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Solutions to GAAP : Graded Questions Investment propertiesSolution 10.1
Recognition and classification
a) IAS 40 defines investment property as:
• 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. See IAS 40.5
b) The recognition criteria that need to be satisfied are as follows:
• it is probable that future economic benefits will flow to the entity; and
• costs can be reliably measured. See IAS 40.16
c) The only property that would be classified as investment property is the land held for
undetermined use. See IAS 40.8-9
Initial measurement
d) Investment property is initially measured at cost on date of recognition.
Where the property has been purchased, the cost comprises:
• its purchase price, and
• any directly attributable expenditure.
Directly attributable expenditure includes, for example,
• professional fees for legal services,
• property transfer taxes and
• other transaction costs. See IAS 40.20-21
e) In terms of IAS40, investment property is initially measured at cost. Directly attributable
expenditure are also included in initial measurement.
Purchase price C400 000 See IAS40.21
Property transfer taxes C 20 500 See IAS40.21
Attorney costs C 18 000 See IAS40.21
Borrowing costs C 2 560 See IAS40.21
Start-up costs (See note below) - See IAS 40.23
TOTAL cost C 441 060
The purchase price is obviously part of the cost. The property taxes, attorney costs and
borrowing costs are included because they are considered to be directly attributable
costs. However, the start-up costs are NOT included in the initial cost, (unless they are
necessary to bring the property to the condition necessary for it to be capable of
operating in the manner intended by management).
© Service & Kolitz, 2020 Chapter 10: Page 1
,Solutions to GAAP : Graded Questions Investment properties
Solution 10.1 continued …
Subsequent measurement models
f) Investment property is subsequently measured using either the cost or fair value model:
• The cost model: The investment property is measured at its cost less any subsequent
accumulated depreciation and accumulated impairment losses, as per IAS 16.
• The fair value model: The investment property shall be subsequently measured at the
fair value at the end of the reporting period, with all fair value adjustments being
recognised directly in profit or loss. No depreciation is accounted for under the fair
value model. See IAS 40.32A and IAS 40.56 and IAS 40.35
g) False:
The measurement model should be applied consistently to all investment properties (i.e. it
may not be applied on a property-by-property basis).
The only exception is if the entity chooses to apply the fair value model when measuring
its investment property but where the fair value of a specific property/ies is unable to be
reliably measured, in which case the cost model would be used for that specific
property/ies. See IAS 40.33 &.56
h) When the fair value model is used, it should be used for all investment properties,
including investment properties under construction.
However, when the fair value of a property under construction is unable to be reliably
measured, the property is measured at cost until its fair value is reliably measured or the
construction is completed (whichever occurs first). See IAS 40.53
If, when construction is complete:
• a fair value is reliably measurable, the property is then measured under the fair value
model. See IAS 40.53A
• the fair value is not reliably measurable on a continuing basis, then the cost model
must be used until the asset is disposed of, during which time the residual value must
be assumed to be zero. See IAS 40.53 & .53A-
© Service & Kolitz, 2020 Chapter 10: Page 2
,Solutions to GAAP : Graded Questions Investment properties
Solution 10.1 continued …
Usage (classification, change in use and joint use)
i) How a property is to be used determines its classification. Adride intends to sell both
buildings (Building A and Building B). Building A and Building B should be classified as
investment property before the decision to sell. After the decision to sell, Building A
should be reclassified as inventory, but Building B should remain classified as investment
property (assuming that the criteria for classification as a ‘non-current asset held for sale’
have not been met).
Explanation:
Adride has decided to sell both Building A and Building B. However, each building has a
different situation and thus the classification of each building differs. Adride should
classify the two buildings as follows:
• Before the decision to sell:
- Building A and Building B are both classified as investment properties (because
they are being held to earn rental income). See IAS 40.5
• After the decision to sell:
- Building A must be reclassified as inventory.
This is because the intention has changed to selling the property and the property
is being redeveloped with a view to making this sale.
The reclassification from investment property to inventory takes place as soon as
the redevelopment begins.
Please note that this property was reclassified to inventory and not to non-current
assets held for sale. The reason for this is that Adride buys and sells properties as
part of its ordinary business activities.
- Building B must remain investment property because, although the intention has
changed to selling the property, the property is not being redeveloped with a
view to making this sale. See IAS 40.57 (b)
j) A property that was classified as investment property would cease to be classified as
investment property in only the following two circumstances:
• when development begins with a view to sell, in which case it is transferred to
inventories; and
• when owner-occupation begins, in which case it is transferred to property, plant and
equipment. See IAS 40.57
k) A property that was not classified as investment property may reclassifed into investment
property in the following two circumstances:
• If the property was previously property, plant and equipment, it would be transferred
from property, plant and equipment to investment property when owner-occupation
ceases (i.e. when the owner moves out); and
• If the property was previously inventory, it would be transferred from inventories to
investment property when the lease of this property to another party under an
operating lease begins. See IAS 40.57
© Service & Kolitz, 2020 Chapter 10: Page 3
, Solutions to GAAP : Graded Questions Investment properties
Solution 10.1 continued …
l) This is a joint-use property that must be classified as property, plant and equipment.
Explanation:
Joint-use properties are properties of which:
• a portion is used to earn capital appreciation and / or rental income (an investment
property); and
• a portion is used in the production or supply of goods or services and / or for
administration purposes (an owner-occupied property). See IAS 40.10
Each portion is classified separately if each portion can be sold separately or leased
separately under a finance lease. See IAS 40.10
However, we are told that the floors cannot be sold separately or leased separately under
a finance lease.
When the portions are not separable, the property is:
• classified entirely as property, plant and equipment if the owner-occupied portion is
significant, or
• classified entirely as investment property if the owner-occupied portion is
insignificant. See IAS 40.10
Since a significant portion of the property is owner-occupied (15 of the 20 floors are
used as the head-office), the entire property is classified as property, plant and
equipment.
Judgment is required to determine whether a property qualifies as investment property.
An entity must thus develop criteria so that it can exercise its judgement consistently.
© Service & Kolitz, 2020 Chapter 10: Page 4
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