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iGAAP 2008: IFRS for Canada

The attached sample chapter, which is a work in progress, has beenprepared to illustrate the general form and content of the forthcomingvolume, iGAAP 2008: IFRS for Canada. The contents of the chaptermay be subject to change, and may contain grammatical or othereditorial errors or omissions. In any event, it does not purport and isnot intended to be advice on any particular matter. The authors do notaccept any responsibility or liability to any person in respect of any-thing done or omitted to be done by any such person in reliance, soleor partial, on the whole or any part of the contents of this sample. Thissample is made available solely for evaluation purposes.

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9 Investment Property

1 Introduction

IAS 40 Investment Property was published in June 2003, replacing theoriginal version of the Standard issued in 2000. Its objective is to prescribethe accounting treatment and disclosure requirements for investment prop-erty. The revised Standard applied for annual periods beginning on or afterJanuary 1, 2005, although earlier application was encouraged.

This chapter starts with comments for first-time Canadian readers on thebroad purpose of IAS 40, and then provides an overview of the mostprominent differences between Canadian GAAP and IFRS in this area. Therequirements of IAS 40 are discussed in the following sections:

Section 2 Definitions

Section 3 Recognition

Section 4 Measurement at recognition

Section 5 Measurement after recognition

Section 6 Transfers

Section 7 Disposals

Section 8 Disclosure

At the end of the chapter, in section 9, we have added brief notes onimplications for Canadian preparers.

1.1 Comments for First-Time Canadian Readers

IAS 40 Investment Property permits entities to choose either a costmodel, as described by IAS 16 Property, Plant and Equipment (see thediscussion in Chapter 7 on the consistency of IAS 16 with currentCanadian GAAP), or a fair value model, under which an investmentproperty is measured, after initial measurement, at fair value. Changesin fair value in this model are recognized in the income statement. Thefair value model is not included under Canadian GAAP, and thereforerepresents a significant change for Canadian entities that invest in realestate and choose this model.

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IAS 40 represents a significant departure from Canadian GAAP in anumber of ways. First, it is one of several IFRS standards that areindustry-specific. The recent history of Canadian GAAP goes in theopposite direction and diminishes the importance of industry-specificpractices (see CICA 1100.31). The scope of IAS 40 is in fact quitelimited; it does not apply to all leased property, but only to land orbuildings or both. Such property might be owned by an entity that hadother business interests as well. An entity should apply IAS 40 to theassets that qualify, even though other assets may not.

The most significant element of IAS 40 is its acceptance of the fairvalue model for eligible property. The cost model (as developed in IAS16 for property, plant and equipment) is also accepted, although thefair value model is clearly preferred – entities electing to use the fairvalue model are essentially prohibited from changing to the costmodel, as it would not meet the IAS 8 Accounting Policies, Changes inAccounting Estimates and Errors criterion that a change in accountingpolicies should result in more relevant information.

Note that as an alternative to the cost model, IAS 16 also permits useof a revaluation model for measuring property, plant and equipment.The revaluation model set out in IAS 16 differs from the fair valuemodel set out in IAS 40, and while an entity can elect to use the IAS16 cost model for measuring its investment property, it cannot elect touse the IAS 16 revaluation model.

If an entity elects to use the cost model, it must nonetheless disclosethe fair value of all investment properties in the notes to the financialstatements. While this disclosure is not in the same detail as wouldapply to the use of the fair value model, it still requires management toassemble and communicate the fundamental fair value data that wouldbe communicated by the fair value model. In any case, many of thepractical attributes of the fair value model reflect the same princi-ples-based logic employed in the cost model. For example, the defini-tion of cost, the treatment of non-monetary transactions, and the treat-ment of replacement and compensation are the same for both models.

The fair values used in IAS 40 do not provide for the costs of disposalsince they are not intended to measure sale proceeds. The concept isthat income for these types of properties is best measured as rentalincome, meaning periodic revenues less expenses, plus or minuschanges in the future value of rental income that occur during a period.IAS 40 requires an entity to disclose the direct operating expenses of

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properties that generate revenue and separately disclose those ofproperties that do not.

To measure the increase in fair value from activities during the period,additions to properties are capitalized, and then the fair value of theproperty is determined to see if such additions added value or not. Ifthey did not, a loss would be recorded as the asset is written down toits fair value. If value was added by such expenditures, the asset wouldnot be impaired and might even increase in value, with the increasebeing reported in income in the period of the expenditure. The fairvalue model thus takes a more comprehensive view of theincome-producing activities of property operations than the costmodel.

As discussed in Chapter 7, IAS 16 requires that each part of an itemof property, plant and equipment with a cost that is significant inrelation to the total cost of the item should be depreciated separately,potentially requiring detailed analysis and tracking of the significantcomponents of an item of property, plant and equipment. In contrast,the IAS 40 fair value model applies itself to an investment property asa whole. Therefore, as noted in the previous paragraph, there is norequirement to examine the nature and individual fair value of addi-tions during a period, only determine whether the fair value of theproperty as a whole has increased.

The fair value model, if used, must be applied to all investmentproperties. Furthermore, there is an ability to elect that certain proper-ties held under operating leases, normally not capitalized, be treated asinvestment properties. If they are elected, they must use the fair valuemethod. This requirement to uniformly apply the fair value model issimilar to the IAS 16 model for property, plant and equipment, whichmust be applied to all items in a class. The most significant difference,however, is that under the IAS 40 model, the periodic gains and lossesare recorded in net income, not in a revaluation surplus account. Anexception does exist if the fair value of a property cannot be reliablyestimated at its initial recognition as an investment property; suchproperties are measured using the cost model until disposal or der-ecognition.

