owner or by the lessee as a right-of-use asset to earn rentals or for capital appreciation or both, rather than for:
(a) use in the production or supply of goods or services or for administrative purposes; or
(b) sale in the ordinary course of business.
An investment property is capable of generating cash flows independently of other assets held by the entity.
Investment property is sometimes referred to as being a “passive” investment, to distinguish it from actively managed
property such as plant assets, the use of which is integrated with the rest of the entity’s operations. This characteristic
is what distinguishes investment property from owner-occupied property, which is property held by the entity or by the
lessee as right-of-use asset in its business (i.e., for use in production or supply of goods or services or for
administrative purposes).

According to the standard (IAS 40), investment property includes:

 Land held for long-term capital appreciation as opposed to short-term purposes like land held for sale in the
ordinary course of business;
 Land held for a currently undetermined future use;
 A building owned by the reporting entity (or a right-of-use asset relating to a building held by the reporting
entity) and leased out under one or more operating leases;
 A vacant building held by an entity to be leased out under one or more operating leases;
 Property under construction or being developed for future use as investment property.

However, the following items are not investment property and are therefore outside the scope of the standard:

 Property employed in the business (i.e., held for use in production or supply of goods or services or for
administrative purposes, the accounting for which is governed by IAS 16 PPE);
 Owner-occupied property (IAS 16), 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
(whether the employees pay rent at market rates) and owner-occupied property awaiting disposal;
 Property being constructed or developed on behalf of third parties, (IFRS 15 Revenue Recognition applies)
 Property held for sale in the ordinary course of business or in the process of construction or development for
such sale, the accounting for which is specified by IAS 2 Inventories;
 Property that is leased to another entity under a finance lease (IFRS 16 applies)

Transfer to or from investment property can be made only when there has been change in the use of the property.

How a property the owner uses partly for its own use, and partly to earn rentals or for capital appreciation be
reported? Is it investment property or PPE?

Such scenario is a partial own use. In such cases if the portions can be sold or leased out separately, they are
accounted separately. Therefore, the part that is rented out is investment property. If the portions cannot be sold or
leased out separately, the property is investment property only if the owner-occupied portion is insignificant.

6.2. Initial recognition and measurement of investment property

Investment property is recognized as an asset when, and only when,

 it becomes probable that the entity will enjoy the future economic benefits which are attributable to it, and
 the costs of the investment property can be reliably measured.

These recognition criteria are applied to all investment property costs (costs incurred initially to acquire an investment
property and subsequent costs to add or to replace a part of an investment property) when the costs are incurred.

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In general, this will occur when the property is first acquired or constructed by the reporting entity. In unusual
circumstances where it would be concluded that the owner’s likelihood of receipt of the economic benefits would be
less than probable, the costs incurred would not qualify for capitalization and would consequently have to be
expensed.

How do we measure the value of investment property?

Investment property is measured initially at cost and subsequently an entity can choose between the fair value and cost
model.
Cost. The amount of cash or cash equivalents paid or the fair value of other consideration given to acquire an asset at
the time of its acquisition or construction or, where applicable, the amount attributed to that asset when initially
recognized in accordance with the specific requirements of other IFRS.
Fair value. The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date (IFRS 13).

Up on initial measurement the cost of investment property is usually equivalent to fair value, if the acquisition was the
result of an arm’s-length exchange transaction. Included in the purchase cost will be such directly attributable
expenditure as legal fees and property transfer taxes, if incurred in the transaction.

IAS 40 does not provide explicit guidance on measuring cost for a self-constructed investment property. However,
IAS 16 provides that the cost of a self-constructed asset is determined using the same principles as for an acquired
asset. If an entity makes similar assets for sale in the normal course of business, the cost of the asset is usually the
same as the cost of constructing an asset for sale (inventory), which would therefore include overhead charges which
can be allocated on a reasonable and consistent basis to the construction activities. To the extent that the acquisition
cost includes an interest charge, if the payment is deferred, the amount to be recognised as an investment asset should
not include the interest charges, unless the asset meets the definition of a qualifying asset under IAS 23, which
requires borrowing costs to be capitalised.

Furthermore, start-up costs (unless they are essential in bringing the property to its working condition), initial
operating losses (incurred prior to the investment property achieving planned level of occupancy) or abnormal
amounts of wasted material, labour or other resources (in construction or development) do not constitute part of the
capitalized cost of an investment property.

If an investment property is acquired in exchange for equity instruments of the reporting entity, the cost of the
investment property is the fair value of the equity instruments issued, although the fair value of the investment
property received is used to measure its cost if it is more clearly evident than the fair value of the equity instruments
issued.

The initial cost of an investment property held by a lessee as a right-of-use asset shall be accounted for by applying
IFRS 16, Leases (IFRS 16.23). The asset is recognised at cost comprising:

oThe present value of the minimum lease payments with equivalent amount recognised as a liability;
oAny lease payments made on or before the lease commencement date reduced by lease incentives received if any;
oAny initial direct costs incurred; and
oEstimated cost of asset dismantling and site restoration.
6.3. Subsequent measurement of investment property

In some instances, there may be further expenditure incurred on the investment property after the date of initial
recognition. Consistent with similar situations arising in connection with property, plant and equipment (dealt with
under IAS 16), if the costs meet the recognition criteria discussed above, then those costs may be added to the carrying
amount of the investment property. Costs of the day-to-day servicing of an investment property (essentially repairs and
maintenance) would not ordinarily meet the recognition criteria and would therefore be recognized in profit or loss as
period costs when incurred. Costs of day to-day servicing would include the cost of labor and consumables and may
include the cost of minor parts.

