Summary of IAS 40 Investment Property - applies in 2024

Summary

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• ❌ Derecognition of investment property occurs when it is sold, leased under a finance lease, or permanently withdrawn from use, with gains or losses recognized in profit or loss.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