05 Investment Property

Chapter
Investment Property
2008 Nelson Lam and Peter Lau
Intermediate Financial Reporting: An IFRS Perspective (Chapter 5) - 1
Agend
a
1. Applicable Standard and Scope
2. Property Classified as Investment Property
3. Recognition
4. Measurement at Recognition
5. Measurement after Recognition
6. Transfers
7. Derecognition
8. Disclosure
1. Applicable Standard and

Scope
Investment property should be accounted for by
using IAS 40 Investment Property.
A lessee may also be required to measure its
leases by using IAS 40 for:
1. investment property interests held under a lease
accounted for as a finance lease and
2. investment property provided to a lessee under
an operating lease.
1. Applicable Standard and

Scope
IAS 40 does not deal with matters covered in IAS 17 Leases, including:
1. Classification of leases as finance leases or operating leases;
2. Recognition of lease income from investment property (see also IAS 18
Revenue);
3. Measurement in a lessees financial statements of property interests held
under a lease accounted for as an operating lease;
4. Measurement in a lessors financial statements of its net investment in a
finance lease;
5. Accounting for sale and leaseback transactions; and
6. Disclosure about finance leases and operating leases.
IAS 40 also does not apply to:

1. biological assets related to agricultural activity (see IAS 41 Agriculture); and
2. mineral rights and mineral reserves such as oil, natural gas and similar nonregenerative resources.
2. Classified as Investment
Property
Investment property is defined as:
property (land or a buildingor part of a buildingor 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:
1. use in the production or supply of goods or services or for
administrative purposes; or
2. sale in the ordinary course of business.
Property
In order to classify a property as investment
property, an entity has to ensure that the property
can fulfil both:
1. The mode of usage (either to earn rental and/or for
capital appreciation), and
2. The mode of ownership (either owned or held under a
finance lease).
Mode
Modeof
ofUsage
Usage
Mode
Modeof
ofOwnership
Ownership
Property
IAS 40 has contrasted an investment property with
an owner-occupied property.
An owner-occupied property is not an investment
property, but should be a property under IAS 16,
Property, Plant and Equipment (see Chapter 3).
Owner-occupied property is defined as:
Mode
Modeof
ofUsage
Usage
property held (by the owner or by the lessee under a

finance lease) for use in the production or supply of
goods or services or for administrative purposes.
Property
Comparing with
the definition of investment property that has the term
to earn rental,
the definition of property, plant and equipment also
has a similar term held for rental to others.
Mode
Modeof
ofUsage
Usage
In order to distinguish them, an entity can consider a

property from two correlated aspects:
1. The generation of cash flows, and
2. The significance of ancillary services.
.
Cash Flow
Extent of Ancillary
Services
Property
1. The generation of cash flows
Mode
Modeof
ofUsage
Usage
Investment
Investment
Property
Property
Owner-occupied
Owner-occupied
property
property
held to earn rentals or for

capital appreciation or both
therefore, generates cash
flows largely independently
of the other assets held by
an entity.
Cash Flow
the production or supply of

goods or services (or the use
of property for administrative
purposes)
generates cash flows that
are attributable not only to
property, but also to other
assets used in the production
or supply process
Property
2. Extent of Ancillary Services
Mode
Modeof
ofUsage
Usage
Investment
Investment
Property
Property
No significant ancillary
services provided
Passive investor
Investment property
Use IAS 40
Cash Flow
How to determine
those in between
these 2 ends?
Judgement used and
applied consistently
Owner-occupied
Owner-occupied
property
property
Significant ancillary
services provided
Significant exposure to
variation in the cash
flows
Owner-occupied
Use IAS 16
Extent of Ancillary
Services
Property
To meet the definition of investment property, a
property must be
owned by an entity or
held by an entity under a finance lease
Implies that a property interest held by a lessee

under an operating lease cannot be classified as
investment property since such property interest is
neither owned nor held by a lessee under a finance
lease.
Mode
Modeof
ofOwnership
Ownership
Property
IAS 40 amended in December 2003 to allow that a
property interest that is held by a lessee under an
operating lease may be classified and accounted for
as investment property if, and only if:
An entity has a choice
1. The property would otherwise meet the definition of an

investment property and
2. The lessee uses the fair value model in accordance
with IAS 40 for the asset recognised.
Mode
Modeof
ofOwnership
Ownership
This classification alternative is available on a

property-by-property basis
However, once this classification alternative is
selected for one such property interest held under
an operating lease,
all properties classified as investment property shall
be accounted for using the Fair Value Model
2. Classified as Investment Property

