IAS 40 – Investment Property | Humayun Atif (CMA, CPA)

IAS 40 deals with Investment property and it includes land or a building (Including integral parts of the building like lifts, chiller plants, and air conditioning plants) or both that is:

• held for rental earnings, or
• kept for capital appreciation, or
• for both.

Please keep in mind that Investment property excludes the following:

• Owner-occupied property as IAS 16 deals with this kind of property.
• assets used in production or supply of goods and services, or for administration, again IAS 16 applied and
• Assets held for sale in the ordinary course of business which is under the scope of IAS 2.

Investment property should only be recognized when the below criteria are met:

1. Future economic benefits will flow to the entity; and
2. Cost can be measured reliably.

 Initial measurement:  At Cost.

 Subsequent measurement: IAS 40 recommends two models:

1. Cost Model: It’s the same like IAS 16 cost model and investment property shown at cost less accumulated depreciation and after accumulated impairment losses.
2. Fair Value Model: Investment property should be measured at fair value & fair value should be as per IFRS 13- Fair value measurement. All changes both upward and downward should be reported to the income statement. The point to remember is that in the fair value model no depreciation is charged on an investment property. Another point is that no impairment test is required as properties are shown at fair value at each financial reporting date.

Revaluation Model (IAS16) vs. Fair Value Model (IAS 40)

1. In the Revaluation model surplus on revaluation goes to equity under revaluation surplus while in the Fair value model it is reported to the income statement.
2. In the revaluation model depreciation is charged on revalued amounts but in the Fair value model, no depreciation is charged.
3. In the revaluation model impairment test is required but in the Fair value model, no impairment test is required annually.
4. In the revaluation model if the trend is downward then it is reported to the income statement but in the Fair value model in both (upward & downward) trends it is reported to the income statement.
5. Revaluation made for Property, Plant & equipment but Fair value model as per IAS 40 is for Land or Building and not for equipment.

Please also view: https://accountingblogger.com/ias-36-impairment-of-assets/

IAS 36 – Impairment Of Assets | Humayun Atif (CMA, CPA)

 Disclosures

• Model used i.e., the fair value or the cost model
• Assumptions and methods applied in determining the fair value of investment property
• the extent to which the fair value of investment property is based on a valuation by a qualified independent valuer; if there has been no such valuation, that fact must be disclosed
• rental income from investment property
• direct operating expenses (including repairs and maintenance) arising from investment property that generated rental income during the period
• the cumulative change in fair value recognized in profit or loss on a sale from a pool of assets in which the cost model is used into a pool in which the fair value model is used
• restrictions on the reliability of investment property or the remittance of income and proceeds of disposal
• contractual obligations to purchase, construct, or develop investment property or for repairs, maintenance, or enhancements

Additional Disclosures for the Fair Value Model

• a reconciliation between the carrying amounts of investment property at the beginning and end of the period, showing additions, disposals, fair value adjustments, net foreign exchange differences, transfers to and from inventories and owner-occupied property, and other changes.
• significant adjustments to an outside valuation (if any).
• if an entity that otherwise uses the fair value model measures an item of investment property using the cost model, certain additional disclosures are required

Additional Disclosures for the Cost Model

• the depreciation methods used
• the useful lives or the depreciation rates used
• the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period
• a reconciliation of the carrying amount of investment property at the beginning and end of the period, showing additions, disposals, depreciation, the impairment recognized or reversed, foreign exchange differences, transfers to and from inventories and owner-occupied property, and other changes.

ABOUT THE AUTHOR

Humayun Atif | CMA, CPA, CA (FIN), MS-IT, Oracle Certified, CA Articles from Big4

Atif is passionate about Business, Tech, and the written word. He is the author of the book ‘IFRS Made Easy’. He is a Tax and IFRS coach and the founder of accountingblogger.com