for Accounting Professionals
IAS 40 INVESTMENT PROPERTY
2011
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
1
IFRS WORKBOOKS
(1 million downloaded)
Welcome to IFRS Workbooks! These are the latest versions of the legendary workbooks in Russian and English produced by 3 TACIS projects, sponsored by the
European Union (2003-2009) and led by PricewaterhouseCoopers. They have also appeared on the website of the Ministry of Finance of the Russian Federation.
The workbooks cover various concepts of IFRS based accounting. They are intended to be practical self-instruction aids that professional accountants can use to upgrade
their knowledge, understanding and skills.
Each workbook is a self-standing short course designed for approximately of three hours of study. Although the workbooks are part of a series, each one is independent of
the others. Each workbook is a combination of Information, Examples, Self-Test Questions and Answers. A basic knowledge of accounting is assumed, but if any
additional knowledge is required this is mentioned at the beginning of the section.
Having written the first three editions, we want to update them and provide them to you to download. Please tell your friends and colleagues. Relating to the first three
editions and updated texts, the copyright of the material contained in each workbook belongs to the European Union and according to its policy may be used free of charge
for any non-commercial purpose. The copyright and responsibility of later books and the updates are ours. Our copyright policy is the same as that of the European Union.
We wish to especially thank Elizabeth Appraxine (European Union) who administered these TACIS projects, Richard J. Gregson (Partner, PricewaterhouseCoopers) who
led the projects and all friends at Bankir.Ru for hosting the books.
TACIS project partners included Rosexpertiza (Russia), ACCA (UK), Agriconsulting (Italy), FBK (Russia), and European Savings Bank Group (Brussels). The help of Philip
W. Smith (editor of the third edition) and Allan Gamborg, project managers and Ekaterina Nekrasova, Director of PricewaterhouseCoopers, who managed the production
of the Russian version (2008-9) is gratefully acknowledged. Glyn R. Phillips, manager of the first two projects conceived the idea, designed the workbooks and edited the
first two versions. We are proud to realise his vision.
Robin Joyce
Professor of the Chair of
International Banking and Finance
Financial University
under the Government of the Russian Federation
Visiting Professor of the Siberian Academy of Finance and Banking
Moscow, Russia
2011 Updated
IAS 40 INVESTMENT PROPERTY
TABLE OF CONTENTS
1. Introduction
3
2. Bank accounting and investment property 4
3.Definitions
5
4. Recognition
14
5. Disclosure
31
6. Multiple choice questions
35
property is revalued, the unrealised gain (or loss) is recorded in the
income statement.
In contrast, when an owner-occupied property is revalued, any
gains are taken directly to equity in the form of a revaluation
reserve. The table below identifies the different accounting
treatment applied to properties under IFRS depending on their
current and future uses and their ownership.
Scope
IAS 40 is applied to recognition, measurement and disclosure of
investment property.
IAS 40 does not deal with matters covered in IAS 17 Leases,
including:
7. Answers to multiple choice questions 40
1. classification of leases as finance leases, or operating
leases;
Note: Material from the following PricewaterhouseCoopers publications has been
used in this workbook: Applying IFRS
Illustrative Corporate Consolidated Financial Statements 2006
2. recognition of lease income from investment property;
1. Introduction
Aim
The aim of this workbook is to assist the individual in understanding
the IFRS accounting treatment and disclosures of Investment
Properties, as detailed in IAS 40.
3. measurement in a lessee’s financial statements of property
interests held under a lease, accounted for as an operating
lease;
4. measurement in a lessor’s financial statements of its net
investment in a finance lease;
5. accounting for sale and leaseback transactions; and
Summary
6. disclosure about finance leases and operating leases.
Accounting for investment properties differs from that of owneroccupied properties. The key difference is that when an investment
However, IAS 40 makes reference to both operating and finance
leases of investment property and the accounting for both covered
in IAS17. When property becomes the subject of a sale-and-
leaseback transaction, IAS 40 refers the reader to IAS 17 to
account for the transaction.
IAS 40 does not apply to:
1. biological assets related to agricultural activity (see IAS 41
Agriculture); and
2. mineral rights and mineral reserves such as oil, natural
gas, and similar non-regenerative resources.
2. Bank accounting and investment property
Banks may acquire properties when they foreclose on clients’
loans. Usually such properties will be shown as ‘’held for sale’’ (see
IFRS 5 workbook). If the properties are to be sold, they are
normally disposed of swiftly, as regulations of the Central Bank may
demand that the value of such properties are reduced in the books
of the banks holding them.
The bank may decide to maintain ownership of the properties
(having completed any outstanding legal steps) either for its own
use (IAS16) or as investment properties (IAS 40).
Summary
The bank may acquire an unfinished building when it forecloses on
a loan. It may decide to complete the building rather than sell it in
its unfinished state. IAS 40 applies.
Most banks are heavily involved in property: their own property and
that of their clients. Their clients often use property as collateral, as
well as using bank funds to finance the purchase and sometimes
for the construction of property. As a bank’s involvement in property
increases, so does the need for banks to employ their own property
experts.
IAS 40 applies to existing investment property that is being
redeveloped for continued use as investment property.
The use of IAS 40 would also be found if the bank owns a
subsidiary, associate or joint venture that is directly involved in
investment property. Its consolidated accounts would include
investment property as a result.
Banks’ primary involvement in investment property is where it owns
a building and uses a relatively-small part of it for banking. It leases
the rest of the building for commercial or residential use. The parts
leased to others may be accounted for as investment property.
Bank clients may be involved in investment property. If so, financial
analysis of their IFRS financial statements would require knowledge
of IAS 40.
Concerns for Bankers
In general, banks will not build up a portfolio of investment
properties unless the profits from these are considerably higher
than those that can be earned from banking activities. (Banks will
prefer to use their funds in their banking business.) Investment in
properties involves medium and long-term financing, and therefore
may have a negative effect on liquidity from banks.
IFRS primarily concerns the economic value and profit of
transactions, whilst bankers are deeply concerned about liquidity
and cash flows.
Investment properties are medium and long-term ventures. There
may be little, or no, inflow of cash until the property is finished and
rented to third parties. This may require the developer to provide
finance for much of the work for considerable periods of time before
reimbursement, with a potential for liquidity problems arising as a
result.
Property values tend to decrease in economic recessions, but also
decrease in specific towns (or areas of towns) if a major employer
(private sector or public sector) moves away from that location.
Regular reviews of the cash flows are needed to ensure that any
slippage in the development and any anticipated reduction in rental
values are quickly identified and action taken.
Investment properties, both commercial and residential, may loses
tenants, and will be replaced by tenants who pay lower rents, or
some of the property may be left empty, generating no rent.
Another major concern with investment property is hidden losses
generated by making insufficient progress, or mistakes in the early
or middle stages of the development, causing cost overruns to
appear in later accounting periods.
Banks which are financing such property are seeing the value of
their collateral decrease, based on cash flows, and may experience
late payments and defaults.
Credit officers need to understand the impact of IAS 40 in the
financial statements of clients. Where clients use the fair value
model for accounting for investment property, gains will appear in
the income statement even if they have not been realised. Such
unrealised gains have not generated cash flows, and may become
losses in future periods if significant revaluations occur.
Appraisers utilised to provide valuations for clients should be
recognised by the bank as acceptably professional and
knowledgeable in the locations and type of properties being
appraised.
In reviewing loans for impairment, the bank may have to change its
discount rate to reflect investors’ new expectations of yields in the
new market conditions.
In addition, if the property needs to be sold, the number of buyers
will be fewer than in more-favourable economic periods. Those
buyers may be expecting to pay extremely-low ‘’fire-sale’’ prices,
rather than higher prices that were being paid a few months before.
The property market may have a surplus of sellers and fewer
buyers leading to lower prices.
3.Definitions
Clients should provide professional appraisals based on all
acceptable approaches, including the Income Approach, from which
the future cash flows can be analysed for possible impairment.
Carrying Amount
A carrying amount is the amount at which an asset is recorded in
the balance sheet.
Clients may use the cost model for their investment property. Any
impairment charges need to be examined by the bank to decide
whether there is evidence that the bank’s loan is at risk.
Cost
Cost is the amount of cash (or cash equivalents) paid, or the fair
value of other consideration given, to acquire an asset at the time of
its purchase, or construction. Where payment is in shares, please
see IFRS 2 workbook.
Impact of Property Value Decreases
Fair Value
Fair value is the price that would be received to sell an asset, or
paid to transfer a liability, in an orderly transaction between
market participants at the measurement date. (IFRS 13)
owner-occupied property or for short-term sale in the
ordinary course of business, the land is regarded as held
for capital appreciation.)
(3)
a building owned by the entity (or held by the entity under a
finance lease) and leased out under one or more
operating leases.
(4)
a building that is vacant but is held to be leased out under
one or more operating leases.
(5)
property that is being constructed or developed for future use
as investment property.
Investment Property
Investment property is property that can be:
1. land, or
2. a building, or
3. part of a building, or
4. both land and building.
It is held by the owner (or by the lessee, under a finance lease)
to earn rent, or for capital appreciation, or both.
It does not include property held by the owner or lessee:
1. for the owner’s or lessee’s use in the production, supply of
goods, services, or for administrative purposes; or
2. for sale in the ordinary course of business.
It includes:
(1)
land held for long-term capital appreciation rather than for
short-term sale in the ordinary course of business.