Example
Example
Examples that are NOT investment property include: Which IAS?
Owner-occupied property
IAS 16 & 17
Property (completed or under development) intended
for sale in the ordinary course of business
IAS 2
Property being constructed or developed for third parties IAS 11
Property leased out under finance lease
IAS 17
Property that is being constructed or developed for
future use as investment property
IAS 16 & 17
Hows the classification for existing investment
property being redeveloped for continued future
Still
Still Investment
Investment Property
Property
use as investment property?

Example
Example
GV Inc. has three properties in Hong Kong and
overseas and uses them to earn rental. Except for
Property C which is owned by GV, the other 2
properties, Property A and B are held by GV under
operating leases.
Evaluate the accounting implication of IAS 40 on
GVs properties.

Example
Example
Property C meets the definition of investment property under IAS 40 and
GV must use IAS 40 to account for it.
Property A and B do not meet such definition since they are neither owned
nor held by GV under a finance lease.
However, GV has a classification alternative under IAS 40 to choose to
account for either Property A or B (or both) as investment property.
In consequence, GV can consider the following alternatives:
If either Property A or B (or both) are not accounted for under IAS 40 as
investment property, GV will be required to use the fair value model in
accordance with IAS 40 to account for all properties classified as investment
property, including Property C and Property A and/or B.
The property not classified as investment property should be accounted for by
using IAS 17 Leases.
If both Property A and B are not classified as investment property, GV will be
required to account for Property A and B as a lease under IAS 17 and will
choose between cost model and fair value model in accordance with IAS 40
to account for Property C.

Some properties comprise a portion held as investment property and
another portion NOT held as investment property.
If these portions:
Could
Could be
be sold
sold
separately
separately
or leased out separately under a finance lease
Could
Could not
not be
be
sold
sold separately
separately
the property is investment property

only if an insignificant portion is NOT held as
investment property
an entity accounts for the portions separately

An entity owns property that is leased to, and occupied by, its
parent or another subsidiary
The property does not qualify as investment property in the
consolidated financial statements, because the property is
owner-occupied from the perspective of the group
Consolidated
But, from the perspective of the entity that owns it, the
property is investment property if it meets the definition of
investment property
Individual
The lessor treats the property as investment
property in its individual financial statements.
3. Recognition
Recognition criteria
Initial
Initial Cost
Cost
Subsequent
Subsequent
Expenditure
Expenditure
Same as IAS 16 Property, Plant and Equipment

Investment property shall be recognised as an asset when, and only
when:
a) it is probable that the future economic benefits that are associated
with the investment property will flow to the entity; and
b) the cost of the investment property can be measured reliably.
3. Recognition
Recognition criteria
(capitalisation) for
Old IAS 16
Subsequent
Subsequent
Expenditure
Expenditure
Initial
Initial Cost
Cost
Criteria not Probable

Probable that
that future
future
economic
economic benefit
benefit of
of
the same
Probable
Probable that
that future
future
economic
economic benefits
benefits in
in
the
excess
the asset
asset will
will flow
flow to
to
excess of
of the
the originally
originally
the
assessed
the enterprise
enterprise
assessed standard
standard of
of
performance
Cost
performance of
of the
the
Cost measured
measured reliably
reliably
existing
existing asset
asset will
will flow
flow
to
to the
the entity
entity
Now IAS 16 and IAS 40
Same
criteria
Probable
Probable that
that future
future economic
economic benefit
benefit of
of the
the asset
asset
will
will flow
flow to
to the
the entity
entity
Cost
Cost measured
measured reliably
reliably
Same
Samecriteria
criteriaapplied
appliedto
toboth
bothcosts
costs
Expenditure not fulfilling the recognition