Investment property is initially measured at cost including transaction costs and subsequently it shall be reported using
the cost or fair value model.

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Fair Value vs Cost Model

Analogous to the financial reporting of property, plant and equipment under IAS 16, IAS 40 provides that investment
property may be reported at either fair value (fair value model) or at depreciated cost less accumulated impairment
(cost model). The cost model is the benchmark treatment prescribed by IAS 16 for owner-occupied assets. However,
the fair value approach under IAS 40 more closely resembles that used for financial instruments than it does the
allowed alternative (revaluation) method for owner-occupied assets. Also, under IAS 40 if the cost method is used, fair
value information must however be determined and disclosed. IAS 40 notes that it is highly unlikely for a change from
a fair value model to a cost model to occur. And if a lessee applies the fair value model for its investment property, it
shall apply the same model for its right-of-use assets as well.

Fair value Model

When investment property is carried at fair value at each subsequent financial reporting date

 the carrying amount (the amount at which an asset is recognized in the statement of financial position) must be
adjusted to the then-current fair value,
 the adjustment or gains/losses arising from changes in fair value must be reported in the profit or loss for the
period in which it arises.

The decision to use fair value or cost model is only to be made once and is to be applied consistently to all investment
properties. When choosing the fair value model all of the investment property must be measured at fair value, except
when there is an inability to measure fair value reliably.
Example: Can a company opt for the fair value model for an investment property under construction, while all other
completed investment properties are valued using the acquisition cost model?

No. though the company chooses the fair value model in such cases it is not permitted to value investment properties
under construction using the fair value model and all other investment properties under the acquisition cost model.
In this case, the company drawing up its balance sheet must value the investment property under construction using
the acquisition cost model despite using the fair value model for its other investment properties (IAS 40.54)

Cost model
After initial recognition, investment property is accounted for in accordance with the cost model as set out in IAS 16,
Property, Plant and Equipment—cost less accumulated depreciation and less accumulated impairment losses.

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 6.4. Presentation and disclosure requirements
IAS 1, Presentation of Financial Statements, requires that, when material, the aggregate carrying amount of the entity’s investment
property should be presented in the statement of financial position.
IAS 40 stipulates disclosure requirements set out below.

1. Disclosures applicable to all investment properties (general disclosures)

There is a requirement to disclose whether the entity applies the fair value or the cost model.
When classification is difficult, an entity that holds an investment property will need to disclose the criteria used to
distinguish investment property from owner-occupied property and from property held for sale in the ordinary course of
business.
The methods and any significant assumptions that were used in ascertaining the fair values of the investment properties
are to be disclosed as well. Such disclosure also includes a statement about whether the determination of fair value was
supported by market evidence or relied heavily on other factors (which the entity needs to disclose as well) due to the
nature of the property and the absence of comparable market data.This disclosure regarding the methods and significant
assumptions underlying the determination of fair value is not required for entities that have adopted IFRS 13, Fair Value
Measurement. Such entities should instead provide the disclosures required under IFRS 13.
If investment property has been revalued by an independent appraiser, the relevant qualifications, and recent experience.
The amount of rental income derived from investment property.
Direct operating expenses (including repairs and maintenance) arising from investment property that generated rental
income during the period.
Direct operating expenses (including repairs and maintenance) arising from investment property that did not generate
rental income during the period.
The cumulative change in fair value recognised in profit and loss on a sale of investment property from a pool of assets in
which the cost model is used into a pool in which the fair value model is used.
The existence and the amount of any restrictions which may potentially affect the realisability of investment property or
the remittance of income and proceeds from disposal to be received.
Material contractual obligations to purchase or build investment property or to make repairs, maintenance or
improvements thereto.
2. Disclosures applicable to investment property measured using the fair value model
In addition to the disclosures outlined above, the standard requires that an entity that uses the fair value model should present a
reconciliation of the carrying amounts of the investment property, from the beginning to the end of the reporting period, showing
the following:
 Additions, disclosing separately those additions resulting from acquisitions, those resulting from business combinations and
those deriving from capitalized expenditures subsequent to the property’s initial recognition.
 Assets classified as held-for-sale or included in a disposal group classified as held-for-sale, in accordance with IFRS 5 and
other disposals.
 Net gains or losses from fair value adjustments.
 The net exchange differences, if any, arising from the translation of the financial statements of a foreign entity.
 Transfers to and from inventories and owner-occupied property.
 Any other movements
3. Disclosures applicable to investment property measured using the cost model
In addition to the general disclosure requirements outlined in 1. above, the standard requires that an entity that applies the cost
model should disclose:
o The depreciation methods used;
o The useful lives or the depreciation rates used;
o The gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the
beginning and end of the period;
o A reconciliation of the carrying amount of investment property at the beginning and the end of the period showing the
following details:
 Additions resulting from acquisitions, those resulting from business combinations and those deriving from
capitalised expenditures subsequent to the property’s initial recognition;
 Disposals, depreciation, impairment losses recognised and reversed, the net exchange differences, if any, arising
from the translation of the financial statements of a foreign entity, transfers to and from inventories and owner-
occupied properties, and any other movements.
o The fair value of investment property carried under the cost model. In exceptional cases, when the fair value of the
investment property cannot be reliably estimated, the entity should instead disclose:
 A description of such property;
 An explanation of why fair value cannot be reliably measured;
 If possible, the range of estimates within which fair value is highly likely to lie.