(2)
land held for a currently undetermined future use. (If an
undertaking has not determined that it will use the land as
Owner-occupied property
Owner-occupied property is property held (by the owner, or by the
lessee under a finance lease) for use in the business and IAS 16
Property, Plant and Equipment applies to owner-occupied property.
Property type- different accounting treatment applied to properties under IFRS depending on their current and future uses and their ownership
Standard
Standard Name
Valuation
Owner-occupied property
IAS 16
Property, plant and equipment
Cost or revaluation.
(see also IAS 20 Government grants)
Property acquired in an exchange of
assets
Investment property
Investment property being redeveloped for
continuing use as investment property.
Investment property held for sale without
development (unless it meets the criteria
of IFRS 5 – see below).
Property held under an operating lease
classified as an investment property
Property held under a finance lease
IAS 16
Property, plant and equipment
IAS 40
IAS 40
Investment property
Investment property
Fair value or the carrying amount of the assets given
up.
Cost or fair value.
Cost or fair value.
IAS 40
Investment property
Cost or fair value.
IAS 40
Investment property
IAS 17
Fair value (accounted for as a finance lease under IAS
17).
The lower of fair value and the present value of the
minimum lease payments.
Leasing costs expensed.
Property held under an operating lease –
owner -occupied
Property lease to another party under a
finance lease
Property sale and leaseback
IAS 17
Leases. Owner-occupied IAS 16,
Investment property IAS 40.
Leases
IAS 17
Leases
IAS 17
Leases
Trading properties – property (including
investment property) intended for sale in
the normal course of business or being
built or developed for that purpose
Property held for sale, or included in a
disposal group that is held for sale.
Assets received in exchange for loans
(taking possession of collateral)
IAS 2
Inventories (Properties held for sale that meet the
criteria of IFRS 5 should be recorded according to
IFRS 5 – see below. These are generally not in the
normal course of business.)
Non-current assets held for sale and discontinued
operations
Non-current assets held for sale and discontinued
operations
Property, plant and equipment (see Property acquired
in an exchange of assets above)
Construction contracts
Lower of cost and net realisable value.
Provisions, contingent liabilities and contingent assets
(see also IFRIC 1, IFRIC 5)
Present value of the expected costs, using a pre-tax
discount rate.
IFRS 5
IFRS 5
IAS 16
Property provided as part of a
construction contract
Future costs of dismantling, removal and
site restoration.
IAS 11
IAS 37
Notes to the table on the previous page.
Account receivable equal to the net investment in the
lease.
As operating lease or finance lease, as appropriate
Lower of carrying amount and fair value less costs to
sell.
Lower of fair value less costs to sell and carrying
amount of the loan net of impairment at the date of
exchange.
(see HSBC plc Annual Report 2005 page 247)
Stage of contract completion or cost.
[Type text]
The table above identifies the different accounting treatment
applied to properties under IFRS depending on their current and
future uses and their ownership.
Note 1: Where an asset is revalued under IAS 16, increases in
carrying amounts above cost are recorded as revaluation
surplus, in equity.
Under IAS 40, using the revaluation model, all changes in
fair value are recorded in the income statement.
Reductions below cost are recorded in the income statement
under both methods.
EXAMPLE investment property
You buy a 25-year lease of half an office block, sublet all the
property to third parties, and use the fair value model. This is
investment property.
Once this classification alternative is selected for one property
interest held under an operating lease, all property classified as
investment property is accounted for using the fair value model, and
accounted for as finance leases under IAS 17.
Note 2. In the cases where the asset is subject to cost or
revaluations, the carrying value will be reduced by
accumulated depreciation and accumulated impairment (see
IAS 36 workbook).
EXAMPLE fair value for whole portfolio
Your client buys short-term leases of retail shops and subleases
them as bazaars. Your client treats one property as investment
property. Due to this, all investment property in your client’s portfolio
must be accounted for using the fair value model.
Workbooks are available on our website on each standard that
explain each accounting treatment with examples.
Investment property is held to earn rent, or for capital appreciation,
or both.
EXAMPLE owner occupied
You buy a property to let, but the tenant goes bankrupt.
Temporarily you use it as offices whilst you seek a new tenant.
During this time, it is owner-occupied property.
A property interest that is held by a lessee, under an operating
lease, may be classified and accounted for as investment property
only if the property would otherwise meet the definition of an
investment property, and the lessee uses the fair value model for
the asset. The lease must be accounted for as a finance lease
under IAS 17.
The fair value model is described later in this book.
The following are examples of investment property:
(1) land held for long-term capital appreciation, rather than
for short-term sale in the ordinary course of business.
(2) land held for a undetermined future use. The land is
regarded as held for capital appreciation.
(3)
EXAMPLE How should management recognise land held for a
currently undetermined future use?
Issue
Investment property is land or buildings (or part thereof) held by the
owner or lessee under a finance lease to earn rental income or for
[Type text]
capital appreciation, or both.
operating leases) to different entrepreneurs. This is investment
property.
How should management recognise land held for a currently
undetermined future use?
Background
Bank A is involved in real estate development. A has purchased
land in Moscow through the exercise of a purchase option that had
been acquired some years ago. The purchase price was 10 million
and the fair value of the land as determined by an independent
valuer is 23.7 million. The bank is undecided about whether to
develop the land for sale to a third party or sell it, but will determine
a use within the next accounting period.
The bank’s accounting policy is to recognise investment property at
fair value.
Solution
The land should be classified as inventory. Although the bank has
not determined a use, the property is being held either for sale or
for further development and eventual sale in the ordinary course of
business. The property would be held at the lower of cost and fair
(market) value.
Had the bank decided to hold the land for long-term capital
appreciation rather than short-term sale in the ordinary course of
business, then it would be classified as investment property.
(4) a building owned by the bank (or held by the bank under
a finance lease) and leased out, via operating leases.
EXAMPLE investment property
You own a 99-year (finance) lease on a building. After using it as
bank premises, you have organised the building into 50 separate
offices, for startup businesses. You sublet these offices (via
.
(5) a building that is vacant, but is held to be leased out via
one, or more, operating leases.
EXAMPLE investment property
You own a 99-year (finance) lease on a building. You have
converted the building into 50 separate offices, for startup
businesses. You plan to sublet these offices (via operating
leases) to different entrepreneurs, but are awaiting the
approval of the local authorities. This is investment property.
The following are examples of items that are not investment
property and are outside the scope of IAS 40 (see table on page
6):
(1) property held for sale in the ordinary course of business,
or in the process of construction, or development. These
are accounted for under IAS 2 Inventories, or IFRS 5.
(2) property being built, or developed, on behalf of third
parties. These are accounted for under IAS 11
Construction Contracts.
(3) owner-occupied property. This is accounted for under
IAS 16.
Included as owner-occupied property is property held for future use
as owner-occupied property, property held for future development
and use as owner-occupied property, property occupied by
employees (whether, or not, the employees pay rent at market
rates) and owner-occupied property awaiting disposal. Such
properties are accounted for under IAS 16, not IAS 40.
[Type text]
construction period?
EXAMPLES owner-occupied property.
You own the following properties:
1. A new office, into which your bank will move next month.
2. Some land, on which you will build an extension to your
bank.
3. An employee social club.
4. Your existing branch office, that you will vacate and sell.
All are owner-occupied property.
IAS 40 applies to existing investment property that is being
redeveloped for continued use as investment property.
EXAMPLES investment property
You own the following properties:
1. Land on which you will develop offices to let.
2. An office block that is being modernised to increase rents. The
office was leased to third party tenants, and will also be leased
to third party tenants when modernised. It will continue to be
accounted for as investment property throughout the
modernisation.
3.
Property being constructed for future use as investment
property
Issue
Investment property is land or buildings (or part thereof) held by
the owner or lessee under a finance lease to earn rental income
or for capital appreciation, or both.
i) can property being constructed for future use as investment
property be recognised as investment property during the
ii) how should the accounting change if management is
redeveloping an existing investment property?
Background
A bank has recently acquired a plot of land to construct an office
building. The land and building will be leased to a third party
under an operating lease agreement when the development is
completed.
Solution
i) IAS 40 applies.
ii) Management can continue to recognise the property as
investment
property
during
the
construction
period.
Redevelopment of investment property for continued future use
as investment property is within the scope of IAS 40.
These properties continue to be recognised as investment
property, and are measured at either cost, or fair value,
depending on the accounting policy the bank has adopted.
(4) property that is leased to another bank, under a finance
lease.
EXAMPLE owned land leased
You own a building that is leased to a third party under a 999-year
finance lease. This is not an investment property. You account for
the lease as an account receivable. (See IAS 17)
EXAMPLE Investment property is land or buildings (or part thereof)
[Type text]
held by the owner or lessee under a finance lease to earn rental
income or for capital appreciation, or both.
2. another portion that is held for use in the production, supply of
goods, services, or for administrative purposes.
How should management classify a property that is held for
undetermined future use?
If these portions could be leased out separately, the portions are
accounted for separately. This also applies if the law allows the
parts to be sold separately.
Background
B is a supplier of industrial paint in Germany. In 20X3, B purchased
a plot of land on the outskirts of Frankfurt that has mainly low-cost
public housing and has very limited public transport facilities.
