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.

The basic concept of Investment Property

IAS 40 Investment Property shall be applied in the recognition, measurement and disclosure of transactions regarding investment property.

What is the definition of Investment Property ?

Based on Para. 5 of IAS 40, Investment Property is 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 (a) use in the production or supply of goods or services or for administrative purposes; or (b) sale in the ordinary course of business.

Investment Property is the opposite of Owner-occupied property. The Owner-occupied property is 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.

Investment property is held to earn rentals or for capital appreciation or both. Therefore, an investment property generates cash flows largely independently of the other assets held by an entity. This distinguishes investment property from owner-occupied property. 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. IAS 16 Property, Plant and Equipment applies to owner-occupied property.

In the step of recognition, investment property shall be recognised as an asset when, and only when :

1. it is probable that the future economic benefits that are associated with the investment property will flow to the entity; and
2. the cost of the investment property can be measured reliably.

An investment property shall be measured initially at its cost. Transaction costs shall be included in the initial measurement. The cost of a purchased investment property comprises its purchase price and any directly attributable expenditure which includes, for example, professional fees for legal services, property transfer taxes and other transactions costs. While, the cost of a self-constructed investment property is its cost at the date when the construction or development is complete. Until that date, an entity applies IAS 16. At that date, the property becomes investment property and IAS 40 applies.

After the initial recognition, an entity may choose as its accounting policy measurement of investment property either the fair value model or the cost model, and shall apply that policy to all of its investment property.

If an entity choose the cost model, it shall measure all of its investment property in accordance with IAS 16’s requirements for that model, other than those 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.

Regarding the depreciation, if an entity choose the cost model as its investment property measurement, it has to depreciate the property in accordance with IAS 16. While the fair value model was chosen, the property shall not be depreciated (Hrd).