criteria will be charged to income statement
Clearer
Clearerapproach
approachon
onso-called
so-called
Component
ComponentAccounting
Accounting
4. Measurement at
Recognition
An entity is required to initially recognise and measure
an investment property at its cost, including transaction
costs.
This requirement together with the definition of the cost
is similar to that of property, plant and equipment (see
Chapter 3).
The initial cost of a property interest held under a lease
and classified as an investment property
shall be as prescribed for a finance lease in IAS 17
i.e. the asset shall be recognised at the lower of
the fair value of the property and
the present value of the minimum lease payments.
Introduce the measurement base for investment

property acquired from exchange
Same as IAS 16 Property, Plant and Equipment
5. Measurement after
Recognition
Introduce Cost Model and choose either
and
Fair
Fair Value
Value Model
Model
Cost
Cost Model
Model
IAS 40 implicitly implies that the choice can only be elected on the
first-time adoption of IAS 40
The model chosen should be applied to all investment properties,
except for
Property held under operating lease

classified as investment properties
Investment property backing liabilities
that pay a return linked directly to the
fair value of, or returns from specific
assets including that investment property
Investment property with a fair value that
cannot be reliably determinable on a
continuing basis (i.e. inability to determine
fair value reliably)
No choice,
only fair value model
Choose a model for
all such properties
No choice,
only cost model

There is a rebuttable presumption that an
Fair
Fair Value
Value Model
Model
entity can reliably determine the fair value of
Cost
Cost Model
Model
an investment property on a continuing basis.
However, in exceptional cases and in initial recognition of investment
property, there is clear evidence that the fair value of the investment
property is not reliably determinable on a continuing basis.
This arises when, and only when,
comparable market transactions are infrequent and
alternative reliable estimates of fair value (for example, based on
discounted cash flow projections) are not available.
In such cases, an entity shall measure that investment property (alone)

using the cost model in IAS 16
residual value shall be assumed to be zero
apply IAS 16 until disposal of the investment property
shall continue to account for other investment properties using the
fair value model
Recognition

Cost
Cost Model
Model
For an entity that chooses the cost model, the entity should measure all
of its investment property in accordance with the cost model in IAS 16,
except for
1. Different models are adopted in accounting for liability-linked investment
property and other investment property, and
2. Those investment properties that meet the criteria to be classified as held
for sale (or are included in a disposal group that is classified as held for
sale) in accordance with IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations. (see Chapter 22)

Fair
Fair Value
Value Model
Model
After initial recognition, an entity that chooses
shall measure all of its investment property at fair value, except in the
cases that
1. the fair value cannot be determined reliably, or
2. the cost model is chosen for the investment property backing liabilities that pay a
return linked directly to the fair value of, or returns from specific assets including
that investment property
When a property interest held by a lessee under an operating

lease is classified as an investment property
the fair value model must be applied for all investment
properties
A gain or loss arising from a change in the fair value of
investment property shall be recognised in profit or loss for the
period in which it arises

Fair
Fair Value
Value Model
Model
Fair value is defined as the amount for which an asset could be
exchanged between knowledgeable, willing parties in an arms length
transaction
Same definition used in other IFRSs and IASs
But IAS 40 provides more explanations unique for a fair value of a property
The fair value of investment property shall reflect

market conditions at the balance sheet date
No depreciation is required in IAS 40

