12
INVESTMENT PROPERTY
INTRODUCTION
IAS 40 is not a specialised industry standard. IAS 40 applies to the accounting treatment for investment property and related disclosure requirements. Determining whether a property is investment property depends on the use of the property and the type of entity that holds the property. Investment properties are initially measured at cost and, with some exceptions, may be subsequently measured using a cost model or fair value model, with changes in the fair value under the fair value model being recognised in profit or loss.
An investment in property (land and/or buildings) held with the intention of earning rental income or for capital appreciation (or both) is described as an investment property. An investment property is capable of generating cash flows independently of other assets held by the entity. Investment property is sometimes referred to as being a “passive” investment, to distinguish it from actively managed property such as plant assets, the use of which is integrated with the rest of the entity's operations. This characteristic is what distinguishes investment property from owner‐occupied property, which is property held by the entity or by the lessee as right‐of‐use asset in its business (i.e., for use in production or supply of goods or services or for administrative purposes).
This classification option to report the lessee's property interest as investment property is available on a property‐by‐property basis.
On the other hand, IAS 40 requires that all investment property should be consistently accounted for using either the fair value or cost model. Given these requirements, it is held that once the valuation methodology is selected for one leased property, all property classified as investment property must be accounted for consistently on same basis only.
IFRS 16, issued in January 2016, amended the scope of IAS 40 by defining investment property to include both owned investment property and property held by a lessee as a right‐of‐use asset.
DEFINITIONS OF TERMS
The following terms are used in IAS 40 with the meaning specified:
Carrying amount. The amount at which an asset is recognised in the statement of financial position.
Cost. 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 IFRS.
Fair value. 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 (IFRS 13).
Investment property. Property (land or a building, or part of a building, or both) held (by the owner or by the lessee as a right‐of‐use asset) to earn rental income or for capital appreciation purposes or both, rather than for:
- Use in the production or supply of goods or services or for administrative purposes;
- Sale in the ordinary course of business.
Owner‐occupied property. Property held (by the owner, i.e., the entity itself or by a lessee as a right‐of‐use asset) for use in the production or supply of goods or services or for administrative purposes.
IDENTIFICATION
The best way to understand what investment property constitutes is to look at examples of investments that are considered by the standard as investment properties, and contrast these with those investments that do not qualify for this categorisation.
According to the standard, examples of investment property are:
- Land held for long‐term capital appreciation as opposed to short‐term purposes like land held for sale in the ordinary course of business;
- Land held for a currently undetermined future use;
- A building owned by the reporting entity (or a right‐of‐use asset relating to a building held by the reporting entity) and leased out under one or more operating leases;
- A vacant building held by an entity to be leased out under one or more operating leases;
- Property under construction or being developed for future use as investment property.
The following are examples of items that are not investment property and are therefore outside the scope of the standard:
- Property employed in the business (i.e., held for use in production or supply of goods or services or for administrative purposes, the accounting for which is governed by IAS 16);
- Owner‐occupied property (IAS 16), including 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 being constructed or developed on behalf of third parties, the accounting of which is outlined in IFRS 15;
- Property held for sale in the ordinary course of business or in the process of construction or development for such sale, the accounting for which is specified by IAS 2;
- Property that is leased to another entity under a finance lease.
Example: Entity X built a residential property with the intention of selling it. In the past, X has regularly developed property and then sold it immediately after completion. To increase the chances of a sale, X chooses to let some of the flats as soon as they are ready for occupation. The tenants move into the property before completion. How has X mapped the property on the balance sheet?
Henceforth, X classifies the property as inventory. This corresponds to X's core business and its strategy regarding property. These undertakings are carried out with the intention of increasing the chances of selling the property and not for the long‐term generation of rental income. The property is also not held for the purpose of capital appreciation.
X's intention to sell the property under construction immediately after completion in the ordinary course of business has not changed. Consequently, the property under construction does not fulfil the definition of an investment property (IAS 40.9(a)).