The government has plans to develop the area as an industrial park
in five years’ time, and the land is expected to greatly appreciate in
value if the government proceeds with the plan. B’s management
has not decided what to do with the property.
Solution
Management should classify the property as an investment
property. Although B has not determined a use for the property after
the park’s development, in the medium term the land is held for
capital appreciation.
IFRS considers land as held for capital appreciation if the owner
has not determined whether it will use the land either as owneroccupied property, or for short-term sale, in the ordinary course of
business.
The owner should choose either the fair value model, or the cost
model, to recognise the investment property.
Some properties comprise:
1. a portion that is held to earn rent, or for capital appreciation,
EXAMPLE part-leased, part-owned
A client owns a petrol station, which it operates. Above the petrol
station is an office that it leases to a third party.
The petrol station is owner-occupied property, and the office is
investment property, and is accounted for separately.
EXAMPLE Property held to earn rentals.
Issue
Property, plant and equipment (PPE) are tangible assets that a
bank:
i) uses in the production or supply of goods or services, rents to
others, or uses for administrative purposes; and
ii) expects to use for more than one period.
Certain properties include a portion that is held to earn rentals or for
capital appreciation, and another portion that is held for use in the
production or supply of goods and services or for administrative
purposes.
If these portions can be sold separately (if the law allows), or leased
out separately under a finance lease, a bank accounts for the
portions separately. The property is treated exclusively as
investment property if an insignificant portion is held for use in
production, or supply of goods or services, or for administrative
purposes.
[Type text]
How should the condition that the portions be capable of separate
sale, or lease under finance lease, be interpreted for the purpose of
determining if split accounting is appropriate?
Background
A bank owns an office building. The bank occupies nine of the ten
floors as its head office, while the tenth floor is leased out to a third
party under an operating lease.
Management proposes that the property be treated entirely as PPE
because the portion leased to a third party is leased under an
operating lease and only represents 10% of the property.
Solution
Management should recognise nine floors as PPE, but the
remaining one floor as investment property.
The conditions regarding separate sale or lease under finance
lease relate only to management’s ability and not to the terms of
any current lease. The requirement for the property to be capable of
being leased under a finance lease is to ensure that the definition of
an investment property included in of IAS 40 is met.
EXAMPLE sublet
You sublet 3 floors of your office block to a third party, but your
staff can share the canteen and restrooms within the sublet area.
The sublet area is investment property.
In some cases, a bank provides ancillary services to the occupants
of a property it holds. A bank treats such a property as investment
property, if the services are insignificant to the arrangement as a
whole.
EXAMPLE insignificant services provided
The owner of a building provides security and maintenance
services to the lessees, who occupy the building. The building is the
owner’s investment property.
In other cases, the services provided are significant.
EXAMPLE significant services provided
Your client owns and manages a office building. Services
provided to guests are significant to the arrangement as a whole.
Therefore, an owner-managed office building
is owner-occupied property, rather than investment property.
The amount of the property leased, 10%, is more than an
insignificant portion of the property. The requirement to account
separately for the PPE and investment property elements must be
followed, assuming the 10th floor can be sold, or leased out under a
finance lease.
It may be difficult to determine whether ancillary services are so
significant that a property does not qualify as investment property.
For example, the owner of an office building sometimes transfers
some responsibilities to third parties under a management
contract.
If the portions could not be sold separately, the property is
investment property, only if an insignificant portion is held for use
in the production, supply of goods, services, or for administrative
purposes.
EXAMPLES outsourcing
A office building owner’s position may be that of a passive investor,
having outsourced all running of the property to another firm.
Alternatively, the owner may only have outsourced some day-to-
[Type text]
day functions, such as the catering.
Judgment is needed to determine whether a property qualifies as
investment property.
A bank may develop criteria so that it can exercise its judgment
consistently.
In some cases, a bank owns property that is leased to, and
occupied by, its parent or another subsidiary.
The property does not qualify as investment property in the
consolidated financial statements, because the property is owneroccupied from the perspective of the group.
However, from the perspective of the bank that owns it, the
property is investment property if it meets the definition.
Therefore, the lessor treats the property as investment property in
its individual financial statements (but not in the consolidated
financial statements).
EXAMPLE Investment and owner occupied
You lease your whole factory to your parent company. In your
financial statements it is treated as investment property. In the
group accounts it is treated as owner-occupied property.
group as a whole. However, from the perspective of the individual
bank that owns it, the property is investment property if it meets the
definition. The lessor therefore treats the property as investment
property in its stand-alone financial statements [IAS40].
Should a hotel owned by a bank that was leased to a related
company be classified as investment property in the consolidated
financial statements?
Background
Bank A owns a hotel. B, a fellow subsidiary of A, manages a chain
of hotels, and receives management fees for operating its chain,
except for the hotel owned by A. A’s hotel owned is leased to B for
2,000,000 a month for a period of 5 years. Any profit or losses from
operating A’s hotel rests with B. The hotel that A owns has an
estimated remaining useful life of 40 years.
Solution
The hotel should be classified as property, plant and equipment in
the consolidated financial statements.
The hotel is both owned and managed by the group from the
perspective of the group, and therefore it should be recognised as
owner-occupied for the use in the supply of goods or services.
A should recognise the property (subject to an operating lease) as
investment property in its individual financial statement.
EXAMPLE Property occupied by subsidiary
Issue
A bank owns property that is leased to, and occupied by, its parent
or another subsidiary. The property does not qualify as investment
property in consolidated financial statements that include both
entities, because it is owner-occupied from the perspective of the
B should recognise the transaction as an operating lease
arrangement in its individual financial statement and charge the
rental payments to the income statement over the period of the
lease.
[Type text]
4. Recognition
Investment property is recorded as an asset only when:
1. it is probable that there will be future benefits from the
investment property and
Parts of investment properties may have been acquired through
replacement. For example, the interior walls may be replacements
of original walls.
A bank will record the cost of replacing part of an existing
investment property at the time that cost is incurred.
2. the costs of the investment property can be measured reliably.
These costs include costs incurred initially to acquire an investment
property and costs incurred subsequently to add to, replace part of,
or service, a property.
EXAMPLE site cost
You buy land and a factory building. You remove the building and
build offices on the land. The cost of the land, factory and rebuilding
costs are all included in the cost of the investment property, as they
are effectively all part of the site costs.
Service Costs – Repairs and Maintenance
A bank does not record the costs of repairs and maintenance in the
carrying amount of an investment property – they are not
capitalised. These costs are recorded in the income statement as
incurred. These costs exclude items that significantly add value.
Costs of servicing are primarily the cost of labour and consumables,
and may include the cost of minor parts.
EXAMPLE Costs of servicing
Your client owns a block of flats. Your client is responsible for
cleaning, repairs and maintenance of the common areas. These
costs are expensed when incurred, and matched with the rental
income in the income statement.
The carrying amount of the parts that have been replaced is
eliminated from the balance sheet.
In the following examples, I/B refers to Income Statement and
Balance Sheet (SFP).
EXAMPLE parts that are replaced
Your building has a carrying amount of $1 m.
New interior walls cost $0,2 m.
The original walls have a carrying amount of $0,1 m.
Add the cost of the new walls, and remove the carrying amount of
the old walls: $1 m + $0,2 m -$0,1 m = $1,1 m.
I/B
DR
CR
Property, plant & equipment
B
$0,2 m
Cash
B
$0,2 m
This records the purchase of the new walls
Depreciation
I
$0,1 m
Property, plant & equipment
B
$0,1 m
This records the disposal of the old walls
[Type text]
EXAMPLE parts that are replaced
You own a block of flats above your bank. It has a central security
system that needs replacing. The replacement cost is $25.000. You
estimate that the original security system has a carrying value of
$10.000 within the overall value of the block of flats.
Increase the carrying value of the flats by $15.000 ($25.000$10.000) when the new system is installed.
I/B
DR
CR
Property, plant & equipment
B
25.000
Cash
B
25.000
Recording the purchase of the new system
Depreciation
I
10.000
Property, plant & equipment
B
10.000
This records the disposal of the old system
Measurement at Recognition
An investment property is measured initially at its cost. Transaction
costs are included in the initial measurement.
The cost of an investment property comprises its purchase price
and any directly attributable expenditure.
EXAMPLES attributable costs
Directly attributable expenditure includes professional fees for
legal services, property transfer taxes and other transaction
costs.
The cost of a self-built investment property is its cost at the date
when the construction, or development, is complete.
IAS 40 applies.
EXAMPLE self build
You are given some land by the local council. Throughout 2XX3,
you build a factory on the land. On January 1 st 2XX4, you let the
factory to a third party. You account for the factory as investment
property under IAS 40.
Examples of costs that should be expensed in the income
statement, (and not capitalised) are:
(i) start-up costs (unless they are necessary to bring the
property to the condition necessary for it to be capable
of operating in the manner intended by management),
(ii) operating losses incurred before the investment property
achieves the planned level of occupancy, or
(iii) abnormal amounts of wasted material, labour or other
resources incurred in constructing or developing the
property.
If payment for an investment property is deferred, its cost is the
cash price equivalent. The difference between the cash price
equivalent and the total payments is recorded as interest expense
over the period of credit.