Fair
Fair Value
Value Model
Model
Under IAS 40
Fair value has the following attributes:
Being time-specific as of a given date
Reflects rental income from current leases and from
future leases in light of current conditions (with
reasonable and supportable assumption)
Equal to initial cost of a lease
Current price in an active market being the best
evidence
Other values when no active market
Differ from value in use
Avoid double count assets or liabilities
Not reflect future capital expenditure
Recognition
Fair value model (e.g. IAS 40)
Example
Example
Revaluation model (e.g. IAS 16)
Refers
Refers to
to fair
fair value
value
Refers
Refers to
to fair
fair value
value
Change
Change in
in fair
fair value
value recognised
recognised in
in
profit
profit or
or loss
loss for
for the
the period
period in
in which
which
itit arises
arises
Change
Change in
in fair
fair value
value recognised
recognised
directly
directly in
in equity
equity (or
(or other
other
comprehensive
comprehensive income)
income)
No
No depreciation
depreciation or
or amortisation
amortisation is
is
required
required
Depreciation
Depreciation or
or amortisation
amortisation is
is
required
required
Reflect
Reflect market
market conditions
conditions at
at the
the end
end
of
of reporting
reporting period
period (i.e.
(i.e. revalued
revalued at
at
each
each balance
balance sheet
sheet date)
date)
Not
Not clearly
clearly defined,
defined, only
only require
require
sufficient
sufficient regular
regular that
that no
no material
material
different
different from
from fair
fair value
value
N/A
N/A
Deficit
Deficit about
about fair
fair value
value below
below
depreciated
depreciated or
or amortised
amortised cost
cost is
is
recognised
recognised in
in profit
profit or
or loss
loss
6.
Transfers
Introduce transfer section
Transfers to, or from, investment property shall be made when, and only
when, there is a change in use, evidenced by:
Change in use
Transfer from investment property
a) Commencement of owneroccupation
b) Commencement of development
with a view to sale
Change in use
b) Commencement of an operating
lease to another party
c) End of construction or development
Inventories
Inventories
Investment
Investment
Property
Property
Transfer to investment property
a) End of owner-occupation
Measurement
Measurementat
attransfer?
transfer?
Owner-Occupied
Owner-Occupied
Property
Property
Owner-Occupied
Owner-Occupied
Property
Property
Inventories
Inventories
Investment
Investment
Property
Property
End
End of
of
construction
construction
Depend on the model the entity is using
5. Transfer
Cost
Cost Model
Model
When an entity uses
transfers DO NOT change the carrying amount of the property
transferred and
they DO NOT change the cost of that property for measurement or
disclosure purposes.
Measurement
Measurementat
attransfer?
transfer?
5. Transfer
For a transfer from investment property (i.e. the following cases) carried
at fair value
Fair
Fair Value
Value Model
Model
Change in use
Transfer from investment property
a) Commencement of owneroccupation
b) Commencement of development
with a view to sale
Owner-Occupied
Owner-Occupied
Property
Property
Inventories
Inventories
Investment
Investment
Property
Property
the propertys deemed cost for subsequent accounting in

accordance with IAS 16 or IAS 2 shall be its fair value at the date of
change in use.
Measurement
Measurementat
attransfer?
transfer?
6. Transfers
For a transfer to investment property (i.e. the following cases) and that
investment property will be carried at fair value
Fair
Fair Value
Value Model
Model
Change in use
Transfer to investment property
a) End of owner-occupation
b) Commencement of an operating
lease to another party
c) End of construction or
development
Owner-Occupied
Owner-Occupied
Property
Property
Inventories
Inventories
Investment
Investment
Property
Property
End
End of
of
construction
construction
Measurement
Measurementat
attransfer?
transfer?
6. Transfers
For a transfer to investment property (i.e. the following cases) and that
investment property will be carried at fair value
Fair
Fair Value
Value Model
Model
Owner-Occupied
Owner-Occupied
Property
Property
Investment
Investment
Property
Property
apply IAS 16 up to the date of change in use.

