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Summary IAS 40 Investment Property
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IAS 40 Investment PropertyInvestment property is defined as property i.e both land and buldings or only land
that is held to earn rentals or capital appreciation. Investment property is therefore
held with a long-term goal in mind.
The accounting implications are that no depreciation is recognized in the income
statement. The reason is that office or production operations are not performed in
these structures and because of inconstant or inconsistent use of the property,
property diminishment in this regard is assumed to be negligible.
Two accounting models may be adopted. The cost model which is very similar to
IAS 16’s cost model and the fair value model.
Under the fair value model, fair value gains or losses are recognized in the income
statement to account for capital appreciation. If the building is being let, then rental
income will also be recognized in profit or loss.
Para 7 of IAS 40 mentions independent cash flows. If the building is used for rental
income, then for cash flows to be independent of other assets, the building is more
akin to a stand-alone asset (unfurnished) in that other assets are not needed to
generate cash flows (income and expenses). Whereas with PPE, an owner-
occupied building might also contain production machinery and cash flows
earned/incurred by both assets may overlap and not be independent.
Para 10 talks about identifiability of the nature of investment property vs. PPE.
Assume that 95% of the property meets the definition to be classified as investment
property and 5% meets the definition to be classified as PPE. If the 5% of PPE can
be sold separately from the portion that meets the investment property recognition
criteria i.e it has its own directly attributable income and expenditure, the portion will
be classified as PPE even though the portion is insignificant. If the PPE portion has
expenditure that is shared with the investment property portion and cannot be
distinguished, then the identifiability criterion will not be met and as the portion is
insignificant, 100% of the property will be recognized as investment property.
Para 11 and 12 mentions ancillary services which may change the nature of
investment property. One needs to assess which services are insignificant and
significant in relation to the service rendering arrangement as a whole. To meet the
investment property qualifying criteria, an owner of the property should not be
involved in the day- to- day operations or running of the arrangement. The example
given in the standard is of a hotel manager. If he is involved in all the functions of
providing accommodation to guests such as laundry services, bookings, client
satisfaction and follow up, then this would classify as an active involvement and
should be regarded as PPE. If however, he outsourced these functions to a property
management company, then the arrangement would meet the investment property
recognition criterion as he is assuming a more passive role.
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