International Accounting Standard 40
In April 2001 the International Accounting Standards Board (IASB) adopted IAS 40 Investment Property, which had originally been issued by the International Accounting Standards Committee (IASC) in April 2000. That standard had replaced some parts of IAS 25 Accounting for Investments, which had been issued in March 1986 and had not already been replaced by IAS 39 Financial Instruments: Recognition and Measurement.
In December 2003 the IASB issued a revised IAS 40 as part of its initial agenda of technical
Other IFRSs have made minor consequential amendments to IAS 40. They include IFRS 9 Financial Instruments (issued November 2009 and October 2010), IFRS 13 Fair Value Measurement (issued May 2011), IAS 19 Employee Benefits (issued June 2011) and Annual Improvements to IFRSs 2011-2013 Cycle (issued December 2013).
INTERNATIONAL ACCOUNTING STANDARD 40
CLASSIFICATION OF PROPERTY AS INVESTMENT PROPERTY OR
MEASUREMENT AT RECOGNITION
MEASUREMENT AFTER RECOGNITION
Fair value model
Inability to determine fair value reliably
Fair value model and cost model
Fair value model
Fair value model
WITHDRAWAL OF IAS 40 (2000)
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW, SEE PART B OF THIS
APPROVAL BY THE BOARD OF IAS 40 ISSUED IN DECEMBER 2003
IASB BASIS FOR CONCLUSIONS ON IAS 40 (AS REVISED IN 2003)
IASC BASIS FOR CONCLUSIONS ON IAS 40 (2000)
International Accounting Standard 40 Investment Property (IAS 40) is set out in paragraphs 1-86. All the paragraphs have equal authority but retain the IASC format of the Standard when it was adopted by the IASB. IAS 40 should be read in the context of its objective and the IASB's Basis for Conclusions, the Preface to International Financial Reporting Standards and the Conceptual Framework for Financial Reporting. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance.
International Accounting Standard 40 Investment Property (IAS 40) replaces IAS 40
Investment Property (issued in 2000), and should be applied for annual periods beginning on or after 1 January 2005. Earlier application is encouraged.
Reasons for revising IAS 40
The International Accounting Standards Board developed this revised IAS 40 as part of its project on Improvements to International Accounting Standards. The project was undertaken in the light of queries and criticisms raised in relation to the Standards by securities regulators, professional accountants and other interested parties. The objectives of the project were to reduce or eliminate alternatives, redundancies and conflicts within the Standards, to deal with some convergence issues and to make other improvements.
For IAS 40 the Board's main objective was a limited revision to permit a property interest held by a lessee under an operating lease to qualify as investment property under specified conditions. Those conditions include requirements that the property must otherwise meet the definition of an investment property, and that the lessee must account for the lease as if it were a finance lease and measure the resulting lease asset using the fair value model. The Board did not reconsider the fundamental approach to the accounting for investment property contained in IAS 40.
The main changes
The main changes from the previous version of IAS 40 are described below.
A property interest that is held by a lessee under an operating lease may be
classified and accounted for as investment property provided that:
the rest of the definition of investment property is met;
the operating lease is accounted for as if it were a finance lease in
accordance with IAS 17 Leases; and
the lessee uses the fair value model set out in this Standard for the asset
The classification alternative described in paragraph IN5 is available on a property-by-property basis. However, because it is a general requirement of the Standard that all investment property should be consistently accounted for using the fair value or cost model, once this alternative is selected for one such property, all property classified as investment property is to be accounted for consistently on a fair value basis.
The Standard requires an entity to disclose:
whether it applies the fair value model or the cost model; and
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.
When a valuation obtained for investment property is adjusted significantly for the purpose of the financial statements, a reconciliation is required between the valuation obtained and the valuation included in the financial statements.
The Standard clarifies that if a property interest held under a lease is classified as investment property, the item accounted for at fair value is that interest and not the underlying property.
Comparative information is required for all disclosures.