Apportioning Property between Investment Property and Owner‐Occupied Property
In many cases it will be clear what constitutes investment property as opposed to owner‐occupied property, but in other instances making this distinction might be less obvious. Certain properties are not held entirely for rental purposes or for capital appreciation purposes. For example, portions of these properties might be used by the entity for manufacturing or for administrative purposes. If these portions, earmarked for different purposes, could be sold, or leased under a finance lease, separately, then the entity is required to account for them separately (dual‐use property). However, if the portions cannot be sold, or leased under a finance lease, separately, the property would be deemed as investment property only if an insignificant portion is held by the entity for business use. An example would include that of a shopping mall, in which the landlord maintains an office for the purposes of managing and administering the commercial building, which is rented to tenants.
When ancillary services are provided by the entity and these ancillary services are a relatively insignificant component of the arrangement, as when the owner of a residential building provides maintenance and security services to the tenants, the entity treats such an investment as investment property. Another example is when the owner of an office building provides security and maintenance services to the lessees who occupy the building.
On the other hand, if the service provided is a comparatively significant component of the arrangement, then the investment would be considered as an owner‐occupied property. For instance, an entity that owns and operates a hotel and provides services to the guests of the hotel would be unable to argue that it is an investment property in the context of IAS 40. Similar is the case with respect to a workspace solution provider. Rather, such an investment would be classified as an owner‐occupied property.
Judgement is therefore required in determining whether a property qualifies as investment property. It is so important a factor that if an entity develops criteria for determining when to classify a property as an investment property, it is required by this standard to disclose these criteria in the context of difficult or controversial classifications.
Property Leased to a Subsidiary or a Parent Company
Property leased to a subsidiary or its parent company is considered an investment property from the perspective of the entity in its separate financial statements. However, for the purposes of consolidated financial statements, from the perspective of the group, it will not qualify as an investment property, since it is an owner‐occupied property when viewed from the group perspective (which includes both the lessor and the lessee). This will necessitate the processing of appropriate adjustments to account for the difference in classification when preparing the consolidated accounts.
Interrelationship between IFRS 3 and IAS 40
The standard was amended through annual improvements to the IFRS 2011–2013 cycle to clarify the relationship between IFRS 3 and IAS 40. It states that IAS 40 assists preparers to distinguish between investment property and owner‐occupied property rather than to determine whether the acquisition of an investment property is a business combination in accordance with IFRS 3 (see Chapter 15).
RECOGNITION AND MEASUREMENT
Recognition
Investment property is recognised as an asset when, and only when, it becomes probable that the entity will enjoy the future economic benefits which are attributable to it, and when the costs of the investment property can be reliably measured.
These recognition criteria are applied to all investment property costs (costs incurred initially to acquire an investment property and subsequent costs to add or to replace a part of an investment property) when the costs are incurred.
In general, this will occur when the property is first acquired or constructed by the reporting entity. In unusual circumstances where it would be concluded that the owner's likelihood of receipt of the economic benefits would be less than probable, the costs incurred would not qualify for capitalisation and would consequently have to be expensed.
Initial measurement will be at cost, which is usually equivalent to fair value, if the acquisition was the result of an arm's‐length exchange transaction. Included in the purchase cost will be such directly attributable expenditure as legal fees and property transfer taxes, if incurred in the transaction.
IAS 40 does not provide explicit guidance on measuring cost for a self‐constructed investment property. However, IAS 16 provides that the cost of a self‐constructed asset is determined using the same principles as for an acquired asset. If an entity makes similar assets for sale in the normal course of business, the cost of the asset is usually the same as the cost of constructing an asset for sale (inventory), which would therefore include overhead charges which can be allocated on a reasonable and consistent basis to the construction activities. To the extent that the acquisition cost includes an interest charge, if the payment is deferred, the amount to be recognised as an investment asset should not include the interest charges, unless the asset meets the definition of a qualifying asset under IAS 23, which requires borrowing costs to be capitalised.
Furthermore, start‐up costs (unless they are essential in bringing the property to its working condition), initial operating losses (incurred prior to the investment property achieving planned level of occupancy) or abnormal amounts of wasted material, labour or other resources (in construction or development) do not constitute part of the capitalised cost of an investment property.