EXAMPLE purchase of asset on credit
You can pay $1m cash for a building, or pay for it over 3 years for a
total cost of $1,3m. Using either payment method, the cost will be
$1m. If the second payment option is used, the $0,3m will be
treated as interest and will be accounted for as follows:
I/B
DR
CR
Property, plant & equipment
B
$1.0 m
Accounts payable
B
$1.0 m
[Type text]
Being the purchase of the
building
Unexpired interest
Accrued interest payable < 1 year
Accrued interest payable >1 year
Interest expense
Unexpired interest
Annual interest charge
Accrued interest payable < 1 year
Cash
Payment of Interest
B
B
B
I
B
B
B
$0.3m
$0.1m
$0.2m
$0,1 m
$0,1 m
$0,1 m
$0,1 m
The initial cost of a property interest held under a lease, and
classified as an investment property is accounted for as a finance
lease under IAS 17. This recognises the property at the lower of the
fair value and present value of the minimum lease payments. An
equivalent amount is recorded as a liability.
(The present value of minimum lease payments is described in the
workbook covering IAS 17).
EXAMPLE Present value of lease payments
You lease a building from the owner. Its fair market value is
$1,1m. The present value of the minimum lease payments is
$1m. Record the cost as $1m, and the lease liability also as $1m.
I/B
DR
CR
Property, plant & equipment (land)
B
$1m
Finance lease creditor
B
$1m
This records the lease of the
property
The cost of an investment property acquired in exchange for a nonmonetary asset is measured at fair value unless:
the exchange transaction lacks commercial substance or
the fair value of the asset received / given up, is not reliably
measurable.
EXAMPLE asset exchange
You can pay $1 m cash, and give up an aircraft with a fair value
of $4 m, in exchange for a building, which will be leased to third
parties. If the building cannot be measured at fair value, its fair
value should be taken to be $5 m.
I/B
DR
CR
Investment property
B
$5 m
Cash
B
$1 m
Property,
plant
& equipment B
$4 m
(aircraft)
This records the exchange of
aircraft and cash for the building.
The acquired asset is measured at the carrying amount of the
assets given up, even if a bank cannot immediately de-recognise
the asset given up.
If the acquired asset is not measured at fair value, its cost is
measured at the carrying amount of the asset given up.
Measurement After Recognition
Accounting Policy
A bank must choose either the fair value model, or the cost model.
Once the method is chosen, the bank should apply that method to
all of its investment property.
Changes in accounting policies are detailed in IAS 8 (see IAS 8
workbook).
A change of policy from the cost model to the fair value model may
result in a more relevant presentation of financial statements.
[Type text]
It is highly unlikely that a change from the fair value model to the
cost model will result in a more appropriate presentation.
IAS 40 requires all banks to determine the fair value of investment
property, either for measurement (if the bank uses the fair value
model) or for disclosure (if it uses the cost model).
Fair value should be determined by an independent valuer who:
 holds a recognised and relevant professional qualification,
and
 has recent experience in the location, and category, of the
investment property being valued.
Fair Value Model
After initial recognition of property at cost, a bank that chooses the
fair value model will measure all of its investment property at fair
value.
EXAMPLE Fair value model - valuation methods
Issue
After initial recognition, if fair value model is chosen, all of the
bank’s investment property should be measured at fair value.
Which fair value valuation methods should management adopt?
the market are compared with the subject property. Sales prices
are analysed by applying appropriate units of comparison, adjusted
by differences between the subject property and related market
data.
The sales comparison approach has broad applicability and is
persuasive whenever sufficient market data is available. However,
its reliability decreases when market conditions are marked by rapid
change or volatility or in valuations where market transactions are
limited.
Income capitalisation method: market value is estimated from the
expected future benefits to be generated by the property in the form
of income streams. The method considers net income generated by
comparable property, capitalised to determine the value for the
subject property. The income capitalisation method is often applied
to ownership of equity interests in a leased property.
Cost method: establishes the value of the property by reference to
the cost of constructing an equivalent property. The cost method is
often applied in valuations of new or recent construction, and
proposed construction, additions or renovation.
The valuation methods above do not include any future capital
expenditure that will improve or enhance the property, and do not
reflect the related future benefits from this future expenditure.
A lessee must apply fair value to investment property under an
operating lease.
Solution
IFRS do not prescribe a particular valuation method. The IASC
considered the market value guidance issued by the International
Valuation Standards Committee (IVS) in developing IAS 40. The
valuation methods recognised by IVS include the following:
EXAMPLE Recognition of property where the land component is
under operating lease
Sales comparison method: similar or substitute properties sold in
Issue
[Type text]
Leases of land should be classified as operating leases if title is not
expected to pass to the lessee by the end of the lease term [IAS17].
EXAMPLE Fair value model - use basis for fair value 1
Can management automatically classify, as investment property,
property that is leased out under an operating lease?
Issue
Background
A bank owns a hotel that it leases out (as lessor) under an
operating lease to a hotel management group. The hotel is situated
on land leased by the government to the bank (as lessee) for a
period of 99 years with no transfer of title to the bank at the end of
the lease. The hotel building’s useful life is expected to be
approximately 40 years. There are no provisions in the lease to
return the land with the building intact at the end of the 99-year
lease.
The concept of fair value under IFRS is similar to the concept of
market value as defined by the International Valuation Standard
Committee (IVS).
Solution
Land
Should management attribute any value to a building if the fair
value of the property (land and building) is determined on the basis
of redevelopment of the site?
The land should be accounted for as operating lease under IAS 17
and can be recognised as an investment property only if it meets
the definition of investment property [IAS40] and the bank has
chosen the fair value model for investment property.
The market value of an investment property is determined on the
basis of the highest value, considering any use that is financially
feasible, justifiable and reasonably probable. The "highest and
best-use" value may result in a property’s fair value being
determined on the basis of redevelopment of the site.
Background
Bank A owns an investment property that consists of land and a
building leased to a department store in the centre of a major city.
The carrying value of the property is 80 (land = 60, building = 20).
Building
Management should account for the hotel building as investment
property.
The building meets the definition of investment property and should
be accounted for under IAS 40. A building is recognised as
investment property if the lease of land extends beyond the
building’s expected useful life and there are no provisions in the
lease to return the land with the building intact.
Management commissions a firm of property valuers to value the
property. The valuation report provides the following results:
Existing use basis - 85 (land 65, building 20)
Highest and best-use basis - 100 (land 100, building 0)
The highest and best-use valuation assumes redevelopment of the
site. This will involve demolishing the current building and
constructing an office tower, which would be leased to tenants.
[Type text]
Management does not intend to redevelop the property but would
like to recognise the higher value (100). However, management
proposes that the value be allocated as land 80 and building 20,
because the existing building will still be used for the foreseeable
future.
Solution
The highest and best-use value (100) should be used, but none of
the value should be allocated to the building.
The property’s market value is obtained on the basis of the building
being demolished for redevelopment of the site, as opposed to its
current use (as a department store).
The market value of the current building on the highest and bestuse of the property (as an office block) is therefore zero. The
building’s carrying amount should therefore be reduced to zero. The
land value is increased to 100.
Gain / losses from a change in the fair value are recognised in the
income statement for the period in which they arise. This is a
critical difference from property that is subject to IAS 16, where
unrealised revaluation surpluses are not recorded in the income
statement, but taken directly to the revaluation reserve in equity.
EXAMPLE gain in value
Your block of flats has been revalued, showing increase in value
of $1m. This should be shown in the income statement for the
period.
I/B
DR
CR
Property, plant & equipment
B
$1m
Gain on revaluation of investment I
$1m
property
This records the revaluation of the
flats
The fair value of investment property is the price at which the
property could be exchanged between knowledgeable,
independent parties.
EXAMPLE - Fair value model - use basis for fair value 2
Issue
The concept of fair value under IFRS is similar to the concept of
market value as defined by the International Valuation Standard
Committee (IVS).
Market value differs depending on the use of a property. On what
basis should management determine fair value?
Background
A bank owns an investment property that is a piece of land with an
old warehouse on it. The land can be redeveloped into a modern
leisure park. The market value of the land would be higher if
redeveloped than the market value under its current use.
Management is unclear about whether the investment property’s
fair value should be based on the market value of the property (land
and warehouse) under its current use, or the potential market value
of the land.
Solution
The fair value of the property should be the market value of the land
for its potential use.
[Type text]
The "highest and best-use" is used as the most appropriate model
for fair value. Using this approach of valuation, the existing use of
the property is not the only basis considered. Fair value is the
highest value, determined from market evidence, by considering
any other use that is financially feasible, justifiable and reasonably
probable.
This approach is confirmed in IAS 40. It establishes that the
guidance in IAS 40 is substantially identical to the fair value
guidance in the International Valuation Standards. These standards
are published by the International Valuation Standards Committee
and require the highest and best-use basis of valuation.
For the purpose of establishing fair value, a seller is neither overeager, nor forced, to sell and is prepared to sell at a reasonable
price in current market conditions.
In the absence of current prices in an active market, a bank
considers information from a variety of sources, including:
i.
current prices in an active market for properties of different
nature, condition or location (or subject to different lease or
other contracts), adjusted to reflect those differences;
ii.
recent prices of similar properties on less active markets,
with adjustments to reflect any changes in economic
conditions since the date of the transactions that occurred at
those prices; and
iii.
discounted cash flow projections based on reliable estimates
of future cash flows, supported by the terms of any existing
lease and other contracts and (when possible) by external
evidence such as current market rents for similar properties
in the same location and condition, and using discount rates
that reflect current market assessments of the uncertainty in
the amount and timing of the cash flows.