Some significant changes have been incorporated into the Standard as a result of amendments that the Board made to IAS 16 Property, Plant and Equipment as part
of the Improvements project:
to specify what costs are included in the cost of investment property and
when replaced items should be derecognised;
to specify when exchange transactions (ie transactions in which investment property is acquired in exchange for non-monetary assets, in whole or in part) have commercial substance and how such transactions,
with or without commercial substance, are accounted for; and
to specify the accounting for compensation from third parties for
investment property that was impaired, lost or given up.
Summary of the approach required by the Standard
The Standard permits entities to choose either:
a fair value model, under which an investment property is measured, after initial measurement, at fair value with changes in fair value
recognised in profit or loss; or
a cost model. The cost model is specified in IAS 16 and requires an investment property to be measured after initial measurement at depreciated cost (less any accumulated impairment losses). An entity that chooses the cost model discloses the fair value of its investment property.
The choice between the cost and fair value models is not available to a lessee accounting for a property interest held under an operating lease that it has elected to classify and account for as investment property. The Standard
requires such investment property to be measured using the fair value model.
The fair value model differs from the revaluation model that is permitted for some non-financial assets. Under the revaluation model, increases in carrying amount above a cost-based measure are recognised as revaluation surplus. However, under the fair value model, all changes in fair value are recognised in profit or loss.
The Standard requires an entity to apply its chosen model to all of its investment property. However, this does not mean that all eligible operating leases must be classified as investment properties.
In exceptional cases, when an entity has adopted the fair value model, there may be clear evidence when an entity first acquires an investment property (or when an existing property first becomes investment property following the completion of construction or development, or after a change in use) that its fair value will not be reliably measurable on a continuing basis. In such cases, the Standard requires the entity to measure that investment property using the cost model in IAS 16 until disposal of the investment property. The residual value of the investment property is assumed to be zero.
A change from one model to the other is made only if the change results in a more relevant presentation. The Standard states that this is highly unlikely to be the case for a change from the fair value model to the cost model.
IAS 40 depends upon IAS 17 for requirements for the classification of leases, the accounting for finance and operating leases and for some of the disclosures relevant to leased investment properties. When a property interest held under an operating lease is classified and accounted for as an investment property, IAS 40 overrides IAS 17 by requiring that the lease is accounted for as if it were a finance lease. Paragraphs 14-18 of IAS 17 apply to the classification of leases of land and buildings. In particular, paragraph 18 specifies when it is not necessary to measure separately the land and building elements of such a lease.
International Accounting Standard 40
The objective of this Standard is to prescribe the accounting treatment for investment property and related disclosure requirements.
This Standard shall be applied in the recognition, measurement and disclosure of investment property.
Among other things, this Standard applies to the measurement in a lessee's financial statements of investment property interests held under a lease accounted for as a finance lease and to the measurement in a lessor's financial statements of investment property provided to a lessee under an operating lease.
This Standard does not deal with matters covered in IAS 17 Leases, including:
classification of leases as finance leases or operating leases;
recognition of lease income from investment property (see also IAS 18
measurement in a lessee's financial statements of property interests held
under a lease accounted for as an operating lease;
measurement in a lessor's financial statements of its net investment in a
accounting for sale and leaseback transactions; and
disclosure about finance leases and operating leases.
This Standard does not apply to:
biological assets related to agricultural activity (see IAS 41 Agriculture);
mineral rights and mineral reserves such as oil, natural gas and similar
The following terms are used in this Standard with the meanings
Carrying amount is the amount at which an asset is recognised in the
statement of financial position.
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 acquisition or construction or, where applicable, the amount attributed to that asset when initially recognised in accordance with the specific requirements of other IFRSs, eg IFRS 2 Share-based Payment.
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. (See IFRS 13 Fair Value Measurement).
Investment property is 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:
use in the production or supply of goods or services or for
administrative purposes; or
sale in the ordinary course of business.
Owner-occupied property is 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.
