Summary of IAS 40 Investment Property - applies in 2024
Summary
TLDRThis video provides an overview of IAS 40, the accounting standard for investment property, focusing on immovable tangible assets like buildings and land. It explains when and how to apply the standard, how to measure investment property at cost or fair value, and the distinctions between fair value and cost models. It also covers transfers between asset categories, when to recognize investment property in financial statements, and derecognition upon disposal or permanent withdrawal from use. The video offers guidance on understanding the purpose of property use to ensure proper classification under IAS 40.
Takeaways
- 📅 The IAS 40 standard applies to investment properties such as buildings or land, effective from January 1, 2005, with some minor updates since then.
- 🏢 Investment property refers to immovable tangible assets held for earning rentals, capital appreciation, or both—not for production, administrative purposes, or sale in the ordinary course of business.
- ❓ The purpose of holding a building or land determines whether IAS 40 applies. For production or admin purposes, IAS 16 applies, and for sale, IAS 2 applies.
- ✅ Investment property can be recognized when it's probable that future economic benefits will flow to the entity and the cost can be reliably measured.
- 💰 Initial measurement of investment property is at cost, including purchase price and directly attributable expenditures, but excludes startup costs, pre-operation losses, or abnormal waste.
- ⚖️ After the initial recognition, investment property can be measured using either the fair value model or the cost model, with fair value changes recognized in profit or loss.
- 🚫 Fair value model differs from IAS 16's revaluation model, as fair value changes are recognized in profit or loss without charging depreciation.
- 🔄 Transfers of assets to or from investment property are allowed only when there is a change in use, such as converting a rented property into one used for the entity's own purposes.
- ❌ Derecognition of investment property occurs when it is sold, leased under a finance lease, or permanently withdrawn from use, with gains or losses recognized in profit or loss.
- 📚 Further resources and details about IAS 40, IFRS 13 (fair value measurement), and other standards can be found on IFRSbox.com, which also provides additional learning materials.
Q & A
What is the main purpose of IAS 40?
-The main purpose of IAS 40 is to prescribe the accounting treatment and disclosure requirements for investment property, which includes land or buildings held to earn rentals or for capital appreciation.
What qualifies as investment property under IAS 40?
-Investment property is land or buildings, or a part of them, that is held to earn rentals or for capital appreciation. It is not held for use in production, administrative purposes, or for sale in the ordinary course of business.
When should investment property be recognized in financial statements?
-Investment property should be recognized in financial statements when two conditions are met: (1) it is probable that future economic benefits will flow to the entity, and (2) the cost of the property can be measured reliably.
How is investment property measured initially?
-Initially, investment property is measured at cost, which includes the purchase price and any directly attributable expenditures such as legal or professional fees. Deferred payments are discounted to present value.
What are the two models for measuring investment property after initial recognition?
-After initial recognition, investment property can be measured using either the fair value model or the cost model. Under the fair value model, the property is revalued to fair value at the end of each reporting period, while under the cost model, it is carried at cost less accumulated depreciation and impairment losses.
How does the fair value model differ from the revaluation model in IAS 16?
-Under the fair value model, gains or losses from changes in fair value are recognized directly in profit or loss, and no depreciation is charged. In contrast, the revaluation model under IAS 16 requires depreciation to be charged and revaluation gains or losses to be handled differently.
What should an entity do if it cannot measure the fair value of investment property reliably?
-If fair value cannot be measured reliably, and the property is under construction, the entity should keep the property at cost until construction is completed or fair value can be reliably measured. For completed investment properties, the cost model under IAS 16 should be applied.
When can assets be transferred to or from investment property?
-Assets can be transferred to or from investment property only when there is a change in use, such as when a building previously rented out is now used as the company’s headquarters.
When should investment property be derecognized from financial statements?
-Investment property should be derecognized when it is disposed of or permanently withdrawn from use, and no future economic benefits are expected from its sale or use.
How is gain or loss calculated upon derecognition of investment property?
