OVERVIEW
Objective
¾
To describe the accounting treatment of investment properties.INTRODUCTION
DISCLOSURE RECOGNITION
AND MEASUREMENT
¾ Rule
¾ Initial Measurement
¾ Meaning of cost
¾ Expenditure after initial
recognition
MEASUREMENT AFTER RECOGNITION
¾ Fair value model
¾ Exceptional circumstances
¾ The cost model
¾ Transfers
¾ Disposals
¾ Change in method
¾ Objective
¾ Scope
1
INTRODUCTION
1.1
Objective
¾
IAS 40 prescribes the accounting treatment for investment property and the related disclosure requirements.1.2
Scope
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IAS 40 shall be applied in the recognition, measurement and disclosure of investment properties.¾
IAS 40 shall be applied in the measurement of investment properties: held by a lessee under a finance lease, and
held by a lessor and leased out under an operating lease.
IAS 40 does not deal with those matters covered under IAS 17 Leases. IAS 17 states that if an asset obtained through a lease and is treated as an investment property by the lessee then that lease must be treated as a finance lease with the investment property measured using the fair value model of IAS 40.
¾
The standard does not apply to Biological assets in respect of agricultural activity, and
mineral rights and reserves and similar non-regenerative resources.
1.3
Definitions
¾
Investment property is property (land or a 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 purposes, or
sale in the ordinary course of business.
¾
Owner-occupied property is property held by the owner (or by the lessee under a financelease) for use in the production or supply of goods or services or for administrative purposes.
¾
Examples of property include: land held for long-term capital appreciation rather than for short-term sale in the ordinary course of business,
a building that is vacant but is held to be leased out, and
property that is being constructed or developed for future use as an investment property.
Commentary
This class of Investment Property has been moved from IAS 16 Property, Plant and equipment
¾
The following do not meet the definition of investment property: property held for sale in the ordinary course of business, property being constructed for third parties (included in IAS 11 Construction
Contracts),and
owner-occupied property (see IAS 16 Property, Plant and Equipment).
2
RECOGNITION AND MEASUREMENT
2.1
Rule
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Investment property shall be recognised as an asset when it is probable that the future economic benefits that are attributable to the investment property will flow to the entity, and
the cost of the investment property can be measured reliably.
2.2
Initial Measurement
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An investment property shall be measured initially at its cost, which is the fair value of the consideration given for it, and will include any transaction costs.2.3
Meaning of cost
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The cost of a purchased investment property comprises its purchase price, and any directly attributable expenditure. Directly attributable expenditure includes, for example, professional fees for legal services and property transfer taxes.¾
The cost of a self constructed investment property is its cost at the date when the construction or development is complete.2.4
Expenditure after initial recognition
¾
Day to day costs of running the investment property are expensed as incurred.¾
If a part of an investment property requires replacement during the useful life of theproperty the replacement part is capitalised when the cost is incurred as long as the recognition criteria are met. Any value remaining in respect of the replaced part will be de-recognised as the new cost is capitalised.
Commentary
This follows the replacement part principle of IAS 16 Property, Plant and Equipment.
3
MEASUREMENT AFTER RECOGNITION
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An entity shall choose either the fair value model or the cost model as described in the standard and apply that policy to all of its investment properties.3.1
Fair value model
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After initial recognition, an entity that chooses the fair value model shall measure all of its investment property at its fair value (except in exceptional circumstances).Fair Value Measurement Considerations
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Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction. “knowledgeable, willing parties”− knowledgeable means that both the willing buyer and the willing seller are reasonably informed about:
−
the nature and characteristics of the investment property,−
its actual and potential uses, and−
the state of the market as of the date of valuation. a willing buyer is motivated, but not compelled to buy. He is neither over-eager nor determined to buy at any price. This buyer is also one who
purchases in accordance with the realities of the current market, and with the current market expectations.
a willing seller is neither an over-eager nor a forced seller, prepared to sell at any price, nor one prepared to hold out for a price not considered reasonable in the current market. The willing seller is motivated to sell the investment property at market terms for the best price attainable in the open market after proper marketing, whatever that price may be.
an arm’s-length transaction is one between parties who do not have a particular or special relationship that makes prices of transactions
uncharacteristic of the market. The fair value transaction is presumed to be between unrelated parties, each acting independently.
¾
In summary, fair value is measured as the most probable price reasonably obtainable in the market at the date of valuation in keeping with the fair value definition. It is the best price reasonably obtainable by the seller and the most advantageous price reasonably obtainable by the buyer. The fair value of investment property shall reflect the actual market state and circumstances as of the effective valuation date, not as of either a past or future date.¾
The fair value of investment property is an estimated amount rather than a predetermined or actual sale price. It is the price at which the market expects a transaction that meets all other elements of the fair value definition would be completed on the date of valuation.3.2
Exceptional circumstances
¾
There is a rebuttal presumption that an entity will be able to determine the fair value of an investment property reliably on a continuing basis.¾
However in exceptional circumstances where there is clear evidence, when an entity, that has chosen the fair value model, first acquires an investment property to which fair value cannot be determined on a reliable and continuing basis, then that property shall be measured in accordance with the cost model of IAS 16¾
The entity measures all its other investment property at fair value.3.3
The cost model
¾
After initial recognition, an entity that chooses the cost model shall measure all of its investment property using the cost model in IAS 16 Property, Plant and Equipment, that is at cost less any accumulated depreciation and impairment losses.¾
An investment property, measured under the cost model, that is subsequently classed as held for sale in accordance with IFRS 5 NCA held for sale and discontinued operations shall be measured in accordance with that standard.¾
IFRS 5 requires NCA held for sale to be measured at the lower of its carrying value and fair value less costs to sell. Once an asset is classed as held for sale it will no longer be depreciated.3.4
Transfers
¾
Transfers to and from investment property shall be made when and only when there is a change in use evidenced by: commencement of owner occupation for a transfer from investment property to owner occupied property
commencement of development with a view to sale for a transfer from investment property to inventories
end of owner occupation for a transfer from owner occupied property to investment property
commencement of an operating lease to another party for a transfer from inventories to investment property.
