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 :
- it is probable that the future economic benefits that are associated with the investment property will flow to the entity; and
- 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).