This model is clearly completely different from the current CanadianGAAP model, and its introduction into the Canadian marketplace mayhave practical consequences. By its nature, the model could signifi-cantly change key performance measures used by the real estateindustry. This is a highly cash-flow oriented industry, traditionally

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making use of numerous non-GAAP performance measures (e.g.,funds from operations, adjusted funds from operations, etc.) both inCanada and the U.S. The use of the fair value model could causesignificant change to both internal and external performance measure-ment and to the related use of the financial statements.

In many cases, the details of the IAS 40 fair value model resemble theprescriptions of IAS 16 for property, plant and equipment generally.IAS 40, being a comprehensive discussion of both the cost and fairvalue models for investment property, contains elements of both. Fordetails of the differences in the cost model from Canadian GAAP (andthere are many), the reader is directed to Chapter 7 and the discussionof property, plant and equipment. This chapter, which by necessityrepeats many of the issues addressed in the previous chapter, concen-trates on the fair value model.

2 Definitions

IAS 40(5) contains definitions of certain terms used in the Standard. Thissection sets out some of these definitions with further explanations wherenecessary.

2.1 Cost

Cost is defined as ‘‘the amount of cash or cash equivalents paid or the fairvalue of other consideration given to acquire an asset at the time of itsacquisition or construction or, where applicable, the amount attributed tothat asset when initially recognised in accordance with the specific require-ments of other IFRSs . . .’’.

For example, if the consideration for the purchase of a property was anissue of equity shares in the entity, IFRS 2 Share-based Paymentwould be applied to establish the cost of the property.

Measurement of cost at recognition is discussed further at 4.1 below.

2.2 Fair Value

Fair value is ‘‘the amount for which an asset could be exchanged betweenknowledgeable, willing parties in an arm’s length transaction.’’

In this definition, ‘‘knowledgeable’’ means that both the willing buyer andthe willing seller are reasonably informed about the investment property’snature, characteristics, and actual and potential uses, as well as the marketconditions at the statement of financial position date.

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A ‘‘willing’’ buyer is motivated, but not compelled or determined, to buy atany price. A ‘‘willing’’ seller is not compelled or prepared to sell at anyprice, nor prepared to hold out for a price not considered reasonable incurrent market conditions. [IAS 40(42-43)]

An ‘‘arm’s length transaction’’ is one between parties that do not have aparticular or special relationship that would make the price of the transactionuncharacteristic of market conditions. [IAS 40(44)]

Fair value is time-specific, and the amount reported as fair value may beincorrect or inappropriate if estimated at another time, due to a change inmarket conditions. The definition of fair value assumes simultaneousexchange and completion of the contract, without any variation in price thatmight be made in an arm’s length transaction between knowledgeable,willing parties if exchange and completion are not simultaneous. The fairvalue reflects rental income from current leases, reasonable and supportableassumptions regarding future leases in the light of current conditions, andcash outflows expected on a similar basis for the property. [IAS 40(39-40)]

‘‘Fair value’’ is different from ‘‘value in use’’ as defined in IAS 36 Impair-ment of Assets. Fair value is based on the knowledge and estimates ofwilling and knowledgeable buyers and sellers. Value in use reflects theentity’s estimates, including the effects of factors that may be specific to theentity. This means that items such as tax benefits and legal rights, specific tothe current owner, would be taken into account in determining value in use,but not in assessing fair value. [IAS 40(49)]

Further guidance on determining fair value for the purposes of applying thefair value model to investment property is given at 5.2.1 below.

The valuation profession will have an important role in implementingthe Standard. When developing the guidance in the Standard on thefair value of investment property, the IASB considered the Interna-tional Valuation Standards (IVS) issued by the International Valua-tions Standards Committee (IVSC). The guidance in paragraphs 36,37, and 39 to 44 of IAS 40 (revised 2003) is, in substance and largelyin wording as well, identical with the guidance in IVS 1. In practice,professional valuators will usually be engaged to perform the requiredvaluations in accordance with IVS. Further details about IVS can befound at www.ivsc.org. Note that in IAS 40, the IASB provides gui-dance in addition to that provided by the market value model,including guidance on the estimation of fair values when observablemarket prices are not available.

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2.3 Investment Property

Investment property is defined in IAS 40 as:

property (land or a building – or part of a building – or both) held (bythe owner or by the lessee under a finance lease) to earn rentals or forcapital appreciation or both, rather than for:

(a) use in the production or supply of goods or services or foradministrative purposes; or

(b) sale in the ordinary course of business. [IAS 40(5)]

Included within the scope of IAS 40 are:

● land held for long-term capital appreciation, and not for short-term salein the ordinary course of the business;

● land held for a currently undetermined future use. If the entity has notdecided whether land will be used for owner-occupation or forshort-term sale in the ordinary course of business, it should be regardedas held for capital appreciation and accounted for as investment prop-erty;

● a building owned or held under finance lease by an entity and leasedout under operating lease(s); and

● a vacant building being held to be leased out under an operating lease(or leases). [IAS 40(8)]

Note the proposed change to the scope of IAS 40 described in the fourthitem below.

