Objective: IAS 40 prescribes the accounting treatment for investment property and related disclosure requirements.
- Applies to all investment property measured at fair value or cost
- Does not apply to owner-occupied property, biological assets, or mineral rights
- Key focus: measurement models and transfers between categories
Investment Property: Property (land or building, or part of a building, or both) held to earn rentals or for capital appreciation or both.
- Examples include:
- Land held for long-term capital appreciation
- Land held for undecided future use
- Building leased out under operating lease
- Vacant building held to be leased out
- Excludes:
- Property held for sale in ordinary course of business
- Property being constructed for third parties
- Owner-occupied property
- Property leased to another entity under finance lease
| Criterion | Description |
|---|---|
| Future Economic Benefits | Probable that future economic benefits will flow to the entity |
| Cost Reliably Measured | Cost of the investment property can be measured reliably |
Initial Costs: Include purchase price and directly attributable expenditure such as legal fees, property transfer taxes.
Fair Value Model: Investment property is measured at fair value with changes recognized in profit or loss.
Cost Model: Investment property is measured at cost less accumulated depreciation and impairment losses.
- Entity must choose one model for all investment property
- Choice between models is a matter of accounting policy
- Once chosen, model should be applied consistently
Fair Value: The price that would be received to sell an asset in an orderly transaction between market participants.
- Fair value should reflect market conditions at reporting date
- Best evidence is current prices in active market for similar property
- If unavailable, use other valuation techniques
- Gains/losses from fair value changes recognized in profit or loss
- No depreciation is charged under fair value model
Property: Office building held for rental
Beginning Fair Value: $5,000,000
Ending Fair Value: $5,300,000
Accounting Entry: Recognize $300,000 gain in profit or loss
| Transfer Type | Accounting Treatment |
|---|---|
| From Owner-occupied | Measure at fair value, difference to revaluation surplus |
| From Inventory | Measure at fair value, difference to profit or loss |
| To Owner-occupied | Carrying amount becomes deemed cost |
| To Inventory | No change in carrying amount |
Note: Transfers should only occur when there is a change in use.
- Derecognize investment property on disposal or permanent withdrawal
- Gains/losses on disposal calculated as difference between net disposal proceeds and carrying amount
- Recognize gains/losses in profit or loss in period of derecognition
- Consider compensation from third parties for impairment or loss
Fair Value Model Disclosures:
- Basis for determining fair value
- Reconciliation of carrying amounts
- Significant restrictions on realizability
- Contractual obligations to purchase or construct
Cost Model Disclosures:
- Depreciation methods and useful lives
- Gross carrying amount and accumulated depreciation
- Fair value of investment property
- Reconciliation of carrying amounts
- Accounting policy for measurement model
- Extent of involvement of independent valuers
- Rental income and direct operating expenses
- Existence and amounts of restrictions on title
- Property Leased to Another Entity: Accounted for as finance lease if substantially all risks/rewards transferred
- Inseparability: If property could be sold separately, account for components separately
- Ancillary Services: If services are insignificant, property remains investment property