If an investment property is acquired in exchange for equity instruments of the reporting entity, the cost of the investment property is the fair value of the equity instruments issued, although the fair value of the investment property received is used to measure its cost if it is more clearly evident than the fair value of the equity instruments issued.
The initial cost of an investment property held by a lessee as a right‐of‐use asset shall be accounted for by applying IFRS 16, Leases (IFRS 16.23). The asset is recognised at cost comprising:
- The present value of the minimum lease payments with equivalent amount recognised as a liability;
- Any lease payments made on or before the lease commencement date reduced by lease incentives received if any;
- Any initial direct costs incurred; and
- Estimated cost of asset dismantling and site restoration.
Subsequent expenditures
In some instances, there may be further expenditure incurred on the investment property after the date of initial recognition. Consistent with similar situations arising in connection with property, plant and equipment (dealt with under IAS 16), if the costs meet the recognition criteria discussed above, then those costs may be added to the carrying amount of the investment property. Costs of the day‐to‐day servicing of an investment property (essentially repairs and maintenance) would not ordinarily meet the recognition criteria and would therefore be recognised in profit or loss as period costs when incurred. Costs of day‐to‐day servicing would include the cost of labour and consumables and may include the cost of minor parts.
Sometimes, the appropriate accounting treatment for subsequent expenditure would depend upon the circumstances that were considered in the initial measurement and recognition of the investment property. For example, if a property (e.g., an office building) is acquired for investment purposes in a condition that makes it incumbent upon the entity to perform significant renovations thereafter, then such renovation costs (which would constitute subsequent expenditures) will be added to the carrying amount of the investment property when incurred later.
Measurement
Fair value vs. cost model
Analogous to the financial reporting of property, plant and equipment under IAS 16, IAS 40 provides that investment property may be reported at either fair value (fair value model) or at depreciated cost less accumulated impairment (cost model). The cost model is the benchmark treatment prescribed by IAS 16 for owner‐occupied assets. However, the fair value approach under IAS 40 more closely resembles that used for financial instruments than it does the allowed alternative (revaluation) method for owner‐occupied assets. Also, under IAS 40 if the cost method is used, fair value information must nonetheless be determined and disclosed. IAS 40 notes that it is highly unlikely for a change from a fair value model to a cost model to occur. And if a lessee applies the fair value model for its investment property, it shall apply the same model for its right‐of‐use assets as well.
Fair value model
When investment property is carried at fair value, at each subsequent financial reporting date the carrying amount must be adjusted to the then‐current fair value, with the adjustment being reported in the profit or loss for the period in which it arises. When choosing the fair value model, all of the investment property must be measured at fair value, except when there is an inability to measure fair value reliably (see below). The inclusion of the value adjustments in earnings—in contrast to the revaluation approach under IAS 16, whereby adjustments are generally reported in other comprehensive income—is a reflection of the different roles played by plant or owner‐occupied assets and by other investment property. The former are used, or consumed, in the operation of the business, which is often centred upon the production of goods and services for sale to customers. The latter are held for possible appreciation in value, and hence those value changes are highly germane to the assessment of periodic operating performance. With this distinction in mind, the decision was made not only to permit fair value reporting, but to require value changes to be included in profit or loss.
And when a lessee uses the fair value model to measure an investment property that is held as a right‐of‐use asset, it shall measure the right‐of‐use asset, and not the underlying property, at fair value. When lease payments are at market rates, the fair value of an investment property held by a lessee as a right‐of‐use asset at acquisition, net of all expected lease payments (including those relating to recognised lease liabilities), should be zero.
IAS 40 represents the first time that fair value accounting was embraced as an accounting model for non‐financial assets. This has been a matter of great controversy, and to address the many concerns voiced during the exposure draft stage, the IASB added more guidance on the subject to the final standard. However, with the issue of IFRS 13, Fair Value Measurements, in 2011, much of the fair value guidance in IAS 40 has been superseded by that of IFRS 13 (see Chapter 25).