Excluded from the scope of IAS 40 are:

● property being held for sale in the ordinary course of business, or whichis under construction or development for such sale (see Chapter 6Inventory). This means that properties acquired specifically for thepurpose of subsequent disposal in the near future or for developmentand resale are excluded from the scope of IAS 40;

● property being constructed or developed on behalf of third parties (seeChapter 21A Construction Contracts);

● owner-occupied property, which includes property held for futuredevelopment and subsequent use as owner-occupied property, propertyheld for future use as owner-occupied property, employee-occupiedproperty (whether or not the employees pay rent at market rates), andowner-occupied property awaiting disposal;

● property in the course of construction or under development for use asinvestment property. IAS 16 applies until construction or development

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is complete, at which point the property becomes investment propertyand is accounted for in accordance with IAS 40. However, IAS 40 doesapply to property previously held as investment property which isundergoing redevelopment for continued future use as investment prop-erty. This rule has been developed in order to avoid potentially con-fusing temporary transfers of property between different classes ofassets (the October 2007 Exposure Draft of Annual Improvements toIFRS proposes to include all property that is being constructed ordeveloped for future use as investment property within the scope ofIAS 40); and

● property leased to another entity under a finance lease. [IAS 40(9)]

2.3.1 Property Held under Operating Lease

The original 2000 version of IAS 40 did not permit a property held under anoperating lease to be treated as investment property. Indeed, the definition ofinvestment property in the revised Standard still refers to a property that isheld by ‘‘the owner or by the lessee under a finance lease’’. However, therevised Standard separately states that a property interest that is held by alessee under an operating lease may be classified and accounted for as aninvestment property if, and only if, the property would otherwise meet thedefinition of an investment property and the lessee uses the fair value modelfor the asset recognized. A property constituting both land and buildingsmay also be treated as an investment property, where the entire lease isclassified by the lessee as a finance lease because the lease payments cannotbe reliably allocated between the land and buildings elements, as describedin IAS 17(16). The detailed requirements when this treatment is used areconsidered further at 4.1.3 below, including the requirement that the initialcost of the asset should be as prescribed for a finance lease.

In some jurisdictions, such as Hong Kong and the U.K., entities com-monly make large up-front payments to acquire a long-term leaseholdinterest in a property. Some lessees consider that such a leased interestis, in economic substance, virtually indistinguishable from rightsacquired on buying a property. The IASB considered this issue anddecided to limit the ability to treat operating leases as investmentproperty to entities that use the fair value model. The objective is topermit use of the fair value model for similar property interests heldunder finance and operating leases.

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2.4 Owner-Occupied Property

Owner-occupied property is used for the production or supply of goods orservices or for administrative purposes by the owner or the lessee under afinance lease. Such properties are included within the scope of IAS 16 andare not investment properties as defined in IAS 40.

Owner-occupied property can be measured at fair value using therevaluation model in IAS 16; but the buildings component of suchproperties would have to be depreciated, and the treatment of gains andlosses on revaluation is different to that under the fair value model inIAS 40.

2.4.1 Property Held for Multiple Purposes

In cases where property is used partly for capital appreciation and/or rentals,and partly for the production of goods or services or administrative pur-poses, the two parts are accounted for separately if they can be sold or leasedout under a finance lease. If they cannot be sold or leased out separatelyunder a finance lease, the property can be accounted for as an investmentproperty only if an insignificant portion is held for use in the production orsupply of goods or services or for administrative purposes. [IAS 40(10)]

Paragraph B39 of the Basis of Conclusions, originally issued in 2000,explains that quantitative guidance to clarify ‘‘insignificant’’ has not beenprovided because the Board concluded that quantitative guidance wouldcreate arbitrary distinctions.

Example 2.4.1

A hotel operator owns a significant number of buildings. Thehotel operator seeks to maximize revenue by selling roomoccupancy. Can the entity classify these buildings as invest-ment properties?

The answer is no. The property is for use by the entity in thenormal course of business, and therefore is not an investmentproperty. Although the entity may hold the buildings forlong-term appreciation, it is not the principal reason forholding the properties.

2.4.2 Ancillary Services

If an entity provides ancillary services to the occupants of its property, theproperty can still be accounted for as investment property provided the

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services are an ‘‘insignificant’’ portion of the arrangement. [IAS 40(11)]Judgment is often required in such cases, and criteria should be developedby the entity to enable it to assess its arrangement(s) in accordance withIAS 40. Disclosure of such criteria is required in cases of difficult classifica-tion.

In making this judgment, it is important to consider the principaloperations of the entity.

Example 2.4.2

The owner of an office building provides cleaning services forthe lessees of the building and these services are ‘‘insignifi-cant’’ in the context of the full arrangement.

The building is treated as an investment property. It would beunusual for cleaning services to be so material that they wouldprevent a property from being classified as an investmentproperty. A similar conclusion is likely for security and main-tenance services.

At the other extreme, some companies rent out fully furnishedoffices, including a whole range of services such as IT sys-tems and secretarial services. Such arrangements are in thenature of the provision of a service rather than property invest-ment, and the property would be classified as owner-occupiedand accounted for under IAS 16. But there are many instancesin between these extremes where judgment may be required.

2.4.3 Property Leased to Other Group Members

If an entity owns a property being leased to, and occupied by, another groupmember (e.g., a parent or another subsidiary), the property is not recognizedas an investment property in the consolidated financial statements because itwill be treated as owner-occupied from the perspective of the group. How-ever, in the unconsolidated statements of the entity, the property is treated asan investment property if it meets the requirements of IAS 40(5). [IAS40(15)]

3 Recognition

3.1 General Requirements

Investment property is recognized as an asset when:

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(a) it is probable that the future economic benefits that are associatedwith the investment property will flow to the entity; and

(b) the cost of the investment property can be measured reliably.[IAS 40(16)]

This is the same definition employed in IAS 16 for property, plant andequipment, and essentially governs the items that can be treated as capital-ized costs and the distinction between repairs and improvements.

