INVESTMENT PROPERTY (IAS 40)

1. BACKGROUND AND INTRODUCTION

This Standard prescribes criteria for the accounting treatment for, and disclosures relating to, investment property. The Standard shall be applied in the recognition, measurement, and disclosure of investment property.

 The Standard applies to the measurement in a lessee’s financial statements of investment property held under a finance lease and to the measurement in the lessor’s financial statements of investment property leased out under an operating lease. However, all other aspects relating to leases, their accounting and their disclosure, are dealt with in IAS 17, Leases. Additionally, the Standard does not deal with biological assets related to agricultural activity (see IAS 41) or tomineral rights and mineral reserves such as oil, natural gas and similar nonregenerative resources (see

IFRS 6).

 DEFINITIONS OF KEY TERMS (in accordance with IAS 40)

Investment property. Land or building, or part of a building, or both, held by the owner or the lessee under a finance lease to earn rentals and/or for capital appreciation, rather than for use in production or supply of goods and services or for administrative purposes or for sale in the ordinary course of business.

Owner-occupied property. Property held by the owner or the lessee under a finance lease for use in production or supply of goods and services or for administrative purposes.

 INVESTMENT PROPERTY

 Property interests held by a lessee under an operating lease may (i.e., it is optional) be classified and recognized as an investment property if and only if the property would otherwise meet the definition of an investment property and the property is measured using the fair value model described later. This aspect of recognizing investment property is a comparatively recent addition andwas included in response to the fact that in some countries, properties are held under long leases that provide, for all intents and purposes, rights that are similar to those of an outright buyer. The inclusion in the Standard of such interests permits the lessee to measure such assets at fair value. 3.2 One of the distinguishing characteristics of investment property (compared to owneroccupied property) is that it generates cash flows that are largely independent from other assets held by an entity. Owner-occupied property is accounted for under IAS 16, Property, Plant, and Equipment.

 In some instances, an entity occupies part of a property and leases out the balance. If the two portions can be sold separately, each is accounted for appropriately. If the portions cannot be sold separately, then the entire property is treated as investment property only if an insignificant proportion is owner-occupied.

Practical Insight

Precisely what is meant by “insignificant” is not defined and is left to judgment. However, in other Standards, indications are that 2% may be an applicable level