Investment Property

Investment Properties (IAS 40) Overview

  • Date of Lecture: April 22, 2025

  • Course: BAC 200

  • Institution: University of Pretoria

Learning Objectives

  • Understand the evaluation criteria for investment properties (IP):

    • Identify, recognize, and measure investment properties for inclusion in financial statements of a company.

    • Present and disclose investment properties in a company’s financial statements.

  • To achieve these objectives:

    • Discuss definitions relevant to IAS 40.

    • Apply recognition criteria for land and buildings according to IAS 40.

    • Account for investment properties using both the Cost model and Fair Value model.

    • Present and disclose investment properties accurately in financial statements.

Scope of IAS 40

  • The content is based on two lectures covering various aspects of investment properties according to IAS 40.

  • Topics within the Scope:

    1. Introduction to Investment Properties

    2. Classification of Investment Properties

    3. Recognition Criteria for Investment Properties

    4. Initial Measurement

    5. Subsequent Measurement

    6. Derecognition

    7. Presentation and Disclosure

Introduction to Investment Properties

Definition of Investment Property

  • Investment property is defined as property held either:

    • To earn rentals

    • For capital appreciation

    • For both purposes

  • Includes:

    • Land

    • Buildings (which can be a part of a building)

    • A combination of land and buildings

Examples of Investment Properties

  1. Classified as Investment Property:

    • Property held for long-term capital appreciation.

    • Buildings leased under an operating lease.

    • Vacant buildings intended to be leased out.

    • Property under construction for future use as investment property.

    • Redevelopment properties intended for continued use as investment property.

    • Land held for its capital appreciation potential.

  2. NOT classified as Investment Property:

    • Property held for short-term sale or construction.

    • Owner-occupied property (includes factories, shops, employee housing).

    • Properties held for administrative purposes.

Classification of Joint Use Properties

  • Determination of property classification (IAS 16 vs. IAS 40):

    • Properties that are used both to earn rentals/capital appreciation and for administrative/production purposes.

    • Different treatment based on the significance of the owner-occupied portion.

Key Considerations

  • The entire property can be classified as investment property only if the owner-occupied portion is insignificant.

  • If portions can be sold separately, they are classified under the respective models (investment property or owner-occupied property).

Recognition of Investment Property

Recognition Criteria

For property to be recognized as an investment property, it must meet the following criteria:

  1. Future Economic Benefits:

    • The inflow of future economic benefits must be probable.

  2. Reliably Measurable Cost:

    • Costs, both initial (purchase price) and subsequent (repairs), must be reliably measurable.

Cost Components

  • Cost of Investment Property Includes:

    • Purchase price

    • Directly attributable expenditures (professional fees, legal fees, etc.).

  • Exclusions from Cost:

    • Start-up costs (unless necessary for intended operation).

    • Operating losses prior to reaching planned occupancy.

    • Wasteful amounts in construction/development.

Measurement of Costs

Initial Measurement

For Purchased IP

  • Costs include expenditures incurred up to the date construction is substantially completed.

For Constructed IP

  • Costs include the expenditures incurred by the entity until substantial completion.

For Exchanged IP

  • If exchanged, the cost should be the fair value of the asset exchanged or the carrying amount if fair value is unreliable.

Subsequent Measurement

Models Available

  1. Cost Model:

    • Investment property measured as cost less accumulated depreciation and impairment losses.

    • Fair value disclosed as a note, even if cost model is utilized.

  2. Fair Value Model:

    • Investment property is measured at fair value, with any gain or loss recognized in the profit or loss section of the statement.

    • Depreciation or impairment is not accounted for under this model.

Fair Value Definition

  • Defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date.

  • Must include current rental income and assumptions used by market participants.

Derecognition of Investment Property

  • Occurs on:

    • Disposal of property.

    • Permanent withdrawal from use without expectation of future economic benefits.

  • Profit or Loss on Disposal:

    • Calculated as the difference between net disposal proceeds and the carrying amount of the asset. Recognized in profit or loss.

Presentation and Disclosure of Investment Property

Accounting Policy Notes

  • Must disclose whether the fair value model or cost model is used.

  • Criteria for property classification (IP vs. owner-occupied) and methods of depreciation (only for cost model).

General Disclosure Requirements

For Fair Value Model:

  • Fair value measurements by qualified valuers.

  • Any restrictions on property usage.

  • Reconciliation of opening to closing balance.

For Cost Model:

  • Similar disclosures as above but separate for land and buildings.

Summary of Key Examples and Problems

  • Students are encouraged to attempt examples from the provided resource (“Intro to IFRS”), specifically:

    • Example 16.2

    • Example 16.4

    • Example 16.5

  • Address specific accounting problems by examining scenarios that relate to investment properties and their classifications, measurements, and disclosures.

Class Examples and Exercises

  • Multiple class examples illustrating the above concepts.

  • Participation is encouraged to clarify understanding of investment properties.

Comprehensive Example Reference

  • Detailed presentations and disclosure documents are to be reviewed on the clickUP platform.

  • Refer to a comprehensive textbook example for practical understanding (p. 434).