3.2 Recognition of Replacement Parts

Repairs, maintenance, and servicing costs are not included within the car-rying value of the investment property. However, costs incurred to replaceparts of the original property may be recognized in the investment propertyif they meet the recognition criteria. [IAS 40(19)]

The carrying amounts of the replaced parts must be derecognized. If theentity has been using the cost model to measure its investment property, butthe replaced part was not being depreciated separately, and the carryingamount of the replaced part cannot be determined, the cost of the replace-ment may be used as an indication of what the cost of the replaced partwould have been at acquisition.

When the fair value model is being used, the carrying value of the invest-ment property may already reflect the deterioration in value of the replacedpart. If this is not the case, and the fair value of the replaced part cannot bedetermined, the cost of the replacement can be added to the carrying value ofthe investment property, and the new fair value of the property assessed.[IAS 40(68)]

Example 3.2

An elevator is replaced in an office building, which is beingheld as an investment property by Entity A. The fair value ofthe replaced elevator cannot be reliably determined. What isthe accounting treatment for this replacement assuming EntityA uses the fair value model?

The cost of the replacement elevator is capitalized and the fairvalue of the property is assessed. Any difference between theresulting carrying value and the new fair value is taken to theprofit and loss account.

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4 Measurement at Recognition

4.1 General Requirements

An investment property is measured initially at its cost. Transaction costsshall be included in the initial measurement. [IAS 40(20)] Note that IAS 16does not mention transaction costs, but identifies other items such as profes-sional fees.

The cost of an investment property includes its purchase price (if purchased)and other directly attributable expenditures, e.g., professional fees for legalservices, property transfer taxes, and other transaction costs. [IAS 40(21)]

Start-up costs are not included unless they are incurred to bring the asset intothe condition required for its intended operation. Abnormal costs and oper-ating losses incurred before the property reaches its required level of occu-pancy are excluded from the cost of the investment property. [IAS 40(23)]

Example 4.1

Entity A acquires a building for $95 million in March 20X1 asan investment property. During June, Entity A refurbishes theentire building at a cost of $5 million to bring it to thecondition for it to be capable to be rented. Entity A will pay areal estate agent two months rent if the agent locates a lessee.In December, Entity A (lessor) finally rents the property underan operating lease to Entity B (lessee).

Can Entity A capitalize the refurbishment costs and the realestate agent fees?

On day one, when the entity buys the building, Entity Ashould recognize the building under IAS 40. The refurbish-ment costs are necessary to bring the property to the conditionthe management intends for its operation. Therefore, thesecosts should be capitalized.

The real estate agent fees are considered initial direct costsunder IAS 17 Leases, and are therefore capitalized as part ofthe leased building in accordance with IAS 17(52). Where acost model is used, the expenses should be depreciated overthe lease term. However, where a fair value model is used,these costs will be expensed (as part of the loss recognized inthe income statement) to the extent that they increase thecarrying value of the building above its fair value.

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4.1.1 Deferred Payments

The cost of an investment property for which payment is deferred is the cashprice equivalent of these payments. The difference between the cash priceequivalent recognized at initial measurement and the total payments actuallymade is recognized as an interest expense over the period of credit, i.e., theperiod from the point of receipt of the property until the point of settlementof the related liability. [IAS 40(24)]

There is no definition of ‘‘cash price equivalent’’ in IAS 40. It ispresumably intended to equate to the present value of the deferredpayment, but perhaps could also encompass a cash price offered by thevendor as an alternative to the deferred payment terms.

4.1.2 Self-Constructed Investments

The cost of a self-constructed investment property is its cost at the date whenthe construction or development is complete. [IAS 40(22)]

Where the lessor is obligated to complete only the shell of a property,and transfers occupancy to the lessee for fitting out, completion for thelessor will be the date that the lessor completes its work. The lesseefitting out period will become part of the lease term.

Example 4.1.2

Can an entity capitalize interest after physical completion ofan investment property, but before a tenant moves in?

IAS 40(22) requires capitalization to cease when the construc-tion or development is complete.

IAS 23(22) states that the capitalization of borrowing costs aspart of the cost of a qualifying asset should cease when sub-stantially all of the activities necessary to prepare the asset forits intended use, or sale, are complete (see Chapter 28).Therefore, the capitalization of the interest should cease whenthe lessor’s construction of the building is complete and it iseither available to be used (including fit-out by the lessee) orsold as intended.

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4.1.3 Property Held under Lease and Classified as InvestmentProperty

The initial cost of a property interest held under a lease and classified by thelessee as an investment property for the purposes of IAS 40 is prescribed byIAS 17(20). The property is recognized at the lower of its fair value and thepresent value of the minimum lease payments. An equivalent amount isrecognized as a liability in accordance with the same paragraph. That is tosay, the asset is recognized as if the lease was a finance lease even if itwould be classified as an operating lease under IAS 17. [IAS 40(25)]

When a premium or up-front payment is paid on a lease, it is treated as partof the minimum lease payments for this purpose. It is included within thecost of the asset, but excluded from the liability (since it has been paid). If aproperty interest held under a lease is classified as an investment property,the item accounted for at fair value is the property interest held under thelease and not the underlying property. [IAS 40(26)]

This means that it is the fair value of the leased interest, rather than thefair value of the property, that is recognized in the financial statements.Normally, in a very long lease with only nominal ‘‘ground rent’’, thedifference between these two values may be very small.