-Upon derecognition, gain or loss is calculated as the difference between the net disposal proceeds and the carrying amount of the property. This gain or loss is recognized in the profit or loss statement.
Outlines
📊 Overview of IAS 40 Investment Property
The introduction welcomes viewers to a video about the main rules of IAS 40 for investment property. The standard applies to immovable tangible assets like buildings or land. Sylvia, from IFRS Box, explains that IAS 40 covers the accounting treatment and disclosure of investment property, which includes assets held for earning rentals or capital appreciation. Investment property is not intended for production, administrative purposes, or sale in the ordinary course of business. Sylvia also mentions the history of IAS 40, which became effective for periods starting on or after January 2005, with some minor updates over time. Key points include recognizing investment property when future benefits are probable and costs are measurable, and that initial measurement is based on cost, including directly attributable costs.
💡 Measurement Options and Special Considerations
This section focuses on how to measure investment property after initial recognition. Two options are provided: fair value model and cost model. Under the fair value model, the property is measured at fair value at the end of each reporting period, with gains or losses recognized in profit or loss. There is no depreciation under the fair value model, distinguishing it from the revaluation model in IAS 16. If fair value cannot be reliably measured, different treatment is prescribed, depending on whether the property is under construction or completed. The cost model refers to IAS 16 for measurement, similar to other property, plant, and equipment. Transfers to or from investment property are allowed when there is a change in the asset's use. Finally, de-recognition occurs upon disposal or when no further economic benefits are expected, with any resulting gains or losses recognized in profit or loss.
Mindmap
Keywords
💡IAS 40
💡Investment Property
💡Fair Value Model
💡Cost Model
💡Recognition
💡Transfer of Assets
💡Depreciation
💡Gain or Loss on Disposal
💡Fair Value Measurement (IFRS 13)
💡Derecognition
Highlights
Introduction to IAS 40 Investment Property, explaining its relevance for immovable tangible assets like buildings or land.
IAS 40 applies to periods starting on or after January 1, 2005, with minor updates from developments in other standards.
The objective of IAS 40 is to prescribe accounting treatment and disclosure requirements for investment property.
Investment property includes land, buildings, or parts of them, held for earning rentals or capital appreciation.
IAS 40 does not apply to properties used in production, supply of goods/services, or administrative purposes.
Investment property should be recognized when it's probable that future benefits will flow to the entity and the cost can be reliably measured.
Initial measurement of investment property is at cost, including the purchase price and directly attributable expenditures.
Subsequent measurement can follow either the fair value model or the cost model.
Under the fair value model, investment property is revalued at the end of each reporting period with gains/losses recognized in the profit or loss statement.
The fair value model differs from the revaluation model under IAS 16 as it does not include depreciation.
If fair value cannot be reliably measured, investment property is initially kept at cost until it can be measured reliably.
Transfers to or from investment property are allowed only when there's a change in the use of the property.
Investment property is derecognized upon disposal, entering a finance lease, or permanent withdrawal from use.
Gains or losses on derecognition are calculated as net disposal proceeds minus carrying amount, recognized in the profit or loss statement.
For more resources, the video suggests checking IFRSbox.com for additional IFRS materials and newsletters.