Entities are alerted to the possibility of double counting in determining the fair value of certain types of investment property. For instance, when an office building is leased on a furnished basis, the fair value of office furniture and fixtures is generally included in the fair value of the investment property (in this case the office buildings). The apparent rationale is that the rental income relates to the furnished office building; when fair values of furniture and fixtures are included along with the fair value of the investment property, the entity does not recognise them as separate assets.
Inability to measure fair value reliably
There is a rebuttable presumption that, if an entity acquires or constructs property that will qualify as investment property under this standard, it will be able to assess the fair value reliably on an ongoing basis. In rare circumstances, however, when an entity acquires for the first time an investment property (or when an existing property first qualifies to be classified as investment property when there has been a change of use), there may be clear evidence that the fair value of the investment property cannot reliably be determined on a continuous basis. This arises when, and only when, the market for comparable properties is inactive and alternative reliable measurement of fair value is not available.
Under such exceptional circumstances, the standard stipulates that the entity should measure that investment property using the cost model in IAS 16 until the disposal of the investment property, even if comparable market transactions become less frequent or market prices become less readily available. According to IAS 40, the residual value of such investment property measured under the cost model in IAS 16 should be presumed to be zero. The standard further states that, under the exceptional circumstances explained above, in the case of an entity that uses the fair value model, the entity should measure the other investment properties held by it at fair values. In other words, notwithstanding the fact that one of the investment properties, due to exceptional circumstances, is being carried under the cost model IAS 16, an entity that uses the fair value model should continue carrying the other investment properties at fair values. While this results in a mixed measure of the aggregate investment property, it underlines the perceived importance of the fair value method.
Example: Can a company opt for the fair value model for an investment property under construction, while all other completed investment properties are valued using the acquisition cost model and vice‐versa?
No. The company drawing up its balance sheet must choose between using the fair value model (valuation using the fair value) or the acquisition cost model (valuation using the amortised acquisition or construction costs). This decision is only to be made once and is to be applied consistently to all investment properties. This also includes investment properties under construction (IAS 40.33). Hence, it is not permitted to value investment properties under construction using the fair value model and all other investment properties under the acquisition cost model.
Vice‐versa: In very rare cases, it may be that the company drawing up its balance sheet opts to use the fair value model; however, the only investment property in the portfolio to date has been valued using the acquisition cost model in accordance with IAS 16, as the fair value of the property cannot be reliably ascertained (IAS 40.53). In this case, the company drawing up its balance sheet must value the investment property under construction using the acquisition cost model despite using the fair value model for its other investment properties (IAS 40.54).
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—apart from those that meet the criteria to be classified as held‐for‐sale (or are included in a disposal group held for sale) in accordance with IFRS 5, Non‐current Assets Held for Sale and Discontinued Operations, and those that meet the criteria to be classified as right‐to‐use assets in accordance with IFRS 16, Leases.
Liabilities with returns linked to investment property
In case of an internal property fund wherein returns to investors are linked directly to the fair value of or returns from an investment property, then an entity may choose either the fair value or cost model for such investment property. The choice is independent of how other investment properties are measured.
Transfers to or from Investment Property
Transfers to or from investment property should be made only when there is demonstrated “change in use” as contemplated by the standard. IAS 40 presents a non‐exhaustive list of examples, where a change in use takes place when there is a transfer:
- From investment property to owner‐occupied property, when owner‐occupation commences;
- From investment property to inventories, on commencement of development with a view to sale;
- From an owner‐occupied property to investment property, when owner‐occupation ends; or
- From inventories to investment property, when an operating lease to a third party commences.
A change in management's intentions for the use of a property by itself does not constitute evidence of a change in use.
In the case of an entity that employs the cost model, transfers between investment property, owner‐occupied property and inventories do not change the carrying amount of the property transferred and thus do not change the cost of that property for measurement or disclosure purposes.