However, IAS 40 allows any property held under an operating lease tobe classified as an investment property providing certain criteria aremet, in which case the difference between the fair value of the leasedinterest and the fair value of the property may be significant. Forexample, in the case of a short lease at market rent, the market value ofthe leased interest will be small compared to the value of the ultimateinterest in the property.

4.1.3.1 Gross Value of an Interest under a Lease

As noted above, a liability will be recognized in the statement offinancial position for the present value of the minimum lease pay-ments. If the property is subsequently accounted for under the fairvalue model, it is important to ensure that the valuation reflected in thestatement of financial position is consistent with the treatment of theproperty lease and the land component of the lease. If the liability forthe ground rent is recognized separately in the financial statements, thefair value of the leased property should not be calculated net of theground rent.

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4.1.4 Investment Property Acquired through Exchange of AnotherAsset

The treatment of non-monetary exchanges under IAS 40 is exactly the sameas that for IAS 16. The principles are the same as those provided by recentCanadian GAAP. When an investment property is exchanged for an asset (orassets), whether monetary or non-monetary, IAS 40 prescribes the treatmentfor such an exchange. The cost of the investment property is measured at fairvalue unless:

● the exchange transaction lacks commercial substance; or

● the fair value of neither the asset received nor the asset given up isreliably measurable.

The acquired asset is measured in this way even if an entity cannot immedi-ately derecognize the asset given up. If the acquired asset is not measured atfair value, its cost is measured at the carrying amount of the asset given up.[IAS 40(27)]

Whether an exchange transaction has commercial substance is determinedby considering the extent to which the future cash flows are expected tochange as a result of the transaction. IAS 40 states that a transaction hascommercial substance if:

● the configuration (risk, timing, and amount) of the cash flows of theasset received differs from the configuration of the cash flows of thetransferred asset; or

● the entity-specific value of the portion of the entity’s operationsaffected by the transaction changes because of the exchange; and

● the difference in either of these is significant relative to the fair value ofthe assets exchanged.

In determining whether an exchange transaction has commercial substance,the entity-specific value of the portion of the entity’s operations affected bythe transaction should reflect post-tax cash flows. The Standard notes thatthe results of these analyses may be clear without having to perform detailedcalculations. [IAS 40(28)]

The reference in the Standard to the entity-specific value of the portionof the entity’s operations affected by the transaction is intended tocontrast the entity’s cash flows with the cash flows of the specificasset. Thus, if an asset exchange provides synergies to an entity, it hascommercial substance even if the cash flows for the specific asset donot change.

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For an asset for which there are no comparable market transactions, the fairvalue of the asset is reliably measured if:

● the variability in the range in estimates of the fair value of the asset isnot significant; or

● the probabilities of the various estimates within the range can be rea-sonably assessed and used in estimating fair value.

If the fair value of either the asset received or the asset given up can bedetermined reliably, then the fair value of the asset given up is used tomeasure cost unless the fair value of the asset received is more clearlyevident. [IAS 40(29)]

5 Measurement after Recognition

5.1 Accounting Policy

IAS 40 allows entities to choose the fair value model or the cost model.Having decided on its policy, an entity must apply this model to all of itsinvestment property with two limited exceptions. These are:

● where the entity has an investment property backing liabilities that paya return linked directly to the fair value of, or returns from, specifiedassets including that investment property. This may occur in certainsegregated funds of insurance entities and private investment vehicles.An entity may choose a model for all such investment property andindependently choose a different model for all other investment prop-erty. This exception, which was an amendment to IAS 40 made byIFRS 4 Insurance Contracts, is considered in 5.1.1 below; or

● where a lessee chooses to classify a property interest held under anoperating lease as investment property, the fair value model must beused for all investment properties. [IAS 40(34)] The option to classifyproperty leased under an operating lease as investment property isavailable on a property-by-property basis, so that electing to treat onesuch leased interest as investment property does not have the effect ofrequiring all other interests under operating leases to be treated in thesame way, but does affect all other investment properties. [IAS 40(30)]

Once a policy has been adopted, an entity can change this policy in accor-dance with IAS 8 only if it would result in a more appropriate presentationin the financial statements. IAS 40 notes that it is highly unlikely that achange from the fair value model to the cost model will result in a moreappropriate presentation. [IAS 40(31)] The October 2007 Exposure Draft ofAnnual Improvements to IFRS proposes to align this wording with IAS 8, toclarify that ‘‘more appropriate’’ means ‘‘more relevant’’.

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If an entity adopts the cost model, it must still disclose the fair value of all ofits investment property for disclosure purposes, other than in exceptionalcircumstances when the fair value cannot be reliably determined (see 5.2.1.2below).

5.1.1 Investment Property Linked to Liabilities

The choice of policy extends to entities that have investment propertybacking liabilities that pay a return linked directly to the fair value of, orreturns from, specified assets including that investment property. The choiceof policy made by an entity for such property does not affect its choice forthe rest of its property, i.e., an entity may choose the fair value model for itsinvestment property linked to liabilities, but choose the cost model for therest of its investment property. [IAS 40(32A)]

For an entity which operates a property fund that issues units, some of whichare held by investors and others are held by the entity, the property held bythe fund cannot be held partly at cost and partly at fair value. [IAS 40(32B)].

