03 IAS 40 Advanced - Slides

IAS 40
Investment Property
Advanced Baseline
2009 KPMG International. KPMG International is a Swiss Cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firms vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
IAS 40 - 1
Learning objectives
By the end of this session you should know: How to identify an investment property How investment property should be measured The key disclosure requirements
IAS 40 - 2
Investment Property - Definition

Property = land or a building (or part of a building) or both Investment property is property held for Rentals Capital appreciation Not property held for Use in production, supply of goods / services or for administration Sale in ordinary course of business
IAS 40 - 3
Investment Property Operating lease option

Property held by a lessee under an operating lease may be classified and accounted for as investment property if, The property otherwise meets the definition of an investment property, and Lessee uses the fair value model. Option available on a property-by-property basis
IAS 40 - 4
Not investment property (1)
Sale in ordinary course of business
Owner-occupied
Constructed for third party
Inventory IAS 2
Property IAS 16
Contract IAS 11
IAS 40 - 5
Property under finance lease
Employee occupied property
Lease IAS 17
Property IAS 16
IAS 40 - 6
Biological assets
Mineral rights, exploration/extraction
IAS 41
IFRS 6
IAS 40 - 7
Examples of investment property

Land held for long-term capital appreciation Land held for undetermined future use Building owned and leased out Including vacant building that will be leased out under operating lease Property under construction or development For future use as investment property Property being redeveloped For continued use as investment property
IAS 40 - 8
Dual purpose Able to split
Owner occupied
Rental income
IAS 16
IAS 40
IAS 40 - 9
Dual purpose Unable to split
owner occupied
rental income
IAS 40
owner occupied
rental income
IAS 16
IAS 40 - 10
Ancillary services
services
rental income
IAS 40
services
rental income
IAS 16
IAS 40 - 11
Hotels
Owner-managed = owner-occupied IAS 16 3rd-Party-managed = involves judgment: Passive investor = investment property Significant exposure to operating cash flow variation = owner-occupied IAS 16 Disclose classification criteria
IAS 40 - 12
Recognition
Investment property recognised as an asset when: It is probable that the future economic benefits associated with the investment property will flow to entity, and The cost of the investment property can be measured reliably
IAS 40 - 13
Initial measurement
Initially, measured at cost (transaction costs included): Purchased or self-constructed investment property:
Purchase price Any directly attributable expenditure (e.g., professional fees for legal services, property transfer taxes) If not ready for its intended use on acquisition, then consider if requirements of IAS 23 Borrowing Costs should be applied
Property held under lease:

Cost according to IAS 17.20
IAS 40 - 14
Subsequent measurement (1)
Fair value Changes in profit or loss Exemption if cannot reliably determine on ongoing basis
Cost model As per IAS 16 Depreciate Impairment losses
Apply choice to all investment property Change from FV option to cost option not allowed
IAS 40 - 15
Subsequent measurement (2)

Property under construction / development: Fair value model
If fair value is determinable reliably, then it should be followed If fair value is not determinable reliably but is expected to be so when construction is complete, then at cost until the fair value is determinable reliably
Cost model
Follow IAS 16 requirements
IAS 40 - 16
Measurement of fair value, if no active market
Include
Current market conditions Current lease arrangements and expected cash inflows and outflows
Exclude
Estimates based on atypical arrangements Transaction cost of sale Double-count of assets and liabilities Expected cash outflows for improvement Expected cash inflows after improvement
IAS 40 - 17
Transfers to investment property carried at fair value

Owner occupied IAS 16 Inventory IAS 2 Investment Property at cost
Investment Property at FV FV adjustment = Revaluation under IAS 16
Investment Property at FV
Investment Property at FV
FV adjustment = Profit or loss
Change in policy = Equity
IAS 40 - 18
Transfers from investment property carried at fair value

Investment Property
Owner occupied IAS 16
Inventory IAS 2
Fair value becomes new cost basis

IAS 40 - 19
Retirements and disposals

Eliminate items of investment property On disposal, or When permanently withdrawn from use and no future benefits expected through disposal Difference between carrying amount and net disposal proceeds recognised in profit or loss
IAS 40 - 20
Case study
IAS 40 - 21
Key disclosures Both models

Criteria to distinguish between investment property and owner-occupied property and inventory Methods, significant assumptions to determine fair value Extent to which independent valuer involved and any adjustments to the valuation obtained Rental income Direct operating expenses From investment property generating rental income From vacant investment property Material contractual obligations, including repairs, maintenance
IAS 40 - 22
Key disclosures
Fair value model Reconciliation Information on property for which fair value cannot be determined Whether properties held under operating leases have been classified as investment property Cost model Reconciliation Fair value, or Information on property for which fair value cannot be determined
IAS 40 - 23
Key learning points

Investment property is held for rentals or capital appreciation Typical classification issues: dual-use property / ancillary services Recognised initially at cost Subsequently all investment property should be measured using either the fair value model or the cost model Fair value model with changes in fair value recognised in profit or loss Disclosure of the fair value of all investment property is required, regardless of the measurement model used
IAS 40 - 24

03 IAS 40 Advanced - Slides

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IAS 40

Investment Property - Definition

Investment Property Operating lease option

Not investment property (1)

Sale in ordinary course of business

Constructed for third party

Not investment property (2)

Property under finance lease

Employee occupied property

Not investment property (3)

Mineral rights, exploration/extraction

Examples of investment property

Dual purpose Able to split

Dual purpose Unable to split

Property held under lease:

Subsequent measurement (1)

Cost model As per IAS 16 Depreciate Impairment losses

Subsequent measurement (2)

Measurement of fair value, if no active market

Transfers to investment property carried at fair value

Investment Property at FV FV adjustment = Revaluation under IAS 16

FV adjustment = Profit or loss

Change in policy = Equity

Transfers from investment property carried at fair value

Owner occupied IAS 16

Fair value becomes new cost basis

Retirements and disposals

Key disclosures Both models

Key learning points

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