Classification of property as investment property or
A property interest that is held by a lessee under an operating lease may
be classified and accounted for as investment property if, and only if, the
property would otherwise meet the definition of an investment property and the lessee uses the fair value model set out in paragraphs 33-55 for the asset
recognised. This classification alternative is available on a
property-by-property basis. However, once this classification alternative is selected for one such property interest held under an operating lease, all property classified as investment property shall be accounted for using the fair value model. When this classification alternative is selected, any interest so classified is included in the disclosures required by paragraphs 74-78.
Investment property is held to earn rentals or for capital appreciation or both.
Therefore, an investment property generates cash flows largely independently of the other assets held by an entity. This distinguishes investment property from owner-occupied property. The production or supply of goods or services (or the use of property for administrative purposes) generates cash flows that are attributable not only to property, but also to other assets used in the production or supply process. IAS 16 Property, Plant and Equipment applies to owner-occupied
The following are examples of investment property:
land held for long-term capital appreciation rather than for short-term sale in the ordinary course of business.
land held for a currently undetermined future use. (If an entity has not determined that it will use the land as owner-occupied property or for short-term sale in the ordinary course of business, the land is regarded as
held for capital appreciation.)
a building owned by the entity (or held by the entity under a finance
lease) and leased out under one or more operating leases.
a building that is vacant but is held to be leased out under one or more operating leases.
property that is being constructed or developed for future use as
The following are examples of items that are not investment property and are
therefore outside the scope of this Standard:
property intended for sale in the ordinary course of business or in the
process of construction or development for such sale (see IAS 2 Inventories), for example, property acquired exclusively with a view to
subsequent disposal in the near future or for development and resale.
property being constructed or developed on behalf of third parties (see
IAS 11 Construction Contracts).
owner-occupied property (see IAS 16), including (among other things)
property held for future use as owner-occupied property, property held for future development and subsequent 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.
property that is leased to another entity under a finance lease.
Some properties comprise 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 or services or for administrative purposes. If these portions could be sold separately (or leased out separately under a finance lease), an entity accounts for the portions separately. 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 or supply of goods or services or for administrative purposes.
In some cases, an entity provides ancillary services to the occupants of a property it holds. An entity treats such a property as investment property if the services are insignificant to the arrangement as a whole. An example is when the owner of an office building provides security and maintenance services to the lessees who occupy the building.
In other cases, the services provided are significant. For example, if an entity owns and manages a hotel, services provided to guests are significant to the arrangement as a whole. Therefore, an owner-managed hotel is owner-occupied property, rather than investment property.
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 a hotel sometimes transfers some responsibilities to third parties under a management contract. The terms of such contracts vary widely. At one end of the spectrum, the owner's position may, in substance, be that of a passive investor. At the other end of the spectrum, the owner may simply have outsourced day-to-day functions while retaining significant exposure to variation in the cash flows generated by the operations of the hotel.
Judgement is needed to determine whether a property qualifies as investment property. An entity develops criteria so that it can exercise that judgement
consistently in accordance with the definition of investment property and with the related guidance in paragraphs 7-13. Paragraph 75(c) requires an entity to disclose these criteria when classification is difficult.
Judgement is also needed to determine whether the acquisition of investment property is the acquisition of an asset or a group of assets or a business combination within the scope of IFRS 3 Business Combinations. Reference should
be made to IFRS 3 to determine whether it is a business combination. The discussion in paragraphs 7-14 of this Standard relates to whether or not property is owner-occupied property or investment property and not to determining whether or not the acquisition of property is a business combination as defined in IFRS 3. Determining whether a specific transaction meets the definition of a business combination as defined in IFRS 3 and includes an investment property as defined in this Standard requires the separate application of both Standards.
In some cases, an entity 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 owner-occupied from the perspective of the group. However, from the perspective of the entity that owns it, the property is investment property if it meets the definition in paragraph 5. Therefore, the lessor treats the property as investment property in its individual financial statements.
Investment property shall be recognised as an asset when, and only when:
it is probable that the future economic benefits that are associated
with the investment property will flow to the entity; and
the cost of the investment property can be measured reliably.
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