The definition of fair value assumes transfer of an asset and
immediate cash sale.
Fair value is determined without any deduction for transaction
costs arising on sale.
The fair value of investment property reflects market conditions at
the balance sheet date. As market conditions may change, the
amount reported as fair value may also change.
Fair value of investment property reflects rental income from
current leases, and supportable assumptions about rental income
and expected cash outflows from future leases.
Both the buyer and the seller are aware of:
 the nature and characteristics of the investment property,
 its current and potential uses, and
 market conditions at the balance sheet date.
A buyer would not pay a higher price than that of the market.
In exceptional cases, the fair value of the property will not be
reliably determinable on a continuing basis. This will happen if
there ceases to be a market for a particular property, either due to
its use, or its location.
EXAMPLE no market for the property
You own a laundry, for which there has been an active market.
New regulations require major investments in effluent control, and
frequent inspections. Nobody now wants to buy laundries, so the
active market disappears. Fair market value cannot be determined
on a continuing basis.
[Type text]
THE ACCOUNTING TREATMENT IS DETAILED BELOW IN INABILITY TO
DETERMINE FAIR VALUE RELIABLY.
Fair value and value-in-use
Fair value differs from value-in-use, as defined in IAS 36
Impairment of Assets (see IAS 36 workbook).
In determining the fair value of investment property, a bank does
not double-count assets, or liabilities, that are recognised as
separate.
EXAMPLES double counting
1. equipment, such as lifts or air-conditioning, is often an integral
part of a building and is usually included in the fair value of the
investment property, rather than recognised separately as
property, plant and equipment.
Fair value reflects the open market.
Value-in-use reflects the bank’s estimates that may not be
applicable to the open market.
For example, fair value does not reflect any of the following factors
as they would not be generally available to knowledgeable, willing
buyers and sellers:
(1)
additional value derived from the creation of a portfolio of
properties in different locations;
(2)
synergies between investment property and other assets,
including other properties;
(3)
legal rights, or legal restrictions, that are specific only to the
current owner; and
(4) tax benefits, or tax burdens, that are specific to the current
owner.
These elements would be included in value-in-use.
2. where an office is leased on a furnished basis, the fair value
of the office generally includes the fair value of the furniture,
because the rental income relates to the furnished office. When
furniture is included in the fair value of investment property, a
bank does not record that furniture as a separate asset.
3. the fair value of investment property excludes prepaid, or
accrued, operating lease income, because it is recorded as a
separate liability or asset.
The fair value of investment property:
 does not reflect future capital expenditure that will improve,
or enhance, the property
 does not reflect the benefits from this future expenditure.
EXAMPLE improvements
You can pay $1m for a building, which is the market price. If you
spend $0,4m on improvements, the value of the building would
increase to $1,6m.
The fair value should not reflect the benefits of this improvement
option, until the money has been spent.
[Type text]
In some cases the expectation is that the present value of
payments relating to an investment property will exceed the
present value of the related cash receipts, thus generating losses.
This situation is considered to be an onerous contract.
regulations require major investments in emission control, and
frequent inspections. Nobody now wants to buy or rent chemical
factories, so the active market disappears. Fair market value
cannot be determined on a continuing basis.
IAS 37 Provisions, Contingent Liabilities and Contingent Assets
should be applied to determine whether to record a liability for the
onerous contract and, if so, how to measure it.
EXAMPLE provisions
You hold a 25-year lease on a building in a depressed area. It
has few tenants and much of the building is not rented. The
present value of rent payments that you have to make is
$5million. If you spend $1million on improvements, the present
value of payments increases to $6million (including
improvements -$5million + $1million). The expected rents that
you could receive from tenants would have a present value of
$4million. The shortfall of $2million should be accounted for
under IAS 37 (see workbook covering IAS 37).
If there is no market for the property, the cost model set out in IAS
16 should be used until disposal of the investment property.
Inability to Determine Fair Value Reliably
In exceptional cases the fair value of the investment property may
not be reliably determinable on a continuing basis.
If this occurs when the bank first acquires the property, it should be
accounted for under the cost model of IAS 16.
This arises when comparable market transactions are infrequent,
and alternative reliable estimates of fair value (for example, based
on discounted cash flow projections) are not available.
EXAMPLE no market for the property
You own a chemical factory, taken as collateral following a client’s
default, for which there has been an active market. New
EXAMPLE Inability to measure fair value reliably
Issue
After initial recognition, if fair value model is chosen, all of the
bank’s investment property should be measured at fair value.
What are the circumstances under which management can revert to
the cost model for the measurement of investment property?
Background
Bank A owns several investment properties and has adopted the
fair value model for measurement purposes. It has completed the
development of an entertainment complex and intends to lease the
complex to a third party.
Bank A will classify the complex as an investment property. A’s
management is not able to determine the fair value of the
entertainment complex, as there is no active market for such a
property. A sale of the complex would be subject to significant
negotiations.
Solution
The bank should measure the property at fair value. Although there
is no active market for the property, the management intends to
lease it to a third party. Management should be able to approximate
fair value based on the present value of the future lease rentals.
[Type text]
The residual value of the investment property is assumed to be
zero. The full amount recorded as cost will be depreciated over the
useful life of the asset.
If the cost model in IAS 16 is used for a particular property for
which there is no market, all its other investment property will
continue to be valued at fair value.
If the bank has already used the fair value measurement for the
specific property, fair value measurement will continue until
disposal, even if comparable market transactions become less
frequent, or market prices become less readily available.
Cost Model
After choosing initial recognition at cost, all of the investment
property will be measured at cost less any accumulated
depreciation and any accumulated impairment losses. This is in
accordance with IAS 16’s requirements for the cost model (see
IAS 16 workbook):
EXAMPLE impairment loss charged to income statement
Your investment property had a carrying value of $20m, based on
the cost model. The current market value is $19m. The $1m
impairment is expensed to the income statement.
I/B
DR
CR
Accumulated impairment
B
$1m
Impairment losses
I
$1m
This records the impairment of the
property
This excludes those properties 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 Noncurrent Assets Held for Sale and Discontinued Operations.
Investment properties 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) shall be measured in accordance with IFRS 5.
Cost includes external transaction costs, such as legal and agents’
costs, registration fees and property taxes, but not the costs of
internal staff. The costs must be specifically attributable to the
property in question.
The inclusion of external transaction costs in the cost model
contrasts with the fair value model where transaction costs are
excluded from valuations.
Transfers
Transfers to, or from, investment property are made only when
there is a change in use, evidenced by:
(1) start of owner-occupation - transfer from investment
property (IAS 40) to owner-occupied property (IAS 16);
(2) start of development with a view to sale, - transfer from
investment property to inventories; (Note: IAS 40 does
not explain why this option is available, as normally
such properties would be classified as ‘held for
sale’ and accounted for under IFRS 5. It is
suggested that properties would only be classified
as inventories only if the criteria of IFRS 5 have not
yet been met in full.)
[Type text]
(3) end of owner-occupation, - transfer from owneroccupied property to investment property;
(4) start of an operating lease to a third party, - transfer from
inventories (see note in (2) above) to investment
property; or
When a bank decides to dispose of an investment property without
development, it must continue to treat the property as an
investment property, until it is eliminated from the balance sheet,
and does not treat it as inventory.
If the property is a material item, IFRS 5: Non-current Assets Held
for Sale and Discontinued Operations may apply for its disclosure
in the financial statements – see IFRS 5 workbook. Banks usually
choose this option as they do not normally keep inventories of
property.
EXAMPLE until disposal, investment property remains
unchanged
You decide to sell your interest in a block of flats. This remains
investment property, until the sale. IFRS 5 may apply for
disclosing the item.
Similarly, if a bank begins to redevelop an existing investment
property for continued use as investment property, it is not
reclassified as owner-occupied property during the redevelopment.
Summary of accounting treatment for transfer to/from
investment property measured at fair value
Issue
Initial recognition of investment property, and its derecognition
(when it is no longer recognised as investment property), may result
from a change in use of the property rather than its purchase or
sale.
Solution
The following table and the text below it summarise how
management should recognise and derecognise investment
property depending on the nature of the change in use.
The treatment of gains and losses is applicable only to entities that
carry investment property at fair value. No gain or loss is
recognised on transfers of investment property carried at historical
cost.
Changes in use
Transfer
Start of owner
occupation
End of owner
occupation
Start of
development to sell
Investment
Property to PPE*
PPE* to Investment
Property
Investment
Property to
Inventories (or
IFRS 5 – see note
above)
Inventories (or
IFRS 5 – see note
above) to
Investment
Start of operating
lease to third party
Fair Value
gains/losses
None
IAS 16
None
Income statement
[Type text]
Property
*PPE = Property, Plant and Equipment
Transfers to and from investment property should only be made
when there is a change in use of the property. Such transfers and
the resulting effect, under the fair value model, are identified below:
i) An investment property is transferred to PPE only when
management starts to occupy the property. The fair value of the
property at that date becomes the cost for subsequent accounting
under IAS 16, therefore no gain or loss arises.
ii) An investment property is only transferred from PPE to
investment property at the end of owner occupation. Any fair value
gain or loss arising at that date is treated as a revaluation under
IAS 16 and taken to equity.
iii) An investment property that will be sold is only transferred to
inventories (or IFRS 5 – see note above) if and when the company
starts redeveloping the property with a view to selling it. The fair
value of the property at that date becomes the cost for subsequent
accounting under IAS 2, therefore no gain or loss arises.
iv) A transfer from inventories (or IFRS 5 – see note above) to
investment property occurs only when the property is the subject of
an operating lease to a third party. Fair value gain or loss at that
date is recognised in the income statement.