When the investment property is carried under the fair value model, vastly different results follow as far as recognition and measurement is concerned. These are explained below:
- Transfers from (or to) investment property to (or from) owner‐occupied property (in the case of investment property carried under the fair value model)
In some instances, property that at first is appropriately classified as investment property under IAS 40 may later become property, plant and equipment as defined under IAS 16. For example, a building is obtained and leased to unrelated parties, but at a later date the entity expands its own operations to the extent that it now chooses to utilise the building formerly held as a passive investment for its own purposes, such as for the corporate executive offices. The amount reflected in the accounting records as the fair value of the property as of the date of change in status would become the cost basis for subsequent accounting purposes. Previously recognised changes in value, if any, would not be reversed.
Similarly, if property first classified as owner‐occupied property and treated as property, plant and equipment under the benchmark treatment of IAS 16 or treated as right‐of‐use asset under IFRS 16 is later redeployed as investment property, it is to be measured at fair value at the date of the change in its usage. If the value is lower than the carrying amount (i.e., if there is a previously unrecognised decline in its fair value) then this will be reflected in profit or loss in the period of redeployment as an investment property. On the other hand, if there has been an unrecognised increase in value, the accounting will depend on whether this is a reversal of a previously recognised impairment.
If the increase is a reversal of a decline in value, the increase should be recognised in profit or loss; the amount so reported, however, should not exceed the amount needed to restore the carrying amount to what it would have been, net of depreciation, had the earlier impairment not occurred. If, on the other hand, there was no previously recognised impairment which the current value increase is effectively reversing (or, to the extent that the current increase exceeds the earlier decline), then the increase should be recognised in other comprehensive income. If the investment property is later disposed of, any surplus in equity should be transferred to retained earnings without being recognised through profit or loss.
- Transfers from inventories to investment property (in the case of investment property carried under the fair value model)
It may also happen that property originally classified as inventories, originally held for sale in the normal course of the business, is later redeployed as investment property. When reclassified, the initial carrying amount should be fair value as of that date. Any difference between the fair value and the carrying amount of the property at the date of transfer would be reported in profit or loss. This is consistent with the treatment of sales of inventories.
Example: Can a property under construction classified as inventory be reclassified as an investment property if the disposal plans no longer exist?
No. A property under construction that has been classified as inventory to date is not to be reclassified solely on the basis of its intended use being changed. This requires, for example, an operating lease agreement to be commenced (IAS 40.57(d)).
- Transfers from investment property to inventories
IAS 40 requires an investment property to be transferred to inventories only when there is a change of use evidenced by commencement of development with a view to sale. When an investment property carried at fair value is transferred to inventories, the property's deemed cost for subsequent accounting in accordance with IAS 2, Inventories, is its fair value at the date of change in use.
When the entity determines that property held as investment property is to be sold, that property should be classified as a non‐current asset held for sale in accordance with IFRS 5. It should not be derecognised (eliminated from the statement of financial position) or transferred to inventories. The treatment of non‐current assets held for sale is discussed in further detail in Chapter 9. However, in the case of investment property held for sale, these continue to be measured at fair value in accordance with IAS 40 up to the point of sale, unlike, for example, property, plant and equipment, which is measured at the lower of carrying amount or fair value less costs to sell while held for sale.
Example: Can a property that has previously been classified as an investment property be reclassified as inventory if it is renovated to create disposal through sale?
Yes, if the renovation is a development that significantly increases the value of the property. This may be the case when a significantly higher rental standard is achieved through renovation or when the lettable area is significantly increased. However, if the renovation only serves to maintain the property at its current level, then in accordance with IAS 40.57(b), there is no development with the aim of sale.
Disposal and Retirement of Investment Property
An investment property should be derecognised (i.e., eliminated from the statement of financial position of the entity) on disposal or when it is permanently withdrawn from use and no future economic benefits are expected from its disposal. The word “disposal” has been used in the standard to mean not only a sale but also the entering into of a finance lease by the entity. In determining the date of disposal of an investment property, the criteria in IFRS 15, Revenue from Contracts with Customers, for recognising revenue from the sale of goods should be applied. IFRS 16, Leases, applies to a disposal effected by entering into a finance lease and to a sale and leaseback.
