IAS 40 Summary Notes

IAS 40 Investment Property

DEFINITIONS

Investment property is land and/or building held to earn rentals, or for capital
Investment
appreciation or both, rather than for use in the entity or for sale in the ordinary
property
course of business.
 Land held for long term appreciation rather than for sale in ordinary
course of business.
Examples of
 A building leased out under an operating lease.
investment
 A land or building for which no purpose has yet been defined and is not
property
in use of the entity itself.
 An investment property being constructed.
 Property intended for sale in the ordinary course of business (IAS 2
Examples of applies)
non-investment  Property being constructed on behalf of third parties (IAS 11 applies)
property  Owner occupied property (IAS 16 applies)

MEASUREMENT

Initial An investment property should be initially measured at cost.

measurement
There are two choices:
 Fair value model
Subsequent
 Cost model
measurement
Whatever policy is chosen, should be applied to all investment properties.
 The investment property is presented at fair value at the end of each
Fair value reporting period.
model  No depreciation is charged.
 Any gain or loss due to change in fair value is recognised in profit or loss.
The investment property is presented at cost less accumulated depreciation
Cost model
(same as IAS 16)

EXAMPLE 40A
James, a manufacturing company, purchases a property of $1,000,000 on 1 January 2011 for its
investment potential. The land element of the cost is believed to be $400,000 and the building
element is expected to have a useful life of 50 years. At 31 December 2011, the local property
market suggests that the fair value of the property has risen to $1,100,000. Show how the property
would be presented in the financial statements as at 31 December 2011 if James adopts:
(a) The cost model
(b) The fair value model

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IAS 40 Summary Notes

INVESTMENT PROPERTY OF OPERATING LESSEE

A property interest that is held by a lessee under an operating lease may be classified
Situation as an investment property, if, and only if, the property would meet the definition of an
investment property if it were not held under operating lease.
 The classification is available on a property-by-property basis.
 The lessee accounts for the property as if it were a finance lease.
Treatment
 Once the classification has been made for such property interest, the fair value
model must be used for all investment properties held by the entity.

TRANSFERS

Transfers to or from investment property can only be made if there is a change of use. There are
several possible situations in which this might occur and the accounting treatment for each is set
out below:

When From To Transfer measured at

IAS 16
1
(cost model) IAS 40 Carrying amount at the
IAS 16 (cost model) date of transfer
2
End of owner (revaluation model)
occupation IAS 16 Fair value at the date of
3
(cost model) IAS 40 transfer, change in fair
IAS 16 (fair value model) value until date of transfer
4
(revaluation model) is credited in OCI (IAS 16)
Start of IAS 40
5
operating lease IAS 2 (cost model) Carrying amount at the
to another (Lower Cost & NRV) IAS 40 date of transfer
6
entity (fair value model)
IAS 16
7
IAS 40 (cost model) Carrying amount at the
(cost model) IAS 16 date of transfer
8
Start of owner (revaluation model)
occupation IAS 16
Fair value at the date of 9
IAS 40 (cost model)
transfer shall be deemed
(fair value model) IAS 16
cost 10
(revaluation model)
IAS 40 IAS 2 Carrying amount at the
Start of 11
(cost model) (Lower Cost & NRV) date of transfer
development
Fair value at date of
with a view to IAS 40 IAS 2
transfer shall be deemed 12
sale (fair value model) (Lower Cost & NRV)
cost

Example 40B
Example Data: Apply on all of above 12 transfer situations
Building bought on 1 January 2014 for $2,000, useful life 10 years, nil residual value
Change is use on 30 June 2014, Fair value at this date is $2,200 and NRV is $2,100
Year end on 31 December 2014, Fair value at this date is $2,500 and NRV is $2,400

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IAS 40 Summary Notes

ANSWER 40A
As the property has been acquired due to investment potential, it is an investment property.
Part (a) cost model
Depreciation on building $600,000 / 50 years = $12,000
Investment property $1,000,000 – 12,000 = $988,000

Part (b) fair value model

Investment property (at fair value) $1,100,000
Gain on investment property $100,000 (i.e. $1,100,000 - $1,000,000)
No depreciation is to be charged.

ANSWER 40B

Situation 1 Situation 2
Jan 01 PPE 2,000 PPE 2,000
Bank 2,000 Bank 2,000
Jun 30 Depreciation 100 Depreciation 100
PPE 100 PPE 100
Jun 30 PPE 300
Gain (OCI) 300
Jun 30 IP 1,900 IP 2,200
PPE 1,900 PPE 2,200
Dec 31 Depreciation 100 Depreciation 116
IP 100 IP 116

Situation 3 Situation 4
Jan 01 PPE 2,000 PPE 2,000
Bank 2,000 Bank 2,000
Jun 30 Depreciation 100 Depreciation 100
PPE 100 PPE 100
Jun 30 PPE 300 PPE 300
Gain (OCI) 300 Gain (OCI) 300
Jun 30 IP 2,200 IP 2,200
PPE 2,200 PPE 2,200
Dec 31 IP 300 IP 300
PL 300 PL 300

Situation 5 Situation 6
Jan 01 Inventory 2,000 Inventory 2,000
Bank 2,000 Bank 2,000
Jun 30

Jun 30 No write down No write down

necessary necessary
Jun 30 IP 2,000 IP 2,000
Inventory 2,000 Inventory 2,000
Dec 31 Depreciation 105 IP 500
IP 105 PL 500

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IAS 40 Summary Notes

Situation 7 Situation 8
Jan 01 IP 2,000 IP 2,000
Bank 2,000 Bank 2,000
Jun 30 Depreciation 100 Depreciation 100
IP 100 IP 100
Jun 30

Jun 30 PPE 1,900 PPE 1,900

IP 1,900 IP 1,900
Dec 31 Depreciation 100 Depreciation 100
PPE 100 PPE 100
Dec 31 PPE 700
Gain (OCI) 700

Situation 9 Situation 10
Jan 01 IP 2,000 IP 2,000
Bank 2,000 Bank 2,000
Jun 30

Jun 30 IP 200 IP 200

PL 200 PL 200
Jun 30 PPE 2,200 PPE 2,200
IP 2,200 IP 2,200
Dec 31 Depreciation 116 Depreciation 116
PPE 116 PPE 116
Dec 31 PPE 416
Gain (OCI) 416

Situation 11 Situation 12
Jan 01 IP 2,000 IP 2,000
Bank 2,000 Bank 2,000
Jun 30 Depreciation 100
IP 100
Jun 30 IP 200
PL 200
Jun 30 Inventory 1,900 Inventory 2,200
IP 1,900 IP 2,200
Dec 31 No write down No write down
necessary necessary

Dated: 06 September 2016

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