Property being redeveloped for continuing use remains classified as
investment property and is not transferred to PPE.
EXAMPLE redevelopment does not change classification
You own a finance lease on a building. You are converting the
building into 50 separate offices. You plan to sublet these offices to
different entrepreneurs. This remains investment property
throughout the redevelopment.
When a bank uses the cost model, transfers between investment
property, owner-occupied property and inventories (or IFRS 5 –
see note above) do not change the carrying amount of the property
transferred, and they do not change the cost of that property for
measurement, or disclosure purposes. Therefore, there is no profit,
nor loss, on these transactions.
EXAMPLE reclassify property from investment to ready-for-sale
You use the cost model. When you reclassify property from
investment to ready-for-sale, or to owner-occupied, there is no
change to the carrying amounts. Therefore, there is no profit, nor
loss, on these transactions.
For a transfer from investment property, carried at fair value, to
owner-occupied property or inventories (or IFRS 5 – see note
above), the property’s cost for subsequent accounting under IAS
16, or IAS 2, is its fair value.
EXAMPLE Changes in accounting policies
Issue
The adoption of an accounting policy for events or transactions that
differ in substance from previously occurring events or transactions
is not a change in accounting policies (IAS8).
How should management recognise the adoption of a new
accounting policy in respect of an existing asset?
Background
[Type text]
Bank A owns an office building which it uses for its own
administrative purposes. Accordingly, the building is classified as
property, plant and equipment and is carried at depreciated
historical cost (IAS 16).
During the current year, management moved the workforce to a
new building and leased the old building to a third party.
Accordingly, the old building was reclassified as investment
property and carried at fair value. Bank A had not previously
earned rental income on any of its properties.
Management has questioned whether the comparative amounts for
the old building should be restated to fair value to aid comparability
with the prior period.
Solution
Management should recognise the effects prospectively, since it is
not a change in accounting policy but there is a change in use of
the property. No restatement of the comparative amounts should
be made.
The different accounting treatment applied to the same property in
the current and prior years is appropriate, because the building was
used for different purposes in the two years.
Depending on the materiality of the rental revenue in relation to the
bank’s revenue as a whole, management should consider whether
a new reportable segment now exists. This is not the same as a
situation where an existing segment becomes reportable.
Management should not restate operating segment-reporting
information (IFRS 8).
EXAMPLE reclassification from investment property.
You use the fair value model. When you reclassify $20m property
from investment property to ready-for-sale, or to owner-occupied
property, there is no change to the carrying amounts.
The fair value of the investment property becomes the cost of
inventory(or IFRS 5 – see note above), or the cost of owneroccupied property so is no profit, nor loss.
I/B
DR
CR
Property, plant & equipment (owner- B
$20m
occupied property)
Property,
plant
&
equipment B
$20m
(investment property)
Being the reclassification of the
property
I/B
DR
CR
Inventory (or IFRS 5 – see note B
$20m
above)- Property, plant & equipment
Property,
plant
&
equipment B
$20m
(investment property)
Being the alternative reclassification
of the property
If an owner-occupied property becomes an investment property
carried at fair value, you apply IAS 16 up to the date of change in
use. At that date, any difference between the carrying amount
under IAS 16 and fair value will treated in the same way as a
revaluation under IAS 16.
[Type text]
EXAMPLE reclassification from owner-occupied property
You use the fair value model. You reclassify property from owneroccupied property to investment property. Your property had a
carrying value of $15m. It has been revalued at $17m. The $2m
surplus will be credited to the revaluation surplus reserve within
equity.
I/B
DR
CR
Property, plant & equipment
B
$2m
Revaluation reserve
B
$2m
This records the revaluation.
Property,
plant
& equipment B
$17m
(owner-occupied property)
Property,
plant
& equipment B
$17m
(investment property)
Being the reclassification of the
property
A bank depreciates an owner-occupied property according to IAS
16, and records any impairment losses that have occurred. When
an owner-occupied property is transferred to investment property, it
may be revalued and carried at fair value,
At the date of transfer from owner-occupied property to investment
property, treat any difference between the carrying amount and fair
value in the same way as a revaluation under IAS 16:
(1) any resulting decrease in the carrying amount of the
property is immediately recorded in the income
statement.
EXAMPLE revaluation- shortfall
Your owner-occupied property had a carrying value of $20m. It is
transferred to investment property. It has been revalued at $19m.
The $1m shortfall is expensed to the income statement
I/B
B
I
Accumulated impairment
Impairment loss
This records the revaluation of the
property
Property, plant & equipment (owner- B
occupied property)
Property,
plant
&
equipment B
(investment property)
Being the reclassification of the
property
DR
CR
$1m
$1m
$19m
$19m
However, to the extent that an amount is included in revaluation
surplus for that property, the decrease is charged against that
revaluation surplus.
.
EXAMPLE revaluation- surplus
Your owner-occupied property had a carrying value of $10m. It has
been revalued at $12m. The $2m surplus is credited to the
revaluation surplus reserve within equity.
I/B
DR
CR
Property, plant & equipment
B
$2m
Revaluation reserve
B
$2m
This records the revaluation of the
property
It is then transferred to investment property and revalued at $7m.
$2m of the shortfall will be charged to the revaluation reserve. The
remaining $3m shortfall will be charged to the income statement.
I/B
DR
CR
[Type text]
Property, plant & equipment
Revaluation reserve
Accumulated impairment
Impairment loss
This records the revaluation of the
property following reclassification
(2)
(i)
(ii)
(iii)
B
B
B
I
$2m
$2m
$3m
$3m
any resulting increase in the carrying amount is treated as
follows:
the increase is recognised in the income statement to the
extent that the increase reverses a previous impairment loss
for that property,
any remaining part of the increase is credited
directly to equity in revaluation surplus.
On subsequent disposal of the investment property,
the revaluation surplus included in equity may be transferred
to retained earnings. The transfer from revaluation surplus
directly to retained earnings and not through income
statement.
EXAMPLE revaluation shortfall, then surplus
Your owner-occupied property had a carrying value of $20m. It has
been revalued at $19m. The $1m shortfall is expensed to the
income statement.
I/B
DR
CR
Accumulated impairment
B
$1m
Impairment loss
I
$1m
This records the revaluation of the
property in the first year
It is then transferred to investment property and it is revalued at
$23m. $1m of the surplus will be credited to the income statement.
The remaining $3m surplus will be credited directly to the income
statement.
I/B
B
Property, plant & equipment
(investment property)
Accumulated impairment
B
Impairment gain
I
Revaluation gain
I
This records the revaluation of the
property after the reclassification
DR
$3m
CR
$1m
$1m
$3m
For a transfer from inventories (or IFRS 5 – see note above) to
investment property that will be carried at fair value, any difference
between the fair value of the property at that date and its previous
carrying amount is recognised in income statement.
EXAMPLE reclassification and revaluation surplus
You have built a shopping complex for sale for a cost of $3m.
You include it as inventory for this amount.
I/B
DR
CR
Inventory (or IFRS 5 – see note B
$3m
above)
Costs
I
$3m
Transfer of self- build costs to
inventory
A client offers to rent the shopping complex from you, which you
accept. The fair value of the factory, based on the rent, is $4m.
You transfer the shopping complex to investment property,
valued at $4m and record the $1m gain in the income statement.
[Type text]
I/B
B
Property, plant & equipment
(investment property)
Inventory
B
Unrealised gain on investment I
property
This records the revaluation on the
reclassification of inventory to
investment property.
DR
$4m
CR
$3m
$1m
I/B
equipment B
Transfers from inventory to investment property (carried at fair
value) is consistent with the treatment of sales of inventories (or
IFRS 5 – see note above).
On completion of the construction, or development, of a self-built
investment property that will be carried at fair value, any difference
between the fair value of the property at that date, and its previous
carrying amount, is recognised in income statement.
IAS 16 for this amount.
DR
$6m
Property,
plant
&
(investment property)
Property, plant & equipment (owner- B
occupied)
Unrealised gain on investment I
property
This records the revaluation on the
reclassification of owner-occupied to
investment property.
DR
$7m
CR
$6m
$1m
Disposals
1. An investment property is eliminated from the balance sheet on
disposal, and when no future economic benefits are expected
from it.
EXAMPLE reclassification and gain
You have built an office for a cost of $6m. You account for it
under
I/B
Property, plant & equipment (owner- B
occupied)
Costs
I
Costs to build office
Clients lease the office from you. The fair value of the office,
based on the rents, is $7m. You transfer the office to investment
property, valued at $7m, and recognise the $1m gain in the
income statement.
CR
$6m
2. The disposal may be achieved by sale, or by entering into a
finance lease. In determining the date of disposal for investment
property, a bank applies the criteria in IAS 18 for recognising
revenue.
3. Sale and leaseback transactions are detailed in the workbook to
IAS 17.
4. If a bank recognises in the carrying amount of an asset the cost
of a replacement for part of an investment property, it also
derecognises the carrying amount of the part replaced.
