Module 14
IAS 40
Investment Property
2021
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Scope (.02 - .04)
■ IAS 40 applies to recognition, measurement and disclosure of
investment property (IP).
– Applicable to lessee’s right of use assets.
Definitions (.05 - .16)
Land, building,
part of
building, both
■ Investment Property is property [owned or lessee’ right of use asset]
held to earn rentals or for capital appreciation or both, rather than for:
– Use in the production or supply of goods or services or for admin
purposes; or
– Sale in the ordinary course of business
■ Owner Occupied Property is property held for use in the
production/supply of goods or services or for admin purposes (IAS 16)
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Definitions (cont’d)
•Some properties comprise both IP portion and owner occupied
portion:
• If these can be sold separately (or leased separately under
finance lease), the entity accounts for these properties
separately
• If cannot be sold (leased) separately, then only classified as
investment property if the owner-occupied portion is
insignificant
•Group structure can change nature of property!! (NB!)
Definitions (cont’d)
■ Ancillary services (.11)
■ Significant services (.12)
– Owner-managed hotel?
– Owner outsources responsibilities to 3rd party?
Examples – work through all of them!
■Examples of IP (.08):
–Land held for long-term capital appreciation rather than for
short-term sale.
–A building owned by the reporting enterprise and leased out
under one/more operating leases.
■Examples of items that are not IP (.09):
–Property held for sale in the ordinary course of business (IFRS 5
or IAS 2).
–Owner-occupied (OO) property, including property held for future
use as OO, held for future development and subsequent use as
OO, property occupied by employees (regardless of market
related rentals), OO awaiting disposal
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Recognition (.16 - .19)
•Recognise IP as an asset when:
• It complies with the definition, and
• It is probable that future economic benefits will flow to the entity, and
• The cost of the IP can be measured reliably
•“Cost for owned properties” includes the following: initial
cost, and also costs incurred subsequently to add to,
replace part of, or service a property.
•Cost of an IP held as a right of use asset is determined in
terms of IFRS 16.
•Day-to-day service costs are not capitalised.
•Replacement: derecognise old component, recognise
new component.
Measurement initially
(.20 - .29)
■ Owned IP is initially measured at its cost,
transaction cost should be included.
■ Also include directly attributable cost
– E.g. professional fees, property transfer taxes
■ Deferred payments: cost price = cash price,
difference = interest expense over period of
credit
■ Exchange transactions: see par .27 - .29
Measurement
subsequently(.30 - .56)
Choose an
acc policy
and apply to
all IP (.30)
Cost model:
Fair value model:
• Treated according to the
benchmark treatment per
IAS 16, i.e. cost price less
accumulated depreciation
and accumulated
impairment losses.
•
•
• Right of use assets will be
treated according to the
cost model in IFRS 16
•
•
Show all IP at fair value.
Gains or losses from a change in
fair value – included in net profit for
the period.
Fair value = actual market state on
SFP date, not future or past.
Right of use asset shall be remeasured not the underlying
property
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Measurement – subsequently
•Fair value is always required – either for accounting policy
purposes or for disclosure purposes
What are the IAS 8
implications?
Measurement – after initial recognition
■ Cost Model (.56)
– An entity that chooses cost model shall measure all its
IP in accordance with IAS 16 or IFRS 16 for right of use
assets held by the lessee. (other than those properties
classified as held-for-sale – IFRS 5).
Measurement – subsequently
■ Fair Value Model (.33 - .55):
– If this model is chosen, apply to all IP, unless unable to
determine fair value reliably (only in exceptional
circumstances – par 53). In such a case the cost model
(IAS 16 or IFRS 16) is applied.
– NB – gains or losses on fair value adjustments are
recognised in P/L (compare to IAS 16)!
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Inability to measure fair value reliably
(.53)
•Rebuttable presumption that fair value is determinable
on a continuing basis.
•In exceptional cases when the asset is acquired at first
fair value cannot be determined. Only when
comparable market transactions are infrequent and
alternative estimates of fair value are not available.
•Then, IP is measured using the benchmark treatment
in terms of IAS 16 for owned properties and IFRS 16 for
right of use assets until disposal.
•The residual value shall be assumed to be zero.
•The rest of the IP may be measured at fair value.
Inability to measure fair value reliably (.53)
■ If an enterprise previously measured an
IP at fair value, the enterprise should
continue to measure the IP at fair value
until disposed (even if comparable
market transactions become less
frequent or market prices become less
readily available).
