IAS 40 - Investment Property

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1 IAS 40 - Investment Property 1

2 Definition of investment property 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. Registered with the Department of Economic Development, Dubai (#101627) a Partnership Firm Member Crowe Horwath International 2

3 Examples of investment property: I. land held for long-term capital appreciation II. land held for a currently undetermined future use III. building leased out under an finance lease IV. vacant building held to be leased out under an operating lease property that is being constructed or developed for future use as investment property 3

4 The following are not investment property: I. property held for use in the production or supply of goods or services or for administrative purposes II. property held for sale in the ordinary course of business or in the process of construction of development for such sale (IAS 2 Inventories) III. property being constructed or developed on behalf of third parties (IAS 11 Construction Contracts) IV. property leased by lessor to another entity under a finance lease 4

5 Recognition: Investment property should be recognised as an asset when it is probable that the future economic benefits that are associated with the property will flow to the entity, and the cost of the property can be reliably measured. Initial measurement: Investment property is initially measured at cost, including transaction costs. Such cost should not include start-up costs, abnormal waste, or initial operating losses incurred before the investment property achieves the planned level of occupancy. 5

6 Measurement subsequent to initial recognition IAS 40 permits entities to choose between: a fair value model, Investment property is remeasured at fair value, which is the amount for which the property could be exchanged between knowledgeable, willing parties in an arm's length transaction. [IAS 40.5] Gains or losses arising from changes in the fair value of investment property must be included in net profit or loss for the period in which it arises and a cost model. After initial recognition, investment property is accounted for in accordance with the cost model as set out in IAS 16 Property, Plant and Equipment cost less accumulated depreciation and less accumulated impairment losses. 6

7 Disposal An investment property should be derecognised on disposal or when the investment property is permanently withdrawn from use and no future economic benefits are expected from its disposal. The gain or loss on disposal should be calculated as the difference between the net disposal proceeds and the carrying amount of the asset and should be recognised as income or expense in the income statement. 7

8 Disclosure: Both Fair Value Model and Cost Model whether the fair value or the cost model is used the methods and significant assumptions applied in determining the fair value of investment property the extent to which the fair value of investment property is based on a valuation by a qualified independent valuer; if there has been no such valuation, that fact must be disclosed 8

9 Disclosure (continued): the amounts recognised in profit or loss for: rental income from investment property direct operating expenses (including repairs and maintenance) arising from investment property that generated rental income during the period contractual obligations to purchase, construct, or develop investment property or for repairs, maintenance or enhancements 9

10 Question 1 One of our clients is in the real estate, leasing and property development business. In the year ending December 31, The entity has the fair value gain of AED 2 million approx. The gain was not recorded through profit and loss account. The entity has transferred all the gain to shareholders current account. What action taken by the auditor? 10

11 Answer Audit opinion was qualified. investment properties were stated at fair value but the resulting fair value gain has been accounted for in the shareholder's current account instead of statement of profit or loss and other comprehensive income. As a result of this treatment, the Entity's profit for the year should have increased by AED 2 million. 11

12 Question 2 The client is in the construction business and having the land in his home country on his personal name. Recognizing in the books at cost model. What would be the treatment? 12

13 Answer The entity is recognising the land as an investment property in the books at cost model. Since it is a land hence, no depreciation is required. Without modifying the audit opinion we have highlighted this matter under emphasis of matter paragraph. 13

14 Question 3 Company B is constructing a property for future use as investment property. B applies the fair value model under IAS 40. On 1 july 2010, the carrying amount of the property is AED During the year ended 30 june 2011, B capitalizes construction costs of AED 400. The fair value of the property is estimated as AED1800. During the year the entity incurred AED 100 as borrowing cost for that property, AED 100 paid for legal fees to increase number of levels. What would be the fair value gain? A. 200 B. 400 C

15 Answer The gain is:

16 Question 4 Previously the company was using the cost model under ias 40. Now the company is changing to fair value mode. 1 july 2009 the carrying amount of the property is AED 750 and the fair value of the property is During the year end 30 june 2010 company capalizes maintenance costs of AED 400 and borrowing costs of AED 100. Now the carrying cost is AED The fair value of the property at 30 june 2010 is AED1400. Calclaute the gain or loss. A. 650 B. 150 C

17 Answer The gain is:

18 Question 5 Is it possible to change the policy from fair value to cost model? 18

19 Answer The IAS notes that this highly unlikely for a change from a fair value model to a cost model. the fair value of the investment property is not reliably measurable on a continuing basis. This arises when, and only when, the market for comparable properties is inactive (eg there are few recent transactions, price quotations are not current or observed transaction prices indicate that the seller was forced to sell) and alternative reliable measurements of fair value (for example based on discounted cash flow projections) are not available. 19

20 Question 6 If an owner-occupied property becomes an investment property, what would be the treatment? 20

21 Answer This will be carried at fair value, an entity shall apply IAS 16 up to the date of change in use. The entity shall treat any difference at that date between the carrying amount of the property in accordance with IAS 16 and its fair value in the same way as a revaluation in accordance with IAS

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