[Type text]
EXAMPLE new components
Your property has a carrying amount of $10m. The new air
conditioning unit cost $0,2m. The original air conditioning has a
carrying amount of $0,1m. Add the cost of the new air conditioning
unit, and remove the carrying amount of the old unit -$10m + $0,2m
-$0,1m = $10,1m.
I/B
DR
CR
Property, plant & equipment
B
$0,2m
Cash
B
$0,2m
This records the cost of the new unit
Depreciation
I
$0,1m
Property, plant & equipment
B
$0,1m
This records the disposal of the old
unit
For investment property accounted for using the cost model, a
replaced part may have been accounted for within the total cost of
the property.
EXAMPLE gain on disposal
$6m is the carrying value of your property that you sell for $8m.
You record a gain of $2m ($8m-$6m) in the income statement.
Cash
Property, plant & equipment
Gain on disposal of property
Sale of property
I/B
B
B
I
DR
$8m
CR
$6m
$2m
The consideration receivable on disposal of an investment property
is recognised initially at fair value. In particular, if payment for an
investment property is deferred, the consideration received is
recognised initially at the cash price equivalent. The difference
between the nominal amount of the consideration and the cash
price equivalent is recognised as interest revenue in accordance
with IAS 18, using the effective interest method.
EXAMPLE gain on disposal and interest received
If it is not practicable for a bank to determine the carrying amount of
the replaced part, it may use the cost of the replacement as an
indication of what the original cost was in the first instance.
Under the fair value model, the fair value of the investment property
may already reflect that the part to be replaced has lost its value.
Gains, or losses, arising from the disposal of investment property
are determined as the difference between the net disposal
proceeds and the carrying amount of the asset. They are recorded
in the income statement (unless IAS 17 requires otherwise on a
sale and leaseback) in the period or disposal.
A property with a carrying value of $6m is to be sold for $8m
cash, or for $9m payable in 1 year’s time.
You record a gain of $2m ($8m-$6m) in the income statement
for either payment method.
Cash
Property, plant & equipment
Gain on disposal of property
Sale of property
I/B
B
B
I
DR
$8m
CR
If your buyer pays $9m in 1 year’s time, the extra $1m will be
treated as interest receivable
$6m
$2m
[Type text]
I/B
B
B
I
DR
$8m
CR
Accounts receivable
Property, plant & equipment
$6m
Gain on disposal of property
$2m
Sale of property
Cash
B
$9m
Accounts receivable
B
$8m
Interest receivable
I
$1m
Cash receipt and recognition of
interest
Compensation for impairment is recognised in the income
statement when it becomes receivable. Compensation examples:
state nationalising assets, payments from insurance companies.
Impairments, or losses, of investment property, claims for
compensation, and any purchase, or construction, of replacement
assets are separate events and are accounted for as follows:
(1) impairments of investment property are recognised in
accordance with IAS 36;
(2)
retirements, or disposals, of investment property are
recognised in accordance with IAS 40;
(3)
compensation for investment property that was
impaired, lost, or given up, is recorded in the income
statement when it becomes receivable; and
(4)
the cost of assets restored, purchased, or built as
replacements, is determined in accordance with IAS 40.
5. Disclosure
Fair Value Model and Cost Model
These disclosures apply in addition to those in IAS 17.
Under IAS 17, the owner of an investment property provides
lessors’ disclosures about leases into which it has entered.
A bank that holds an investment property under a lease provides
lessees’ disclosures for finance leases, and lessors’ disclosures for
any operating leases into which it has entered.
A bank will disclose:
(1) whether it applies the fair value, or the cost model.
(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.
(3) when classification is difficult, the criteria it uses to distinguish
investment property from owner-occupied property, and from
property held for sale in the ordinary course of business.
(4) the methods and assumptions applied in determining the fair
value including a statement whether fair values are supported
by market evidence, or other factors because of the nature of
the property and lack of comparable market data.
(5) whether fair value of is based on a valuation by an independent
valuer, who holds a recognised and relevant professional
qualification, and has recent experience in the location, and
category of the investment property being valued. If there has
been no such valuation, that fact is disclosed
[Type text]
(6) the amounts recognised in income statement for:

rental income from investment property

direct operating expenses (including repairs and
maintenance) arising from investment property that generated
rental income during the period; and

direct operating expenses (including repairs and
maintenance) arising from investment property that did not
generate rental income during the period.

the cumulative change in fair value recognised in the income
statement on a sale of investment property from a pool of
assets in which the cost model is used into a pool in which the
fair value model is used

the existence and amounts of restrictions on the realisability
of investment property, remittance of income or disposal
proceeds.

contractual obligations to purchase, build or develop
investment property, or for repairs, maintenance, or
enhancements.
1.1
Fair Value Model
(please see Sample Accounting Policy and Note taken from
Illustrative Investment Property Financial Statements 2002,
PWC, below)
A bank that applies the fair value model will disclose a
reconciliation between the carrying amounts of investment
property at the beginning, and end, of the period, showing the
following:
(1) additions, disclosing separately those additions resulting
from acquisitions, and those resulting from subsequent
expenditure recognised in the carrying amount of an
asset;
(2)
(3)
additions resulting from acquisitions through business
combinations;
disposals;
(4)
net gains, or losses, from fair value adjustments;
(5)
the net exchange differences arising on the translation of
the financial statements into a different presentation
currency, and on translation of a foreign operation into
the presentation currency of the reporting bank;
(6)
transfers to, and from, inventories and owner-occupied
property;
(7)
other changes.
When a valuation is adjusted significantly for the purpose of the
financial statements, for example to avoid double-counting of
assets, or liabilities, that are recognised as separate assets and
liabilities, the bank will disclose a reconciliation between the
valuation obtained, and the adjusted valuation included in the
financial statements, showing separately the aggregate amount of
any recognised lease obligations that have been added back, and
any other significant adjustments.
When a bank measures investment property using the cost model,
due to the inability to determine fair value on a continuing basis,
the above reconciliation will disclose amounts relating to that
investment property separately from amounts relating to other
investment property. In addition, a bank will disclose:
(1) a description of the investment property;
[Type text]
(ii)
additions resulting
combinations;
(iii)
disposals;
(2) an explanation of why fair value cannot be determined
reliably;
(3) if possible, the range of estimates within which fair value
is highly likely to lie; and
(4) on disposal of investment property not carried at fair
value:
(i) the fact that the bank has disposed of investment
property not carried at fair value;
(ii) the carrying amount of that investment property at
the time of sale; and
(iii) the amount of gain, or loss, recognised.
1.2
Cost Model
A bank that applies the cost model will also disclose:
(1) the depreciation methods used;
(2) the useful lives, or the depreciation rates, used;
(3)
the gross carrying amount, and the accumulated depreciation
(plus with accumulated impairment losses) at the beginning,
and end, of the period;
(i)
a reconciliation of the carrying amount of investment property
at the beginning, and end, of the period, showing the
following:
additions, disclosing separately those additions resulting from
acquisitions, and those resulting from subsequent expenditure
recognised as an asset;
acquisitions
through
business
(iv) depreciation;
(v)
the amount of impairment losses recognised, and the amount
of impairment losses reversed, during the period, in
accordance with IAS 36;
(vi) the net exchange differences arising on the translation of the
financial statements into a different presentation currency, and
on translation of a foreign operation, into the presentation
currency of the reporting bank;
(vii) transfers to, and from, inventories and owner-occupied
property; and
(viii) other changes; and
(5)
(i)
the fair value of investment property. When a bank cannot
determine the fair value of the investment property reliably, it
will disclose:
a description of the investment property;
(ii)
(4)
from
an explanation of why fair value cannot be determined
reliably; and
(iii) if possible, the range of estimates within which fair value is
highly likely to lie.
Illustrative Corporate Consolidated Financial Statements 2006
(PwC)
Investment property
[Type text]
Investment property is defined as 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, realise capital appreciation or both, rather than for:
(i) use in the production of supply of goods or services or
for administrative purposes; or (ii) sale in the ordinary
course of business.
Note – Accounting policies
Basis of preparation
The consolidated financial statements have been
prepared under the historical cost convention as modified
by the revaluation of land and buildings, , financial assets
and financial liabilities at fair value through profit or loss
and investment properties, which are carried at fair value.
Investment property
Investment property, principally comprising freehold office
buildings, is held for long-term rental yields and is not
occupied by the Group. Investment property is carried at
fair value, representing the open market value determined
annually by external valuers. Fair value is based on active
market prices, adjusted, if necessary, for any difference in
the nature, location or condition of the specific asset. If this
information is not available, the Group uses alternative
valuation methods such as recent prices on less active
markets or discounted cash flow projections. These
valuations are reviewed annually by [name of the external
valuers]. Changes in fair values are recorded in the income
statement as part of other income.
Land held under operating lease is classified and
accounted for as investment property when the rest of the
definition of investment property is met. The operating
lease is accounted for as if it were a finance lease.
Note – Investment property
2006
2005
15,690 16,043
748 (1,396)
1,670 1,043
Beginning of year
Exchange differences
Fair value gains (included in other
(losses)/gains – net)
End of year
18,108 15,690
The investment properties are valued annually on 31
December at fair value based on market values
determined by an independent qualified valuer.