Where different models are chosen, sales of investment property betweenpools of assets using different measurement bases are recognized at fairvalue and the cumulative change in fair value is recognized in profit or loss.[IAS 40(32C)]

5.2 Fair Value Model

After initial recognition, an entity that elects to use the fair value modelmeasures all of its investment property at fair value. [IAS 40(33)] Invest-ment property accounted for in accordance with the fair value model inIAS 40 falls outside the scope of the measurement provisions of IFRS 5, butis otherwise subject to the requirements of that Standard. [IFRS 5(5)]

5.2.1 Determining Fair Value

The definition of fair value is considered at 2.2 above and should be read inconjunction with this section.

The best evidence of fair value is given by current prices in an active marketfor similar property in the same location and condition and subject to similarlease and other contracts. [IAS 40(45)] In the absence of such information,current prices in an active market for properties of a different nature, recentprices of similar properties on less active markets and discounted cash flowprojections are all considered to achieve the most reliable estimate. [IAS40(46)]

Conditions at the statement of financial position date should be reflected indetermining the fair value of an investment property. [IAS 40(38)] Whendetermining the fair value of an investment property, special circumstances

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such as sales and leaseback arrangements are not considered. [IAS 40(36)]No deduction is made for costs that may be incurred on disposal. [IAS40(37)]

Assets or liabilities recognized elsewhere in the financial statements (e.g.,prepaid or accrued operating lease income) should not be double counted inthe fair value of the property. For example, if the elevators and HVACsystem in a property are considered an integral part of the building, they aregenerally included in the fair value of the investment property and are notrecognized as separate assets. Similarly, if an office is leased on a furnishedbasis, the fair value of the office generally includes the fair value of thefurniture, and the furniture is therefore not recognized as a separate asset.[IAS 40(50)]

Example 5.2.1

Acquisition of investment property with existing operatinglease in place

Company C acquires an investment property with an operatinglease that is not at current market rates. How should theinvestment property be accounted for?

IAS 40(40) states:

The fair value of investment property reflects, amongother things, rental income from current leases and rea-sonable and supportable assumptions that represent whatknowledgeable, willing parties would assume aboutrental income from future leases in the light of currentconditions. It also reflects, on a similar basis, any cashoutflows (including rental payments and other outflows)that could be expected in respect of the property. Someof those outflows are reflected in the liability whereasothers relate to outflows that are not recognised in thefinancial statements until a later date (e.g. periodic pay-ments such as contingent rents).

Additionally, IAS 40(26) states that a premium paid for alease should be included in the cost of an investment property.This acknowledges the fact that an investment propertyincludes not only land and buildings but other assets (cus-tomer relationships, furniture, and favourable leases) and lia-bilities (unfavourable leases) that are interrelated in deter-mining the fair value of the investment property. Hence, thefair value of operating leases at above or below market rates

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should be incorporated into the fair value of the investmentproperty. Note that this treatment is not the same for transac-tions in which an investment property is acquired in a businesscombination. In such cases the lease contracts are treated asseparate intangible assets (see Chapter 38).

However, in determining the fair value of an investment prop-erty, an entity should not double count assets or liabilities thatare recognized as separate assets or liabilities. Therefore, thefair value of an investment property is adjusted to exclude,among other things, prepaid or accrued operating leaseincome. [IAS 40(50)]

These requirements would extend to assets or liabilities recognized forsuch items as lease incentives, or that arise when the cash flows undera lease are not in step with the basis of income recognition (e.g.,straight-lining). Such items should not be double counted in the state-ment of financial position. There is no guidance within IAS 40detailing where such assets should be recognized in the statement offinancial position; the requirement is merely that they are not doublecounted.

Furthermore, the fair value of an investment property held under a leasereflects expected cash flows (including contingent rent that is expected tobecome payable). Thus, if a valuation obtained for a property is net of allpayments expected to be made, any recognized lease liability must be addedback to arrive at the fair value of the investment property for accountingpurposes. [IAS 40(50)]

As explained in the October 2007 Exposure Draft, the Board is pro-posing to clarify this requirement under the annual improvementsprocess. They believe that the current wording is misleading because itimplies that the fair value of an investment property asset held under alease is equal to the net fair value plus the carrying amount of anyrecognized lease liability. The proposed revised wording of the lastsentence of IAS 40(50)(d) is: ‘‘Accordingly, if a valuation obtained fora property is net of all payments to be made, it will be necessary to addback any recognized lease liability, to arrive at the carrying amount ofthe investment property using the fair value model.’’ The amendmenttherefore clarifies that it is the carrying amount rather than the fair

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value that is increased. This is what was intended by the originaldrafting so there is no change of substance.

Neither future capital expenditure intended to improve or enhance a prop-erty, nor related future benefits, should be reflected in the fair value of aninvestment property. [IAS 40(51)]

In many jurisdictions, the tax consequences that would flow fromacquiring, holding, and selling an investment property will have asignificant impact on the value a market participant would be willingto pay to acquire the property. It is common that the difference in themarket price will not be directly equal to the tax consequences underexisting tax law, as market participants will also factor into the pricethey are willing to pay the risk that tax law may change. In deter-mining the fair value of an investment property, the valuation shouldtake account of all tax consequences that are available to all marketparticipants, but should not reflect those tax consequences that areunique to the buyer. For example, where the acquisition of the propertywill enable the entity to recover some unused tax losses, this shouldnot be taken into account in the valuation. But where there is a taxbenefit from holding the property which is available to all participants,that should be taken into account in determining the fair value inaccordance with IAS 40(49)(d).

