Summary of IAS 40 Investment Property - applies in 2024

Silvia of CPDbox

9 May 201607:34

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❌ Derecognition of investment property occurs when it is sold, leased under a finance lease, or permanently withdrawn from use, with gains or losses recognized in profit or loss.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

00:00

📊 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.

05:02

💡 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

IAS 40 is an International Accounting Standard that governs the accounting treatment and disclosures for investment properties, which are properties held for rentals or capital appreciation. In the video, the focus is on explaining when and how to apply IAS 40, which is crucial for determining how investment properties should be accounted for in financial statements.

💡Investment Property

Investment property refers to land, buildings, or parts of buildings held to earn rentals or for capital appreciation rather than for production, supply of goods or services, or administrative purposes. The video emphasizes the importance of identifying the purpose of holding such assets to correctly apply IAS 40. It distinguishes investment properties from other types of assets like those used for business operations (IAS 16) or held for sale (IAS 2).

💡Fair Value Model

The fair value model is one of the methods for measuring investment properties under IAS 40. It involves revaluing the property to its fair market value at each reporting period, with gains or losses recognized in the profit or loss statement. The video highlights the distinction between this method and the revaluation model under IAS 16, explaining how fair value model focuses on market-based valuation without charging depreciation.

💡Cost Model

The cost model is another method under IAS 40 for measuring investment properties. Under this model, the property is measured at its original cost minus accumulated depreciation and impairment losses. The video contrasts the cost model with the fair value model and explains that while the cost model is less commonly used for investment properties, it may be necessary in certain cases, like when fair value cannot be reliably determined.

💡Recognition

Recognition refers to the point when an investment property is first included in the financial statements. According to IAS 40, recognition occurs when it is probable that future economic benefits will flow to the entity and the cost of the property can be measured reliably. The video explains these criteria and relates them to the broader rules for recognizing assets in financial reporting.

💡Transfer of Assets

Transfers of assets refer to moving properties to or from the investment property category when there is a change in use. The video explains that a transfer can happen when, for instance, a company starts using a previously rented building as its own headquarters, shifting it from investment property (IAS 40) to property, plant, and equipment (IAS 16).

💡Depreciation

Depreciation is the allocation of the cost of an asset over its useful life. While under the fair value model for investment properties no depreciation is charged, under the cost model, properties are depreciated. The video mentions this distinction to highlight how the accounting treatment of investment properties differs depending on the model applied.

💡Gain or Loss on Disposal

This refers to the financial result from selling or otherwise disposing of an investment property. The video explains that when an investment property is disposed of, the gain or loss is calculated as the difference between the proceeds from the sale and the carrying amount of the property. This result is then recognized in the profit or loss statement.

💡Fair Value Measurement (IFRS 13)

Fair value measurement under IFRS 13 provides guidance on how to determine the fair value of assets, including investment properties. The video references this standard when discussing how investment properties should be valued under the fair value model, noting that the principles of IFRS 13 are used to determine the market-based value of the property at each reporting period.

💡Derecognition

Derecognition occurs when an investment property is removed from the financial statements, either through sale, finance lease, or when it is permanently withdrawn from use with no expected economic benefits. The video explains the conditions under which derecognition happens and how to account for any resulting gain or loss in the profit or loss statement.

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.