Revaluation reserve is
treat any difference at that date between its
frozen and
carrying amount under IAS 16, and
accounted for in
accordance with
its fair value
IAS 16 subsequently
in the same way as a revaluation under IAS 16
Inventories
Inventories
End
End of
of
construction
construction
Measurement
Measurementat
attransfer?
transfer?
Investment
Investment
Property
Property
any difference between

the fair value of the property
at that date and
its previous carrying amount
shall be recognised in profit/loss
6. Transfers
Example
Example
GV has adopted IAS 40 and stated its investment
properties at fair value even the properties are held
under operating leases.
On 1 Mar. 2008, freehold property B stated at
revalued amount of $1 million (originally used as its
own office) has been leased out to derive rental
income.
Revaluation surplus recognised for B was $300,000
while Bs fair value at that date should be
$1,200,000.
What is the accounting implication on the decision?
6. Transfers
Example
Example
Property
PropertyBBwould
wouldbe
bereclassified
reclassifiedas
asinvestment
investmentproperty.
property.
In
Inaccordance
accordancewith
withIAS
IAS40,
40,GV
GVshould
shouldapply
applyIAS
IAS16
16on
onBBup
upto
tothe
thedate
date
of
ofchange
changeininuse
useand
andtreat
treatany
anydifference
differenceat
atthat
thatdate
datebetween
betweenits
its
carrying
carryingamount
amountunder
underIAS
IAS16,
16,and
andits
itsfair
fairvalue
valueininthe
thesame
sameway
wayas
asaa
revaluation
revaluationunder
underIAS
IAS16.
16.
Thus,
Thus,aarevaluation
revaluationsurplus
surplusofof$200,000
$200,000would
wouldbe
befurther
furtherrecognised.
recognised.
Total
Totalrevaluation
revaluationreserves
reserveswould
wouldbecome
become$500,000
$500,000($200,000
($200,000++$300,000)
$300,000)
The
Therevaluation
revaluationreserves
reservesof
of$500,000
$500,000would
wouldbe
befrozen
frozenand
andaccounted
accountedfor
for
ininaccordance
accordancewith
withIAS
IAS16
16subsequently.
subsequently.
Dr
Dr
Cr
Cr
Property,
Property,plant
plantand
andequipment
equipment
Revaluation
Revaluationreserves
reserves
$200,000
$200,000
$200,000
$200,000
To
Torecognise
recognisethe
theadditional
additionalrevaluation
revaluationsurplus.
surplus.
Dr
$1,200,000
Dr Investment
Investmentproperty
property
$1,200,000
Cr
$1,200,000
Cr Property,
Property,plant
plantand
andequipment
equipment
$1,200,000
To
Toreclassify
reclassifythe
theproperty
propertyfrom
fromPPE
PPEtotoinvestment
investmentproperty.
property.
7. Derecognition (or Disposals)

An investment property shall be derecognised (eliminated from the
balance sheet):
1. on disposal or
2. when the investment property is permanently withdrawn from use
and no future economic benefits are expected from its disposal
Gains or losses arising from the retirement or disposal of investment
property shall be determined as the difference between
1. the net disposal proceeds and
2. the carrying amount of the asset,
and shall be recognised in profit or loss (unless IAS 17 requires
otherwise on a sale and leaseback) in the period of the retirement
or disposal
8. Disclosure
a) Disclosure for both Fair Value Model and Cost Model
whether the fair value model or the cost model is adopted
if fair value model is applied, whether property interests held under
operating leases are accounted for as investment property
if classification is difficult, the criteria to distinguish investment property
from owner-occupied property and from property held for sale in the
ordinary course of business
the methods and significant assumptions applied in determining the fair
value of investment property
whether (and the extent to which) the fair value of investment property is
based on a valuation by a qualified independent valuer
the amounts recognised in profit or loss, say for rental income from
investment property, and direct operating expenses (including repairs and
maintenance) arising from investment property
the existence and amount of restrictions on the realisability of investment
property or the remittance of income and proceeds of disposal
contractual obligations to purchase, construct, or develop investment
property or for repairs, maintenance or enhancements
8. Disclosure
b) Additional Disclosure for Fair Value Model
A reconciliation between the carrying amounts of investment property at
the beginning and end of the period similar to that of property, plant and
equipment
When a valuation obtained for investment property is adjusted
significantly for the purpose of the financial statements, the entity shall
disclose a reconciliation between the valuation obtained and the adjusted
valuation included in the financial statements
In the exceptional cases when there is inability to determine fair value
reliably and cost model is applied to a particular investment property,
additional disclosures are required
8. Disclosure
c) Additional Disclosure for Cost Model
the depreciation methods used;
the useful lives or the depreciation rates used;
the gross carrying amount and the accumulated depreciation (aggregated
with accumulated impairment losses) at the beginning and end of the period;
a reconciliation of the carrying amount of investment property at the
beginning and end of the period, similar to that of property, plant and
equipment
the fair value of investment property
In the exceptional cases when there is inability to determine fair value
reliably, additional disclosures are required
Chapter
5
Investment Property

