CHAPTER 5
INVESTMENT PROPERTY
Connolly – International Financial Accounting and Reporting – 4th Edition
5.1 INTRODUCTION
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Land and/or buildings held to earn rentals or for capital
appreciation (or both)
Not considered to be like most non-current assets as not
acquired for ‘use’ in the traditional sense
While recent events may have caused many to question the
cliché ‘as safe as houses’, perhaps it’s not the investment
property but the excessive related debt that is the problem
Connolly – International Financial Accounting and Reporting – 4th Edition
5.2 IAS 40 INVESTMENT PROPERTY
Definition:
An investment property is property (land or a building – or part
of a building – or both) that meets the following conditions:
(a) the property is held to earn rentals or for capital
appreciation or both
Rather than for:
(i) use in the production or supply of goods or services or for
administrative purposes; or
(ii) sale in the ordinary course of business.
Connolly – International Financial Accounting and Reporting – 4th Edition
Scope
IAS 40 applies to all investment property including those:
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held by a lessee under a finance lease
held by a lessee under an operating lease where certain
conditions are met
held by a lessor and rented out under an operating lease
See Chapter 5, Examples 5.1 and 5.2
Connolly – International Financial Accounting and Reporting – 4th Edition
Table 5.2: When is property investment property?
YES
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Land held for LT capital
appreciation rather than ST
sale in the ordinary course of
business;
NO
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Land held for a currently,
undetermined future use;
Building owned by the entity
(or held by the entity under a
finance lease (See Chapter 8))
and leased out under one or
more operating leases;
Building that is vacant but is
held to be leased out under
one or more operating leases ;
and
Property being constructed or
developed for future use as
investment property.
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Property intended for sale in
the ordinary course of
business or in the process of
construction or development
for such sale (IAS 2
Inventories – See Chapter
11);
Property being constructed
or developed on behalf of
third parties (IAS 11
Construction Contracts –
See Chapter 12);
Owner-occupied property
(IAS 16 Property, Plant and
Equipment – See Chapter 6);
and
Property leased to another
entity under a finance lease
(See Chapter 8).
Connolly – International Financial Accounting and Reporting – 4th Edition
Initial recognition and measurement
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Investment property should be recognised initially as an
asset when and only when:
 it is probable that the future economic benefits that are
attributable to the investment property will flow to the
entity; and
 the cost of the investment property can be measured
reliably.
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Investment property should initially be measured at cost.
This includes the purchase price and any directly attributable
expenditure (e.g. professional fees and property taxes).
Connolly – International Financial Accounting and Reporting – 4th Edition
Measurement after initial recognition
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An entity has the choice between the:
 Fair value model (not market value as per IAS 16 – See
Chapter 6)
 Cost model
The selected policy should be applied to all investment
properties
Fair value model
 Price at which the property could be exchanged between
knowledgeable willing parties in an arm’s length
transaction
 No depreciation
 Gains or losses should be recognised in arriving at profit
or loss
Cost model
 At cost less accumulated depreciation
Connolly – International Financial Accounting and Reporting – 4th Edition
Example 5.3: Applying the fair value model
Floyd Limited commenced trading on 1 January 2012 and its non current
assets at 31 December 2012 include two investment properties, Gilmore and
Waters, that are let on an arm’s length basis to a third party. Floyd Limited
applies the fair value model in accounting for investment properties, which
are professionally valued for the first time on 31 December 2012. The
valuation details are as follows:
Property
Cost
€m
Fair value
€m
Increase /
(Decrease) €m
Gilmore
210
345
135
Waters
390
280
(110)
Requirement
Explain and set out the journal entries necessary to record the movements
between cost and far value in respect of each of the properties for the period
ended 31 December 2012.
Connolly – International Financial Accounting and Reporting – 4th Edition
Example 5.3: Applying the fair value model
Suggested Solution:
Under the fair value model, changes in valuation are taken to
the Statement of profit or loss and other comprehensive income
– profit or loss:
Gilmore
DR Investment Property
CR SPLOCI – P/L Gain on Investment Property
€135m
€135m
Waters
DR SPLOCI – P/L Loss on Investment Property
CR Investment Property
€110m
€110m
Connolly – International Financial Accounting and Reporting – 4th Edition
Example 5.4: Applying the cost and fair value models
ABC, a manufacturing company, purchases a property for €1m
on 1 January 2012 for its investment potential. The land
element of the cost is believed to be €400,000 and the
buildings element is expected to have a useful life of 50 years.
At 31 December 2012, local property indices suggest that the
fair value of the property has risen to €1.1m.
Requirement
Show how the property would be presented in the financial
statements as at 31 December 2012 if ABC adopts the:
(i) Cost model; and
(ii) Fair value model.
Connolly – International Financial Accounting and Reporting – 4th Edition
Example 5.4: Applying the cost and fair value models
Suggested Solution:
(i) Cost model
Depreciation in the year is €600,000 = €12,000
50
SPLOCI – P/L = depreciation charge of €12,000; and
SFP = property shown at NBV of €1,000,000 – €12,000 =
€988,000.
(ii) Fair value model
SFP = property shown at fair value of €1.1m; and
SPLOCI – P/L = gain of €0.1m representing the fair value
adjustment.
Connolly – International Financial Accounting and Reporting – 4th Edition
Example
Kerr Limited holds a building for its investment potential. This
building originally cost €250,000.
The fair value at 31 December 2012 was €500,000. At 31
December 2013 the fair value has risen to €600,000.
The property was purchased on 1 January 2009 . Assume a
useful economic life of 25 years.
How should this change in fair value be accounted? (Ignore
taxation)
Connolly – International Financial Accounting and Reporting – 4th Edition
Example: Suggested Solution
Fair Value Model:
• Carry at fair value (2012 = €500,000; 2013 = €600,000)
• Gain of £100,000 to SPLOCI – P/L
Cost Model:
• Carry at depreciated historic cost
• The property is five years old therefore NBV at the end of
2013 is £200,000
Connolly – International Financial Accounting and Reporting – 4th Edition
TRANSFERS
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From owner-occupied to investment property at fair value
= any difference between IAS 16 carrying value and fair
value of property is accounted for as an IAS 16 revaluation
From investment property to owner-occupied or inventory
= property’s deemed cost at date of change in use is its
fair value
From inventories to investment property at fair value = any
difference between fair value and carrying value is
recognised in arriving at profit or loss
See Chapter 5, Table 5.2
Connolly – International Financial Accounting and Reporting – 4th Edition
Disposals
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A gain or loss arising from the retirement or disposal of
investment property is the difference between net disposal
proceeds and the carrying amount of the asset
Gain or loss is recognised in arriving at profit or loss
Connolly – International Financial Accounting and Reporting – 4th Edition
Disclosure
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Fair value and cost models
Fair value model
Cost model
Connolly – International Financial Accounting and Reporting – 4th Edition
5.3 COMPARING IAS 16 AND IAS 40
IAS 16
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Cost or Market Value
Models
IAS 40
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Different recognition rules
for ‘first’ and ‘subsequent’
gains and losses
Depreciation – cost and
market value models
Option to transfer % from
RR to RE to offset
depreciation
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Cost or Fair Value Models
All gains and losses
recognised in SPLOCI in
arriving at operating profit
no RR
Depreciation – cost model
only
N/A
Connolly – International Financial Accounting and Reporting – 4th Edition