IAS 40 – Investment Property
EARNING RENTALS & CAPITAL APPRECIATION
Investment property is land or buildings held to earn rentals or for capital growth or both.
SCOPE/ APPLICATION:
Type Of Property Applicable Accounting Standard
Property bought for routine resale IAS–2 (Inventory)
Property bought for use in business owner occupied property (PPE) IAS–16 (PPE)
Construction of property for 3rd party IFRS–15 (Revenue)
Construction of property for future owner occupied use (self- IAS–16 - PPE
construction asset) - during construction we apply PPE also
Construction of building for the future investment property IAS–40 - during contrustion as well
Land bought but no use yet decided by management IAS–40
DUAL USE OF PROPERTY:
If both portions* can be sold separately means separate lease papers for both properties, then separate
standards on both portions (RENTED IAS 40 & OWNED IAS 16).
If both portions cannot be sold separately, then look for/ check significance (E.g basis used e.g. Floor
Area, Revenue Generation).
* Means One portion of the asset is used in business, and for the other portion you are earning rent.
ANCILLIARY SERVICES: Mariott apply IAS 16 because they are providing other services which is significant.
If ancillary services are insignificant and rental income is major, then IAS 40 applies on complete
property e.g. Dolmen Mall (only shops rented from where rental income is earned significantly)
If ancillary services are significant in comparison with rental income, then IAS 16 applies on
complete property E.g Hotels ( where they don’t just earn from rooms , they have other services
like pick & drop, marriage hall, laundry services , from where they earn more than rent)
IAS 40 - MEASRUMENT MODELS:
1. Cost Model:
a. Cost less Accumulated Depreciation
b. Same as IAS-16
2. Fair Value model
a. Recorded at F.V
b. All changes in F.V taken to P&L
c. No depreciation in case of F.V (Logic – Automatic Booking)
NOTE: If IAS-40 (Whichever model i.e. Cost or F.V Model) is applied on one investment property, then it
will be applied on all other Investment properties. (I.e. if one property on cost model then the rest of
properties are also to be kept on cost model).
Prepared by: Arsalan M. Khan Page 1 of 2
CASE 1: If Parent co. has given a property on rent to Subsidiary:
In individual Book of Parent Co. IAS-40 applies.
In Individual Books of Subsidiary & In Group IAS-16 applies (Because if we look at this on group level,
then this asset is being used by subsidiary in its business, therefore IAS-16).
CASE 2: If Parent co. is selling an asset to Subsidiary:
This sale will not actually be a sale because asset is being sold inside the group.
Therefore in this case, in individual Book of Parent Co. IFRS-5 applies.
In Individual Books of Subsidiary & In Group IAS-16 applies (since the asset is being sold, therefore
IAS-16 will apply with depreciation which wasn’t booked under IFRS-5 will now be booked).
CHANGING MODELS: Are we allowed to shift from COST MODEL to FAIR VALUE MODEL?
Change is allowed if that change increases relevance & reliability of Financial Statements.
Standard says that it is highly unlikely that a change from Fair Value Model to Cost Model will increase
relevance & reliability.
Model’s Change will always be treated as Change In Accounting Policy
CHANGE IN USE: If a property was first used in own business (E.g. MHA Institute), but later it was rented
out, then it means IAS-16 will be applied first and then after Change in use IAS-40 will apply.
Change from IAS-16 to IAS-40 - vice versa also
If cost Model is used in IAS-40: Simply transfer the carrying value at the date of change in use to other
standard (IAS-16). Only change the name of IAS. Cost model treatment is same in both IASs.
If Fair Value Model is used in IAS-40:
I. IAS-16 to IAS-40: Revalue the property at the date of change in use using IAS-16 and then shift
to IAS-40. No depreciation will be charged afterwards.
II. IAS-40 to IAS-16: Revalue the property at the date of change in use using IAS-40 and then shift it
to IAS-16. Now, calculate remaining life of asset and then depreciate.
Prepared by: Arsalan M. Khan Page 2 of 2