05 Investment Property

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05 Investment Property

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Chapter

2008 Nelson Lam and Peter Lau

Intermediate Financial Reporting: An IFRS Perspective (Chapter 5) - 1

2008 Nelson Lam and Peter Lau

Intermediate Financial Reporting: An IFRS Perspective (Chapter 5) - 2

1. Applicable Standard and

2008 Nelson Lam and Peter Lau

Intermediate Financial Reporting: An IFRS Perspective (Chapter 5) - 3

1. Applicable Standard and

IAS 40 also does not apply to:

2008 Nelson Lam and Peter Lau

Intermediate Financial Reporting: An IFRS Perspective (Chapter 5) - 4

2008 Nelson Lam and Peter Lau

Intermediate Financial Reporting: An IFRS Perspective (Chapter 5) - 5

2008 Nelson Lam and Peter Lau

Intermediate Financial Reporting: An IFRS Perspective (Chapter 5) - 6

property held (by the owner or by the lessee under a

2008 Nelson Lam and Peter Lau

Intermediate Financial Reporting: An IFRS Perspective (Chapter 5) - 7

In order to distinguish them, an entity can consider a

held to earn rentals or for

the production or supply of

Implies that a property interest held by a lessee

2008 Nelson Lam and Peter Lau

Intermediate Financial Reporting: An IFRS Perspective (Chapter 5) - 11

An entity has a choice

1. The property would otherwise meet the definition of an

This classification alternative is available on a

Intermediate Financial Reporting: An IFRS Perspective (Chapter 5) - 12

2. Classified as Investment Property

2008 Nelson Lam and Peter Lau

Intermediate Financial Reporting: An IFRS Perspective (Chapter 5) - 13

2. Classified as Investment Property

2008 Nelson Lam and Peter Lau

Intermediate Financial Reporting: An IFRS Perspective (Chapter 5) - 14

2. Classified as Investment Property

Intermediate Financial Reporting: An IFRS Perspective (Chapter 5) - 15

2. Classified as Investment Property

or leased out separately under a finance lease

the property is investment property

2008 Nelson Lam and Peter Lau

an entity accounts for the portions separately

Intermediate Financial Reporting: An IFRS Perspective (Chapter 5) - 16

2. Classified as Investment Property

2008 Nelson Lam and Peter Lau

Intermediate Financial Reporting: An IFRS Perspective (Chapter 5) - 17

Same as IAS 16 Property, Plant and Equipment

2008 Nelson Lam and Peter Lau

Intermediate Financial Reporting: An IFRS Perspective (Chapter 5) - 18

Criteria not Probable

Now IAS 16 and IAS 40

Expenditure not fulfilling the recognition

Intermediate Financial Reporting: An IFRS Perspective (Chapter 5) - 19

Introduce the measurement base for investment

Intermediate Financial Reporting: An IFRS Perspective (Chapter 5) - 20

Property held under operating lease

2008 Nelson Lam and Peter Lau

Intermediate Financial Reporting: An IFRS Perspective (Chapter 5) - 21

5. Measurement after Recognition

In such cases, an entity shall measure that investment property (alone)

Intermediate Financial Reporting: An IFRS Perspective (Chapter 5) - 22

2008 Nelson Lam and Peter Lau

Intermediate Financial Reporting: An IFRS Perspective (Chapter 5) - 23

5. Measurement after Recognition