The following amounts have been recognised in the income
statement:
Rental income
Direct operating expenses arising from investment
properties
that generate rental income
Direct operating expenses that did not generate
rental income
2006 2005
770 620
(640) (550)
(40)
(20)
Note – Capital commitments
Capital expenditure contracted for at the balance
sheet date but not recognised in the financial
statements is as follows:
Property, plant and equipment
Investment property
Consolidated balance sheet (extracts)
2006
3,593
290
2005
3,667
–
Investment property – repairs and maintenance
ASSETS
2006
Non-current
Property, plant and equipment 155,341 98,670
Investment property
18,108 15,690
2005
Contractual obligations for future repairs and
140 130
[Type text]
maintenance of
investment property
6. Multiple choice questions
1.
1.
2.
3.
Fair value is the amount for which an asset:
Could be exchanged by related parties.
Would realise as scrap value.
Could be exchanged by knowledgeable, independent
parties.
2.
1.
2.
3.
4.
5.
Investment property can be:
Land.
A building.
Part of a building.
Both land and building.
All of these.
3.
1.
2.
3.
4.
5.
6.
Investment property can be held by:
The owner.
A lessor, under a finance lease.
A lessee, under a finance lease.
1 & 2.
1& 3.
All.
4.
1.
2.
3.
Owner-occupied property:
Can be treated as investment property.
Cannot be treated as investment property.
Can sometimes be treated as investment property.
5.
A property that is held by a lessee, under an operating
lease, may be held as an investment property, but only
if:
It is a hotel.
The lessee uses the fair value model.
The operating lease exceeds 20 years.
1.
2.
3.
[Type text]
5. 1-7 +10.
6.
1.
2.
3.
If property held under an operating lease is classified
as investment property:
All property held under operating leases are classified as
investment properties.
All investment property will be accounted for using the fair
value model.
Depreciation will no longer be charged.
7. Which of the following are examples of investment
properties:
(1) Land held for long-term capital appreciation.
(2) Land held for an undetermined future use. The land is
regarded as held for capital appreciation.
(3) A building owned by the bank (or held by the bank under a
finance lease) and leased out, via one, or more, operating
leases.
(4) A building that is vacant, but is held to be leased out via one,
or more, operating leases.
(5) Property held for sale in the ordinary course of business.
(6) Property being built on behalf of third parties.
(7) Owner-occupied property.
(8) Property that is being built for use as investment property.
(9) Existing investment property that is being redeveloped for
continued use as investment property.
(10)
Property that is leased to another bank, under a
finance lease.
1.
2.
3.
4.
1-10.
1-7.
1-4.
1-4 +8 + 9.
8. If a property is partly an investment property, and partly
owner-occupied, the firm should account for the
property:
1. As investment property.
2. As owner-occupied.
3. Each portion should be accounted for separately.
9. If a firm provides significant ancillary services to tenants
in its property:
1. It may have to be classified as owner-occupied,
rather than an investment property.
2. It may have to be classified as investment property,
rather than as owner-occupied.
3. The service fees should be capitalised.
10. A parent company leases a property to its subsidiary.
It may be classified as an investment property in the:
1. Subsidiary’s accounts.
2. Consolidated accounts.
3.
Parent company’s individual financial statements.
11. Repairs and maintenance costs are normally:
1. Capitalised.
2. Expensed in the income statement as incurred.
3. Recorded as deferred expenses.
12. If the costs of a major repair (for example, replacement of
walls) are capitalised:
1. They must be shown as a separate asset.
2. Any remaining costs of a previous walls must be written
off.
3. The board of directors must be notified immediately.
[Type text]
13. Elements of cost of an investment are:
i.
ii.
iii.
iv.
Its purchase price
Legal costs.
Property transfers taxes.
Overheads of the property department relating to the purchase
of the asset.
1. i-iv
2. i-iii
3. i-ii
4. I
14. The following costs:
(i) start-up costs (unless they are necessary to bring the property
to the condition necessary for it to be capable of operating in the
manner intended by management).
(ii) operating losses incurred before the investment property
achieves the planned level of occupancy.
(iii) abnormal amounts of wasted material, labour or other resources
incurred in constructing or developing the property.
should be accounted for as:
1. Extraordinary items.
2. (Capitalised as) fixed assets.
3. Expenses.
15. If payment for an investment property is deferred beyond
normal credit terms, any additional payment above the cash
cost of the asset will be accounted for as:
1. Cost of fixed asset.
2. Borrowing cost.
3. Repairs and maintenance.
16. The cost of a property interest held under a lease should
be valued at:
1. Fair value.
2. The present value of the minimum lease payments.
3. The higher of 1& 2.
4. The lower of 1& 2.
17. If one or more assets are exchanged for a new asset, the
new asset is valued at:
1. Replacement cost.
2. Fair value.
3. Residual value.
18. In the case of an exchange of assets, if the acquired asset
cannot be valued:
1. The cost of the asset given up is used.
2. The residual value is used.
3. The asset cannot be capitalised.
19. A bank can choose either the cost model or the revaluation
model, as its accounting policy for investment property. It
must apply the chosen model to:
1. All fixed assets.
2. All investment property.
3. Major assets.
20. A gain arising from a change in the fair value of investment
property should be recorded:
1. In the revaluation reserve.
2. As an extraordinary item.
3. In the income statement.
[Type text]
21. Fair value includes:
1. Special financial arrangements.
2. Transaction costs incurred in the sale.
3. Both 1 & 2.
4. Neither 1 nor 2.
22. Fair value includes:
(1) additional value derived from the creation of a portfolio
of properties in different locations;
(2) synergies between investment property and other
assets;
(3) legal rights, or legal restrictions, that are specific only to
the current owner; and
(4) tax benefits, or tax burdens, that are specific to the
current owner.
(6) All of 1-4.
(7) None of 1-4.
23. Value in use includes:
(1) Additional value derived from the creation of a portfolio
of properties in different locations;
(2) Synergies between investment property and other
assets;
(3) Legal rights, or legal restrictions, that are specific only to
the current owner; and
(4) Tax benefits, or tax burdens, that are specific to the
current owner.
(5) All of 1-4.
(5) None of 1-4.
24. Fair value accounts for future capital expenditure that will
improve the property:
1.
By discounting it to present value.
2.
By noting it as a contingent liability.
3.
By not reflecting it.
25. Using the cost model, the asset in accounted for at:
1. Cost.
2. Cost less accumulated depreciation.
3. Cost less accumulated depreciation and any impairment
losses.
26. Transfers to, or from, investment property is made only
when there is a change in use, evidenced by:
(1) Start of owner-occupation - transfer from investment
property to owner-occupied property;
(2) Start of development with a view to sale, - transfer from
investment property to inventories;
(3) End of owner-occupation, - transfer from owneroccupied property to investment property;
(4) Start of an operating lease to another party, - transfer
from inventories to investment property;
(5) Transfer from property in the course of construction, or
development, to investment property.
(6) Any of 1-5.
(7) None of 1-5.
[Type text]
27. When a bank decides to dispose of an investment property
without development:
1. It is transferred to inventory.
2. It continues to treat the property as an investment
property.
3. It is reclassified as owner-occupied.
28. If a bank begins to redevelop an existing investment
property for continued use as investment property:
1. It is transferred to inventory.
2. It continues to treat the property as an investment
property.
3. It is reclassified as owner-occupied.
29. When a bank uses the cost model, transfers between
investment
property,
owner-occupied
property
and
inventories:
1. Do not change the carrying amount of the property
transferred.
2. Should be revalued at the date of transfer.
3. Are prohibited.
30. For a transfer from investment property, carried at fair
value, to owner-occupied property or inventories, the
property’s cost for subsequent accounting is:
1. Its original cost.
2. Its fair value, at the date of change in use.
3. Its original cost, less accumulated depreciation.
31. For a transfer from inventories to investment property that
will be carried at fair value, any difference between the fair
value of the property at that date and its previous carrying
amount is:
1. Recognised in income statement.
2. Discounted to present value.
3. Noted it as a contingent liability.
4. Written off over the life of the asset.
32. When a bank completes the construction, or development,
of a self-built investment property that will be carried at fair
value, any difference between the fair value of the property at
that date, and its previous carrying amount:
1. Recognised in income statement.
2.
Discounted to present value.
3.
Noted it as a contingent liability.
4.
Written off over the life of the asset.
33. Compensation from third parties for items impaired, lost or
sequestrated should be recorded as income:
1.
When the item is lost.
2.
When the compensation is receivable.
3.
When the cash is received.
34. The carrying amount of an item is derecognised (written
out of the balance sheet):
1 On disposal.
2 On entering into a finance lease.
3 Either.
35. A gain on the sale of an asset should be recorded as:
1.
A capital gain in equity.
[Type text]
2.
3.
A gain in the income statement.
Revenue.
36. The gain, or loss, arising on the sale of an asset is:
1.
The cash proceeds.
2.
The net proceeds minus the carrying value of the
asset.
3.
The net proceeds minus the residual value of the
asset.
7. Answers to multiple choice questions
1. 3
2. 5
3 5
4. 2
5. 2
6. 2
7. 4
8. 3
9. 1
10. 3
11. 2
12. 2
13. 2
14. 3
15. 2
16. 4
17. 2
18. 1
19. 2
20. 3
21. 4
22. 6
23. 5
24. 3
25. 3
26. 6
27. 2
28. 2
29. 1
30. 2
31. 1
32. 1
[Type text]
33. 2
34. 3
35. 2
36. 2