5.2.1.1 Use of Independent Valuator

Entities are encouraged to use, as the basis for determining fair value, avaluation by an independent valuator ‘‘who holds a recognised and relevantprofessional qualification and has recent experience in the location andcategory of the investment property being valued’’. [IAS 40(32)]

The Board decided that an independent valuation would not be required bythe Standard because of the following considerations:

● the cost-benefit ratio of an independent valuation may be inappropriatefor some entities; and

● independent valuators with appropriate expertise are not available insome markets. [IAS 40(32)]

Thus, paragraphs B55 and B56 of the Basis of Conclusions to IAS 40 (2000)state that it is for the preparers of financial statements to decide, in consulta-tion with auditors, whether an entity has sufficient internal resources todetermine reliable fair values. This approach is consistent with the approachto actuarial valuations in IAS 19 Employee Benefits.

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5.2.1.2 Inability to Reliably Determine Fair Value

There is a rebuttable presumption that the fair value of an investmentproperty can be reliably determined on a continuing basis. But in exceptionalcases, when an investment property is first acquired (or when an existingproperty becomes an investment property, e.g., on a change of use), theremay be clear evidence that the fair value of the property is not reliablydeterminable on a continuing basis. This arises when comparable markettransactions are infrequent and alternative reliable estimates of fair value(e.g., based on discounted cash flows) are not available. In such cases, anentity using the fair value model measures that investment property using thecost model in IAS 16 and is required to assume that the residual value of theproperty is zero. The cost model of IAS 16 must continue to be applied untilthe disposal of the property. [IAS 40(53)]

When an entity is compelled, for the reasons set out above, to measure aninvestment property using the cost model under IAS 16, it continues tomeasure all of its other investment property at fair value. [IAS 40(54)]

If an investment property has previously been measured at fair value, itshould continue to be measured at fair value until disposal (or until itotherwise ceases to be an investment property; for example, because itbecomes owner-occupied), even if comparable market transactions becomeless frequent or market prices become less readily available. [IAS 40(55)]

5.2.2 Changes in Fair Value

Changes in the fair value of investment property are recognized in theincome statement in the period in which they arise. [IAS 40(35)]

5.2.3 Property Held under a Lease and Classified as InvestmentProperty

When a property held under a lease which is negotiated at market rates isclassified as an investment property (i.e., accounted for as a finance lease),the fair value of the contractual net interest in the leased property at acquisi-tion, net of all expected lease payments including those relating to recog-nized liabilities, should be zero. This fair value does not change, regardlessof whether, for accounting purposes, the leased asset and liability are recog-nized at fair value or at the present value of minimum lease payments as perIAS 17(20). This means that there should be no initial gain or loss arisingfrom the remeasurement of a leased asset from cost to fair value unless fairvalue is measured at different times. This could occur when an election toapply the fair value model is made after initial recognition. [IAS 40(41)]

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5.2.4 Anticipated Liabilities

When an entity expects that the present value of its payments relating to aninvestment property (excluding payments relating to recognized liabilities)will exceed the present value of the related cash receipts, IAS 37 Provisions,Contingent Liabilities and Contingent Assets should be applied to determinewhether a liability for an ‘‘onerous contract’’ should be recognized, and if itshould, how it should be measured. [IAS 40(52)]

5.3 Cost Model

After initial recognition, an entity that chooses the cost model measures allits investment property in accordance with IAS 16’s requirements for thatmodel (other than those that meet the criteria to be classified as held for saleor are included in a disposal group that is classified as held for sale) inaccordance with IFRS 5. Investment properties that meet the criteria to beclassified as held for sale (or are included in a disposal group that isclassified as held for sale) are measured in accordance with IFRS 5. [IAS40(56)]

6 Transfers

6.1 Point of Transfer

Transfers to or from investment property are made when, and only when,there is a change in use evidenced by one of the following:

● commencement of owner-occupation, for a transfer from investmentproperty to owner-occupation;

● commencement of development with a view to sale, for a transfer frominvestment property to inventories;

● end of owner-occupation, for a transfer from owner-occupied propertyto investment property;

● commencement of an operating lease to another party, for a transferfrom inventories to investment property; or

● end of construction or development, for a transfer from property in thecourse of construction or development (covered by IAS 16) to invest-ment property. (Note that this item is proposed to be deleted in theOctober 2007 Exposure Draft for Annual Improvements to IFRS.) [IAS40(57)]

These circumstances are discussed in more detail below.

Paragraphs 60 to 65 of IAS 40 apply to recognition and measurement issuesthat arise when the fair value model is used for investment property andtransfers are made to or from investment property (see 6.1.1 to 6.1.4 below).

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When the cost model is used, transfers between investment property,owner-occupied property, and inventories do not change the carryingamount of the property transferred. They do not change the cost of theproperty for measurement or disclosure purposes. [IAS 40(59)]

6.1.1 Transfer from Property under Construction to InvestmentProperty

The completion of construction or development of a property signals thetransfer to investment property. If the investment property is to be carried atfair value, the difference between the fair value of the property and thecarrying value at the point of completion is recognized in profit or loss. [IAS40(65)]

As explained at 6.1.5 below, if the redevelopment of an existing propertycommences but the property is intended for future use as an investmentproperty, the property continues to be recognized as an investment property.There is no temporary transfer to properties under development.