Any gains or losses on disposal or retirement of an investment property should be determined as the difference between the net disposal proceeds and the carrying amount of the asset and should be recognised in profit or loss for the period of the retirement or disposal. This is subject to the requirements of IFRS 16 in the case of sale and leaseback transactions.
Compensation from third parties for investment property that was impaired, lost or given up shall be recognised in profit or loss when the compensation becomes receivable.
PRESENTATION AND DISCLOSURE
Presentation
IAS 1, Presentation of Financial Statements, requires that, when material, the aggregate carrying amount of the entity's investment property should be presented in the statement of financial position.
Disclosure
IAS 40 stipulates disclosure requirements set out below.
- Disclosures applicable to all investment properties (general disclosures)
- There is a requirement to disclose whether the entity applies the fair value or the cost model.
- When classification is difficult, an entity that holds an investment property will need to disclose the criteria used to distinguish investment property from owner‐occupied property and from property held for sale in the ordinary course of business.
- The methods and any significant assumptions that were used in ascertaining the fair values of the investment properties are to be disclosed as well. Such disclosure also includes a statement about whether the determination of fair value was supported by market evidence or relied heavily on other factors (which the entity needs to disclose as well) due to the nature of the property and the absence of comparable market data.
- If investment property has been revalued by an independent appraiser, having recognised and relevant qualifications, and who has recent experience with properties having similar characteristics of location and type, the extent to which the fair value of investment property (either used in case the fair value model is used or disclosed in case the cost model is used) is based on valuation by such a qualified independent valuation specialist. If there is no such valuation, that fact should be disclosed as well.
- The following should be disclosed in the statement of comprehensive income:
- The amount of rental income derived from investment property.
- Direct operating expenses (including repairs and maintenance) arising from investment property that generated rental income during the period.
- Direct operating expenses (including repairs and maintenance) arising from investment property that did not generate rental income during the period.
- The cumulative change in fair value recognised in profit and loss on a sale of investment property from a pool of assets in which the cost model is used into a pool in which the fair value model is used.
- The existence and the amount of any restrictions which may potentially affect the realisability of investment property or the remittance of income and proceeds from disposal to be received.
- Material contractual obligations to purchase or build investment property or to make repairs, maintenance or improvements thereto.
- Disclosures applicable to investment property measured using the fair value model
In addition to the disclosures outlined above, the standard requires that an entity that uses the fair value model should present a reconciliation of the carrying amounts of the investment property, from the beginning to the end of the reporting period, showing the following:
- Additions, disclosing separately those additions resulting from acquisitions, those resulting from business combinations and those deriving from capitalised expenditures subsequent to the property's initial recognition.
- Assets classified as held‐for‐sale or included in a disposal group classified as held‐for‐sale, in accordance with IFRS 5 and other disposals.
- Net gains or losses from fair value adjustments.
- The net exchange differences, if any, arising from the translation of the financial statements of a foreign entity.
- Transfers to and from inventories and owner‐occupied property.
- Any other movements.
Comparative reconciliation data for prior periods need not be presented.
Under exceptional circumstances, due to lack of reliable fair value, when an entity measures investment property using the benchmark (cost) treatment under IAS 16, the above reconciliation should disclose amounts separately for that investment property from amounts relating to other investment property. In addition, an entity should disclose:
- A description of such an investment property;
- An explanation of why fair value cannot be reliably measured;
- If possible, the range of estimates within which fair value is highly likely to lie;
- On disposal of such an investment property, the fact that the entity has disposed of investment property not carried at fair value along with its carrying amount at the time of disposal and the amount of gain or loss recognised.
When a valuation obtained for an investment property is adjusted significantly for the purpose of the financial statements (e.g., to avoid double counting of assets or liabilities that are recognised as separate assets and liabilities), the entity is required to present a reconciliation between the valuation obtained and the adjusted valuation included in the financial statements, showing separately the aggregate amount of any recognised lease obligation that has been added back and any other significant adjustments.
