Saturday, April 14, 2007

STANDARDS: IAS 40 INVESTMENT PROPERTY (PART 1)

Resource from : iasplus


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. [IAS 40.5]

Examples of investment property: [IAS 40.8]

  • Land held for long-term capital appreciation
  • Land held for undecided future use
  • Building leased out under an operating lease
  • Vacant building held to be leased out under an operating lease

The following are not investment property and, therefore, are outside the scope of IAS 40: [IAS 40.5 and 40.9]

  • property held for use in the production or supply of goods or services or for administrative purposes;
  • property held for sale in the ordinary course of business or in the process of construction of development for such sale (IAS 2 Inventories);
  • property being constructed or developed on behalf of third parties (IAS 11 Construction Contracts);
  • owner-occupied property (IAS 16 Property, Plant and Equipment), 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 and owner-occupied property awaiting disposal;
  • property that is being constructed of developed for use as an investment property (IAS 16 applies to such property until construction or development is complete). However, IAS 40 does apply to existing investment property that is being redeveloped for continuing use as investment property; and
  • property leased to another entity under an finance lease.

Other Classification Issues

Property held under an operating lease. A property interest that is held by a lessee under an operating lease may be classified and accounted for as investment property provided that: [IAS 40.6]

  • 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 recognised.
  • An entity may make the foregoing classification on a property-by-property basis.

Partial own use. If the owner uses part of the property for its own use, and part to earn rentals or for capital appreciation, and the portions can be sold or leased out separately, they are accounted for separately. Therefore the part that is rented out is investment property. If the portions cannot be sold or leased out separately, the property is investment property only if the owner-occupied portion is insignificant. [IAS 40.10]

Ancillary services. If the enterprise provides ancillary services to the occupants of a property held by the enterprise, the appropriateness of classification as investment property is determined by the significance of the services provided. If those services are a relatively insignificant component of the arrangement as a whole (for instance, the building owner supplies security and maintenance services to the lessees), then the enterprise may treat the property as investment property. Where the services provided are more significant (such as in the case of an owner-managed hotel), the property should be classified as owner-occupied. [IAS 40.11]

Intracompany rentals. Property rented to a parent, subsidiary, or fellow subsidiary is not investment property in consolidated financial statements that include both the lessor and the lessee, because the property is owner-occupied from the perspective of the group. However, such property could qualify as investment property in the separate financial statements of the lessor, if the definition of investment property is otherwise met. [IAS 40.15]

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 enterprise, and the cost of the property can be reliably measured. [IAS 40.16]

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. [IAS 40.20 and 40.23]

IAS 40 Accounting Property PART 2>>>

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