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IFRS Lectures Investment Property
IFRS Lectures Page 2 Overview ► Scope of IAS 40, Investment Property ► Key definitions ► Initial recognition ► Subsequent measurement ► Disclosure requirements
IFRS Lectures Page 3 Scope of IAS 40 does not apply to: ► Biological assets related to agricultural activities ► Mineral rights and mineral revenues such as oil, natural gas and similar non-regenerative resources Any property, defined as ‘ property held (by the owner or by the lessee under a finance lease) for use in the production or supply of goods or services or for administrative purposes’ falls outside the scope of IAS
IFRS Lectures Page 4 Definition An investment property is defined in IAS 40 as a: ‘ 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 or for capital appreciation or both , rather than for: (a) use in the production or supply of goods or services or for administrative purposes; or (b) sale in the ordinary course of business. ’ This means that any entity, whatever the underlying nature of its business, can hold investment property assets.
IFRS Lectures Page 5 Identifying investment property ► The cash flows (from rental or sale of investment property) are largely independent of those from other assets held by the entity. ► By contrast, property used by an entity for administrative purposes or for the production or supply of goods or services do not generate cash flows themselves but do so only in conjunction with other assets
IFRS Lectures Page 6 Identifying investment property Does it constitute investment property? • Land • Buildings leased to others • Property held for trading or being constructed for resale • Owner occupation
IFRS Lectures Page 7 Identifying investment property (cont’d) Does it constitute investment property? • Property in the course of construction and redevelopment • Properties with dual uses • Provision of services
IFRS Lectures Page 8 Identifying investment property (cont’d) Does it constitute investment property? • Group of assets leased out under a single operating lease • Other assets leased – investment property? • Judgment!
IFRS Lectures Page 9 Recognition ► Recognize when: ► Probable that the future economic benefits that are associated with the investment property will flow to the entity and; ► Its cost can be measured reliably. ► Day-to-day servicing: ► Should be recognized in the income statement as incurred ► If larger parts have been replaced, the cost of replacing the part will be recognized, while the carrying amount of the original part is derecognized.
IFRS Lectures Page 10 Initial measurement ► At cost including transaction costs. ► As noted before, self-constructed investment property during construction is currently subject to IAS 16. Once it is completed it becomes investment property to which IAS 40 applies. ► Start up costs and operating losses are not to be capitalized. ► The same accounting is applied both to property acquired under finance leases and to operating leases where the property interests otherwise meet the definition as investment properties and have been classified as such.
IFRS Lectures Page 11 General ► Once recognized, IAS 40 allows entities to choose between : the ‘fair value model’ and the ‘cost model’. ► The standard does not identify a preferred alternative. The fair value model ► All investment property is included in the balance sheet at its fair value; ► All changes in the fair value => the income statement for the period; ► Fair value is ‘the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction’. Measurement after initial recognition
IFRS Lectures Page 12 Determining fair value ► Paragraphs 38 to 52 of IAS 40 contain a substantial amount of guidance on the methodology of valuations in practice. ► The standard states that the best evidence of fair value will be given by actual transactions in similar property in a similar location and condition. ► The other information that an entity may draw on includes: a) transactions in an active market for dissimilar property, as adjusted to reflect the differences; b) transactions in less active markets if they have been adjusted to take account of subsequent changes in economic conditions; or c) discounted cash flow projections. The discount rate should reflect current market assessments of the uncertainty and timing of the cash flows.
IFRS Lectures Page 13 Future capex and development values ► Future capital expenditure that will enhance the benefits ► may not be taken into account in determining the fair value, ► income that might arise from this expenditure may not be taken into account ► However required permits can increase fair value
IFRS Lectures Page 14 Inability to determine fair value ► In such cases, the property should be treated under the cost model of IAS 16. ► The standard stresses that it is only in exceptional cases that the entity will be able to conclude, when it first recognizes a particular investment property, that it will not be able to determine its fair value in the future. ► Entities are strongly discouraged from arguing that fair value cannot be reliably measured.
IFRS Lectures Page 15 The cost model ► All investment property is measured after initial recognition at cost and depreciated ► Fair value of its investment property has to be disclosed ► Entities may have limited internal resources and consequently may need to obtain professional assistance in order to meet the disclosure requirements ► Analysis of appropriate significant parts
IFRS Lectures Page 16 Change in status that result in transfers: ► the commencement or end of owner-occupation; ► the commencement of development with a view to sale, at which point an investment property would be transferred to inventory; ► entering into an operating lease to another party which would generally require a transfer from inventory to investment property; or ► the end of construction or development, when a property in the course of construction or development is transferred to investment property. Transfer of assets into or from investment property
IFRS Lectures Page 17 Changes in status do not result in transfers: ► If an entity decides to dispose of an investment property without development with a view to sale, it may not be transferred to inventory; ► An existing investment property that is being redeveloped for continued future use as an investment property by the entity must remain classified as an investment property and is not reclassified as owner-occupied property during the redevelopment. Transfer of assets into or from investment property
IFRS Lectures Page 18► Transfers to inventory or owner-occupation ► the cost for subsequent accounting under IAS 16 or IAS 2 should be its fair value at the date the use changed; ► Transfers from owner-occupation : ► IAS 16 will be applied up to the time that the use changed. At that date any difference between the IAS 16 carrying amount and the fair value is to be treated in the same way as a revaluation under IAS 16. Accounting for transfers into or from inv. property
IFRS Lectures Page 19 Disposal of the investment property Investment property should be removed from the balance sheet (‘derecognized’) on disposal or when it is permanently withdrawn from use and no further economic benefits are expected from its disposal. A disposal of an investment property is achieved upon a sale or: ► when it becomes the subject of a finance lease (the owner becoming the lessor); or ► when it becomes the subject of a sale and leaseback deal (the original owner becoming the lessee);
IFRS Lectures Page 20 Disposal of investment property IAS 18 – Revenue – applies on a sale. ► The proceeds of sale are recognized at their fair value. If the sale proceeds are deferred, the consideration recognized on the disposal will be the cash price equivalent. ► IAS 18 allows that while revenue would normally be recognized when legal title passes, in some jurisdictions the risks and rewards of ownership may pass to the buyer before legal title has passed. In such cases, provided that the seller has no further substantial acts to complete under the contract, it may be appropriate to recognize revenue.
IFRS Lectures Page 21 Significant disclosures ► whether it applies the cost model or the fair value model; ► methods and significant assumptions applied in determining the fair value of investment property; ► whether independent appraiser was involved; ► rental income from investment properties; ► restrictions on the realizability of investment property; ► contractual obligations to purchase, construct or develop investment property; ► significant disclosures if fair value model is used; ► standard disclosures if cost model is used. Disclosure requirements