- Disclosures applicable to investment property measured using the cost model
In addition to the general disclosure requirements outlined in 1. above, the standard requires that an entity that applies the cost model should disclose:
- The depreciation methods used;
- The useful lives or the depreciation rates used;
- The gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period;
- A reconciliation of the carrying amount of investment property at the beginning and the end of the period showing the following details:
- Additions resulting from acquisitions, those resulting from business combinations and those deriving from capitalised expenditures subsequent to the property's initial recognition;
- Disposals, depreciation, impairment losses recognised and reversed, the net exchange differences, if any, arising from the translation of the financial statements of a foreign entity, transfers to and from inventories and owner‐occupied properties, and any other movements.
Comparative reconciliation data for prior periods need not be presented.
- The fair value of investment property carried under the cost model. In exceptional cases, when the fair value of the investment property cannot be reliably estimated, the entity should instead disclose:
- A description of such property;
- An explanation of why fair value cannot be reliably measured;
- If possible, the range of estimates within which fair value is highly likely to lie.
It is anticipated that in certain cases investment property will be a property leased to others under right‐to‐use arrangements. In that case, the disclosure requirements set forth in IAS 40 will be applicable in addition to those in IFRS 16 despite the arrangement being covered under IFRS 16.
EXAMPLES OF FINANCIAL STATEMENT DISCLOSURES
| Exemplum Reporting PLC Financial Statements For the Year Ended December 31, 202X | |||||
|---|---|---|---|---|---|
| 2. Significant accounting policies | |||||
| 2.6 Investment properties | |||||
| Investment property comprises non‐owner‐occupied buildings held to earn rentals and for capital appreciation. | |||||
| Investment properties are initially recognised at cost, inclusive of transaction costs. Subsequently, investment properties are measured at fair value. Gains and losses arising from changes in the fair value of investment properties are recognised in profit or loss in the period in which they arise. | |||||
| Investment property is derecognised when disposed of, or when no future economic benefits are expected from the disposal. Any gain or loss arising on derecognition of the property is recognised in profit or loss in the period in which the property is derecognised. | |||||
| 16. Investment property | |||||
| Fair value model | |||||
| The fair value of the group's investment properties is determined annually at the reporting date by an independent professionally qualified valuer. | |||||
| In determining the valuations, the valuer refers to current market conditions and recent sales transactions of similar properties. | |||||
| In estimating the fair value of the properties, the highest and best use of the property is their current use. There has been no change in the valuation technique used during the year. | |||||
| Amounts recognised in profit or loss | 202X | 202X‐1 | |||
| Rental income | X | X | |||
| Direct operating expenses | |||||
| On property that generated rental income | X | X | |||
| On property that did not generate rental income | X | X | |||
| Investment properties with a carrying amount of EUR X (202X‐1: EUR X) have been pledged as security for liabilities. The holder of the security does not have the right to sell or re‐pledge the investment properties in the absence of default. | |||||
| 202X | 202X‐1 | ||||
| Carrying value at the beginning of the year | X | X | |||
| Fair value changes | X | X | |||
| Exchange differences | X | X | |||
| Additions | X | X | |||
| Carrying value at the end of the year | X | X | |||
| Fair value hierarchy | |||||
| Level 1 | Level 2 | Level 3 | Fair value | ||
| Rental property units located in X area | – | – | X | X | |
| The fair valuation of investment property is considered to represent a level 3 valuation based on significant non‐observable inputs being the location and condition of the property, consistent with prior periods. | |||||
| Management does not expect there to be a material sensitivity to the fair values arising from the non‐observable inputs. | |||||
| There were no transfers between level 1, 2 or 3 fair values during the year. | |||||
| The table above presents the changes in the carrying value of the investment property arising from these fair valuation assessments. | |||||
US GAAP COMPARISON
US GAAP does not separately define investment properties. Property held for investment purposes is treated the same as other property, plant and equipment when being held and used and as held‐for‐sale under specific criteria. With the release of Leases Topic 842 in US Codified GAAP, items related to operating leases above will begin to affect the statement of financial position whereby some aspects of leases are capitalised as property assets and liabilities effective for periods beginning after December 15, 2019 for issuers and December 15, 2021 for all others. Upon implementation of Topic 842, IFRS and US GAAP will be essentially converged on the lease subject in practice.