Saturday, April 14, 2007

STANDARDS: IAS 40 INVESTMENT PROPERTY (PART 2)

Resource : iasplus
Measurement subsequent to initial recognition

IAS 40 permits enterprises to choose between: [IAS 40.30]

  • a fair value model; and
  • a cost model.

One method must be adopted for all of an entity's investment property. Change is permitted only if this results in a more appropriate presentation. IAS 40 notes that this is highly unlikely for a change from a fair value model to a cost model.


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. 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. [IAS 40.35]


Fair value should reflect the actual market state and circumstances as of the balance sheet date. [IAS 40.38] The best evidence of fair value is normally given by current prices on an active market for similar property in the same location and condition and subject to similar lease and other contracts. [IAS 40.45] In the absence of such information, the entity may consider current prices for properties of a different nature or subject to different conditions, recent prices on less active markets with adjustments to reflect changes in economic conditions, and discounted cash flow projections based on reliable estimates of future cash flows. [IAS 40.46]


There is a rebuttable presumption that the enterprise will be able to determine the fair value of an investment property reliably on a continuing basis. However, if, in exceptional circumstances, an entity follows the fair value model but at acquisition concludes that a property's fair value is not expected to be reliably measurable on a continuing basis, the property is accounted for in accordance with the benchmark treatment under IAS 16, Property, Plant and Equipment (cost less accumulated depreciation less accumulated impairment losses). [IAS 40.53]
Where a property has previously been measured at fair value, it should continue to be measured at fair value until disposal, even if comparable market transactions become less frequent or market prices become less readily available. [IAS 40.55]

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. [IAS 40.56]


Transfers to or from Investment Property Classification


Transfers to, or from, investment property should only be made when there is a change in use, evidenced by: [IAS 40.57]

  • commencement of owner-occupation (transfer from investment property to owner-occupied property);
  • commencement of development with a view to sale (transfer from investment property to inventories);
  • end of owner-occupation (transfer from owner-occupied property to investment property);
  • commencement of an operating lease to another party (transfer from inventories to investment property); or
  • end of construction or development (transfer from property in the course of construction/development to investment property.

When an enterprise decides to sell an investment property without development, the property is not reclassified as investment property but is dealt with as investment property until it is disposed of.


The following rules apply for accounting for transfers between categories:

  • for a transfer from investment property carried at fair value to owner-occupied property or inventories, the fair value at the change of use is the 'cost' of the property under its new classification; [IAS 40.60]
  • for a transfer from owner-occupied property to investment property carried at fair value, IAS 16 should be applied up to the date of reclassification. Any difference arising between the carrying amount under IAS 16 at that date and the fair value is dealt with as a revaluation under IAS 16; [IAS 40.61]
  • for a transfer from inventories to investment property at fair value, any difference between the fair value at the date of transfer and it previous carrying amount should be recognised in net profit or loss for the period; [IAS 40.63] and
  • when an entity completes construction/development of an investment property that will be carried at fair value, any difference between the fair value at the date of transfer and the previous carrying amount should be recognised in net profit or loss for the period. [IAS 40.65]

When an entity uses the cost model for investment property, transfers between categories do not change the carrying amount of the property transferred, and they do not change the cost of the property for measurement or disclosure purposes.

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. [IAS 40.66 and 40.69] Compensation from third parties is recognised when it becomes receivable. [IAS 40.72]

IAS 40 INVESTMENT PROPERTY PART 2

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