Investment Property (IAS 40)

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CA. Amit Daga

Finance Controller CA. CS. CFA. CIFRS.

9017 Points Joined October 2007

The classification of certain properties as “Investment Property” for financial reporting purposes arises because its argued that the characteristics of investment properties differ sufficiently from the characteristics of owner occupied property.

Investment Property is defined in IAS 40 as…………..

“ Property (land or building – 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 purpose

§ sale in the ordinary course of business”

In addition, a property interest that is held by a lessee under an operating lease may be treated as an investment property if and only if :

§ The rest of the definition of investment property is met

§ The lessee uses the fair model in IAS 40

§ The property interest held under the operating lease is accounted for as if it’s a finance lease

Investment Property IAS 40

Replies (3)

CA. Amit Daga

Finance Controller CA. CS. CFA. CIFRS.

9017 Points Joined October 2007

Example of Investment Property Includes :-

§ Land held for long term appreciation in value, rather than for short – term sale in the ordinary course of business

§ Land whose future use has not yet been determined. If the future use has not been yet been determined, land is assumed to be held for capital appreciation

§A building owned under a finance lease and leased out under an operating lease

§ A building that is vacant, but held to be leased out under an operating lease

§ Investment Property being redeveloped for continued use as investment property

Example of Investment Property does not Includes :-

§ Property intended for sale in the ordinary course of business or for development

§ Property under construction for third parties

§ Owner- occupied property

§ Property occupied by employees

§ Owner occupied property awaiting disposal

§Property being constructed or developed for future use as investment property. Until Construction or development is not complete, IAS 40 will not attract

CA. Amit Daga

Finance Controller CA. CS. CFA. CIFRS.

9017 Points Joined October 2007

Property that is under construction or development for future use as investment property will be valued under Fair value.

However, where fair value of the investment property under construction is not reliably measurable, the property is measured at cost until the earlier of the date construction is completed or the date at which fair value becomes reliably measurable.

Example:- Entity A, is a supplier of industrial products. In 2007, the entity purchase a land on the outskirts of a major city.

The govt. has plans to develop the area as an industrial park in five years time and the land is expected to greatly appreciate in value if the govt. proceeds with the plan.

Entity A’s Management classify such a property that is held for undetermined future use ?

Management should classify the property as an investment property.

Although management has not determined a use for the property after the park’s development takes place, in the medium-term the land is held for capital appreciation.

IFRS considers land as held for capital appreciation, if an entity has not determined that it will use the land either as owner- occupied property or for short term sale in the ordinary course of business.

CA. Amit Daga

Finance Controller CA. CS. CFA. CIFRS.

9017 Points Joined October 2007

Measurement at Initial Recognition

Owned Property :- Investment property should be measured at Cost. The amount will include borrowing cost. Cost incurred relating to market studies before the purchase of property cannot be capitalised but instead are expensed as incurred.

Start-up cost will not be part of cost of investment property. Similarly, operating losses incurred before the investment property achieves its planned level of losses incurred before the investment property achieves its planned level of occupancy should not be capitalised..

Example:- Air-conditioning plant was purchased at the beginning of 2005 at a cost of $.5M. Its depreciated at 10% per annum on a straight line basis. Fair value of assets as on 2008 is $.3M. During 2008 plant has to be replaced that cost $1M. The F.V of investment property at the beginning of 2008 is $15M and at year end its $18M. How is this presented in the financial statements.

Fair value at the beginning of the year $ 15,000,000

Addition- Capitalised subsequent expenditure $ 1,000,000

Disposal ($ 300,000)

Net gain from fair value adjustment $ 2,300,000

Fair value at the end of the year $ 18,000,000