The main changes of IAS 40 (2003 revised)

In December 2003, the IASB issued a revised version of IAS 40 Investment Property.

There are several main changes of revised IAS 40 from the previous version as described below (IN4 to IN11 of IAS 40) :

IN5 of IAS 40 states that a property interest that is held by a lessee under an operating lease may be classified and accounted for as investment property provided that :

1. the rest of the definition of investment property is met;
2. the operating lease is accounted for as if it were a finance lease in accordance with IAS 17 Leases; and
3. the lessee uses the fair value model set out in IAS 40 for the asset recognised.

The classification alternative described in paragraph IN5 is available on a property-by-property basis. However, because it is a general requirement of the Standard that all investment property should be consistently accounted for using the fair value or cost model, once this alternative is selected for one such property, all property classified as investment property is to be accounted for consistently on a fair value basis.

The Standard requires an entity to disclose :

1. whether it applies the fair value model or the cost model; and
2. if it applies the fair value model, whether, and in what circumstances, property interests held under operating leases are classified and accounted for as investment property.

Further, it describes that when a valuation obtained for investment property is adjusted significantly for the purpose of the financial statements, a reconciliation is required between the valuation obtained and the valuation included in the financial statements.

The Standard clarifies that if a property interest held under a lease is classified as investment property, the item accounted for at fair value is that interest and not the underlying property.

As stated in IN10 that comparative information is required for all disclosures.

Latest, IN11 of IAS 40 states that some significant changes have been incorporated into the Standard as a result of amendments that the Board made to IAS 16 Property, Plant and Equipment as part of the Improvement projects :

1. to specify what costs are included in the cost of investment property and when replaced items should be derecognised;
2. to specify when exchange transactions (ie. transactions in which investment property is acquired in exchange for non-monetary assets, in whole or in part) have commercial substance and how such transactions, with or without commercial substance, are accounted for; and
3. to specify the accounting for compensation from third parties for investment property that was impaired, lost or given up.