3.5
Disposals
3.6
Change in method
¾
A change from one model to the other model shall be made only if the change will result in a more appropriate presentation. IAS 40 states that this is highly unlikely to be the case for a change from the fair value model to the cost model.Example 1
A company has four investment properties, A, B, C and D. Before the implementation of IAS 40, it had the following accounting policy:
“Investment properties are valued on a portfolio basis at the fair value at the year-end, with any net gain recognised in the investment property revaluation reserve. Only net losses from revaluation are transferred to statement of comprehensive income”
At 1.01.2007, the carrying amounts of each of the four properties were $100m. At 31.12.2007, following a professional appraisal of value, the properties were valued at:
A $140m B $130m C $95m D $90m
Required:
Show how the application of IAS 40 would change the financial statements of the company if the fair value model is chosen.
Example 2
An investment property company has been constructing a new building for the last 18 months. At 31.12.2006, the cinema was nearing completion, and the costs incurred to date were:
$m
Materials, labour and sub-contractors 14.8
Other directly attributable overheads 2.5
Interest on borrowings 1.3
It is the company’s policy to capitalise interest on specific borrowings raised for the purpose of financing a construction. The amount of borrowings
outstanding at 31.12.2006 in respect of this project is $18m, and the interest rate is 9.5%pa.
During the three months to 31.3.2007 the project was completed, with the following additional costs incurred:
$m
Materials, labour and sub-contractors $1.7
Other overhead $0.3
On 31.3.2007, the company obtained a professional appraisal of the cinema’s fair value, and the valuer concluded that it was worth $24m. The fee for his appraisal was $0.1m, and has not been included in the above figures for costs incurred during the 3 months.
The cinema was taken by a national multiplex chain on an operating lease as at 1.04.2007, and was immediately welcoming capacity crowds. The lease
agreement allows for annual revisions, and thus it was clear that it was worth even more than the valuation at 31.3.2007. Following a complete valuation of the company’s investment properties at 31.12.2007, the fair value of the cinema was established at $28m.
Required:
Set out the accounting entries in respect of the cinema complex for the year ended 31.12.2007.
4
DISCLOSURE
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An entity shall disclose The method and significant assumptions applied in determining fair value
The extent to which the fair value is based on a valuation by an independent valuer The amounts included in the statement of comprehensive income for
−
rental income−
direct operating expenses (including repairs) that generated rental income during the period−
direct operating expense (including repairs) that did not generate rental income during the period¾
When applying the fair value model an entity shall also disclose a reconciliation of the carrying amount at the beginning and end of the period and the movements in the period.¾
When applying the cost model an entity shall also disclose the depreciation method used the useful lives or the depreciation rates used
a reconciliation of the carrying amount at the beginning and end of the period and the movements in the period, and
the fair value of the property or a note stating that the fair value cannot be
determined reliably and giving a description of the property for which we cannot obtain the fair value of and if possible a range of estimates within which the fair value is likely to be.
FOCUS
You should now be able to:
¾
discuss why the treatment of investment properties should differ from other properties;EXAMPLE SOLUTIONS
Solution 1
Under the company’s existing accounting policy, they would carry the investment
properties in the statement of financial position at 31.12.2007 at a total of $455m, and the net gain would be recorded in the revaluation reserve (455 – 400 = 55).
Applying IAS 40 (fair value model), the company would still carry the properties at $455m, but the net gain of $55m would be recorded in the statement of comprehensive income.
Solution 2
Costs incurred in the 3 months to 31.3.2007
$m $m
Dr Asset under construction 1.7
Cr Cash/Creditors 1.7
Dr Asset under construction 0.3
Cr Cash/Creditors 0.3
Dr Asset under construction 0.43
Cr Interest expense 0.43
WORKING
Outstanding borrowings $18m
Interest for 3 months $18m × 3/12 × 9.5% = 0.43m
Accumulated costs at the date of transfer into investment properties:
$m
Costs to 31.12.2006 (14.8 + 2.5 + 1.3) 18.6
Costs to 31.03.2007 (1.7 + 0.3 + 0.43) 2.43
Investment property initially recognized 21.03
Commentary
The receipt of the professional valuation at 31.3.2007 has not improved the profit earning potential of the asset. The valuation itself is also irrelevant since IAS 40 states that initial recognition shall be at cost.
At 31.12.2007
$m $m