Transcripts
hi and welcome to this video with a
summary of the main rules in the
standard is 40 investment property this
standard is applied for various types of
a movable tangible assets like buildings
or lands and within the next few minutes
you'll learn or not only when to apply
is 4d but also how to apply it
I am Sylvia of IFRS box comm and I help
people understand and simplify IFRS I
have created the IFRS kid a complex IFRS
course for you plus lots of free IFRS
materials so you are welcome to check
them out at IFRS box comm is 40 belongs
to the older standards as it was issued
some time ago while in its current
version it's applicable for the period
starting on or after first January 2005
but of course there were some minor
changes as other standards developed the
objective of is 40 is to prescribe
accounting treatment and require
disclosure for investment property but
what is the investment property it is
the land or building or a part of it or
both so you can see here we speak solely
about immovable changeable assets and
that is held for either to earn rentals
or for capital appreciation it means to
make money on increasing prices on a
real estate market or for both so
investment property is not held for use
in the production or supply of goods or
services or for administrative purposes
it is also not held for the sale in the
ordinary course of business so here you
need to focus on the purpose why are you
holding a building or land
how are you monetizing it how do you
make money from it if it's the first
three then use is 40 if it's for a
production or admin purposes use is 16
and in the last instance use is 2 in
most cases let's talk about when to
recognize investment property in your
financial statements you can do it when
two conditions are met it is probable
that the future
make benefits that are associated with
the investment property will flow to the
entity well think about associated
rewards and risks and the cost of the
investment property can be measured
reliably this rule is very similar to
the rule in IAS 16 for property plant
and equipment so maybe you are familiar
with that how do we measure investment
property initially that is when it's
recognized in the financial statements
for the first time we do it at cost
including the transaction cost and the
main components of costs are purchase
price while this is clear and any
directly attributable expenditures and
here there are items like professional
or legal fees be careful because we do
not include any start-up expenses to
investment property well unless they are
directly attributable to that property
we also don't include any operating
losses in pre-operation stage or until
reaching a full capacity
an abnormal waste of materials labor and
other resources incurred a development
of investment property let me also tell
you that the cost shall be measured at
cash price equivalent so if the payment
for the investment property is deferred
to some future point then you need to
discount it to the present value how do
we measure investment property
subsequently that is after the first
reporting period you have two options
here the first option is to use fair
value model here the investment property
is measured at fair value well simple as
that
I'll talk about the fair value model in
more details a bit later but let me
stress here fair value model is not the
same as revaluation model under IAS 16
please remember it and be cautious about
it because many people get it wrong the
second choice is to apply cost model
under cost model you measure investment
property at cost less accumulated
depreciation less impairment loss if any
before I move to add some details let me
stress that you should use a 1 model for
all of your investment
with some exceptions let's discuss fair
value model first under this model the
investment property should be measured
at fair value so it means that you
should revalue the investment property
at least at the end of each reporting
period the rules for fair value
measurement are stipulated in the
standard IFRS 13 fair value measurement
and you can find a video dedicated to
IFRS 13 in this channel to gain or loss
from any measurement is recognized in
profit or loss statement and a journal
entry is to debit profit or loss loss
from fair value measurement and credit
the investment property while if there's
again then you make the opposite entry
at a fair value model you do not charge
any depreciation and that's the main
difference from revaluation model if
you're not able to measure fair value
reliably the Ender standard prescribes
different treatment based on whether
your investment property is under
construction or not if it's under
construction and not yet completed then
you need to keep it at a cost until you
can measure fair value reliably or the
construction is completed if it is
completed investment property then you
might need to keep it using cost model
under IAS 16 but let me tell you this
should be very rare only when there is
no active market and is 40 assumes that
in most cases you should be able to
measure fair value of investment
property reliably the second choice is a
cost model and we will not explain it in
detail here because you should look to
the standard is 16 property plant and
equipment the standard is 40 refers you
dare to if an asset is classified as
hell for sale or in a disposal group
then you should apply IFRS 5 non current
assets held for sale and discontinued
operations now let me mention a few
words about transfers of assets to or
from investment property while you can
do it but only when there is a change in
use for example when you start using a
building for your own headquarters and
you rented it out previously then you
can transfer
from investment property to property
plant and equipment under is 16 finally
let's explain when investment property
needs to be Derrick organized from the
financial statements it's easy on
disposal by sale or entering into a
finance lease or when it's permanently
withdrawn from use and the economic
benefits are no longer expected when you
direct organize an investment property
then you shall calculate gain or loss as
net disposal proceeds less carrying
amount and it shall be recognized in
profit or loss well we have just sum up
the standard is 40 investment property
and if you'd like to learn a bit more
you're welcome to check IFRS box com
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