Transfers (.57 - .65)
■ Transfers only performed when there is a change in use, evidenced by:
– Commencement of owner-occupation
■ IP to owner-occupied
– Commencement of development with view to sell
■ IP to inventories
– End of owner-occupation
■ Owner-occupied to IP
– Commencement of operating lease to 3rd party
■ Inventories to IP
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Transfers (.57 - .65)
■ Transfers from IP to Owner-occupied (IAS 16) or Inventories (IAS 2), the
deemed cost for subsequent accounting, shall be its fair value at date
of change in use
■ Transfer of Owner-occupied property (IAS 16) to IP, entity applies IAS 16
for owned properties & IFRS 16 for right of use assets up to date of
change in use. Therefore differences between carrying amount and fair
value treated as revaluations i.t.o. IAS 16
Transfers (.57 - .65)
■ Transfer of Inventories to IP: the difference between carrying
amount (IAS 2) and fair value, is recognised in P/L (consistent
with sales of inventories)
■ When as entity completes construction or development of a
self constructed IP, any difference between fair value and
previous carrying amount is accounted for in P/L
Disposals (.66 - .73)
•IP is derecognised on disposal or when IP is
permanently withdrawn from use and no further
future economic benefits are expected from its
disposal
•Gains or losses arising from disposal/retirement
recognised in P/L
•Compensation from 3rd parties for IP that was
impaired, lost or given up is recognised in P/L
when the compensation becomes receivable.
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Tax and Deferred Tax on remeasurements of IP
■ The gain/loss on remeasurement has been included in P/L;
therefore it is included in profit before tax.
■ SARS does however not recognise the re-measurement!
■ Thus, we will have temporary and permanent differences,
which only reverse when the IP is sold, and a recoupment is
applicable (s 8(4)a).
Tax and Deferred Tax on remeasurement of IP
■Why permanent and timing differences?
■CAPITAL GAINS TAX!
■A 80% portion of the fair value changes on the LAND will be
included in taxable income when the IP is sold = TD
■The remaining 20% will not be taxed, and is therefore = PD
■For BUILDINGS, if intention is to sell, and there is a wear and
tear allowance, there will be a CGT effect and recoupment.
■If no wear and tear on buildings, then same treatment as for
Land
■There is a rebuttable presumption that the economic benefits
on the IP will be recovered through sale.
If the the asset is depreciable & it is
the business’ model to consume all
the benefits through use than sale.
Consider this example
■ Land purchased on 1/01/2015 for R800
■ Buildings purchased on 1/01/2015 for R2100
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Example: DT on remeasurement of IP
(assume a tax rate of 28%)
Acquired
1/1/15
Land
Remeasure
31/12/15
Change
800
200
1 000
Buildings
2 100
900
3 000
TOTAL
2 900
1100
4 000
CGT – see IAS 12 PP part
two!
FV
20% PD
80% TD
Base cost
PD
Original cost price
TD
Tax base
What taxation rate to use?
■ Depreciable assets:
– Presumption rebutted - Normal rate (NOT APPLICABLE FOR
CACN040/CACB080)
– Intention to sell - CGT
■ Non-depreciable assets:
– Always CGT
■ Inventory:
– Always normal tax rate
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Journals – Presumption
rebutted200
Land (SoFP)
Fair value adj (P/L)
200
Taxation expense (P/L)
44,8
20%PD & 80%TD
Deferred tax (SoFP)
44,8
(200 x 80% x 28%)
Building(SoFP)
900
Fair value adj (P/L)
Taxation expense(P/L)
900
100% TD
252
Deferred tax(SoFP)
252
(900 x 28%)
Tax calc (I/S method) on 31/12/15
presumption rebutted
Profit before tax
1100
Permanent diff on land
(20% of R200)
(40)
Timing differences
(1 060)
•Land (80% of R200)
(160)
•Buildings (100% of R900) (900)
Thus, D/T = R297 liability(1 060 x 28%)
B/S method on 31/12/15
If, intention to rent out
CA
Land
1 000
TB
800
TD
160
DT
45L
40 = Perm. Diff!!
Buildings
Net
3 000
2 100
900
252L
1 060
297L
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Journals – intention cap
appreciation
Land(SoFP)
200
Fair value adj (P/L)
200
Taxation expense(P/L)
20%PD & 80%TD
44,8
Deferred tax (SoFP)
44,8
(200 x 80% x 28%)
Building(SoFP)
900
Fair value adj (P/L)
Taxation expense
900
20%PD & 80%TD
201,6
Deferred tax
201,6
(900 x 80% x 28%)
Tax calc (I/S method) on 31/12/15
If, intention to hold for capital appreciation
Profit before tax
1100
Permanent diff on land
(40)
(20% of R200)
Permanent diff on building
(180)
(20% of R900)
Timing differences
(880)
•Land (80% of R200)
(160)
•Buildings (80% of R900)
(720)
Thus, D/T = R297 liability
B/S method on 31/12/15
If, intention to hold for capital appreciation
CA
Land
1000
TB
800
TD
160
DT
45L
40 = Perm Diff!!
Buildings
3000
2100
720
202L
180 = Perm diff!!
Net
880
247L
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Disclosure
■ Very extensive!
■ Please see par .74 -.79 for disclosure on investment
properties
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