Example 6.1.1A

An entity is in the process of building a property that willbecome an investment property under the definition in IAS 40.The construction of the building is concluded onNovember 15, 20X1, but the furnishings, which are necessaryunder the current market for rent or sale purposes, are onlyconcluded on December 10, 20X1. When does this propertybecome an investment property?

The property becomes an investment property on the date thatthe property is ready for its intended use, which isDecember 10, 20X1.

Example 6.1.1B

Can an entity revalue an investment property interest that is inthe course of construction?

The answer is yes, but it would presumably be fairly rare to doso. Investment property under construction is accounted forunder IAS 16, either at cost or revalued amount. However, therevaluation model can only be employed if the fair value canbe measured reliably. In many circumstances, the uncertainties

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of construction, including costs to complete, time to comple-tion, and the unpredictability of the forces of nature on thecosts to complete the project and to bring it into operation,prevent the preparation of a suitably reliable estimate of fairvalue.

If a project and all the other members of its class qualify forthe fair value measurement option, a revaluation should bemade with sufficient regularity to ensure that the carryingamount does not differ materially from that which would bedetermined using fair value at the statement of financial posi-tion date. If the revaluation leads to an increase of the carryingamount of the asset, the increase is recognized in other com-prehensive income and increases the revaluation surpluswithin equity (unless the increase reverses a revaluationdecrease of the same asset previously recognized in profit orloss, in which case it is recognized in profit or loss). When theconstruction is completed, the property is transferred from theproperty under construction category to the investment prop-erty category at fair value. The difference (if any) between thefair value at the time of the transfer and the revalued carryingamount should be recognized in profit or loss. However, thisamount is not expected to be material as IAS 16 requiresregular revaluation.

The amount reported in equity under the heading of revalua-tion surplus is never recognized in income (see Chapter 7Property, Plant and Equipment.

Example 6.1.1C

An entity leases a newly constructed property to a tenantunder an operating lease. Under the terms of the agreement,the tenant is given a rent-free period of six months duringwhich time the tenant can fit-out the building to its ownspecifications. The fit-out will benefit the lessee only. At theend of the lease term there will be no material benefit of thefit-out to the lessor.

The tenant will not be able to move into the property until thefitting out is complete. Does the property become an invest-ment property when it is handed over to the tenant or when thetenant has completed the fitting out works?

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The property is classified as investment property from the datewhen construction is complete from the perspective of thelessor. The fact that further construction work may be carriedout by the tenant does not affect this. The six-month periodshould be treated as a rent-free period for the tenant, andhence the rental income should be spread over the full term ofthe lease to include this period. Any borrowing costs cannotbe capitalized beyond the start of the six-month period, but theeffect will be mitigated by the recognition of income duringthe rent-free period.

6.1.2 Transfer from Owner-Occupied Property to InvestmentProperty or Vice Versa

End of owner-occupation signals a potential transfer to investment property.If an owner-occupied property becomes an investment property that will becarried at fair value, IAS 16 is applied up to the date of change of use. Anydifference at that date between the carrying amount of the property, inaccordance with IAS 16, and its fair value is treated in the same way as arevaluation in accordance with IAS 16. [IAS 40(61)]

Any increase in carrying amount is recognized in other comprehensiveincome and increases the revaluation surplus within equity, unless theincrease reverses a previous impairment for that property, in which case theincrease is recognized in profit or loss. The amount recognized in profit orloss should not exceed the amount needed to restore the carrying amount tothe amount that would have been determined (net of depreciation) had noimpairment loss been recognized. [IAS 40(62)]

This also means that any decrease in the carrying amount of the property isrecognized in profit or loss, unless the decrease is the reversal of a previousrevaluation surplus, in which case the decrease is recognized in other com-prehensive income and reduces the revaluation surplus within equity. [IAS40(62)]

On subsequent disposal of such a property, the revaluation surplus may betransferred to retained earnings, but not through profit or loss. [IAS 40(62)]

When an investment property carried at fair value is transferred toowner-occupied property, the property’s deemed cost for subsequentaccounting in accordance with IAS 16 is its fair value at the date of changein use. [IAS 40(60)]

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6.1.3 Transfer from Inventory to Investment Property

This may be evidenced by the commencement of an operating lease toanother party. For a transfer to investment property where the property willbe carried at fair value, any difference between the fair value and thecarrying value of the property at the date of transfer is recognized in theprofit or loss. [IAS 40(63)] This is consistent with the treatment of sales ofinventories. [IAS 40(64)]

6.1.4 Transfer from Investment Property to Inventory

The Standard requires an investment property to be transferred to inventoriesonly when there is a change of use evidenced by commencement of develop-ment with a view to sale. [IAS 40(57)(b)]

When an investment property carried at fair value is transferred to invento-ries, the property’s deemed cost for subsequent accounting in accordancewith IAS 2 is its fair value at the date of change in use. [IAS 40(60)]

6.1.5 Continued Classification as Investment Property

If an entity decides to dispose of an investment property without develop-ment, the property continues to be treated as an investment property until itsdisposal. It is not treated as inventory. [IAS 40(58)]

Similarly, if redevelopment on an existing investment property commencesbut the property is intended for future use as an investment property, theproperty continues to be recognized as an investment property. There is notemporary transfer to properties under development. [IAS 40(58)]

Where the fair value model is used, expenditure incurred in the rede-velopment of an investment property which remains classified as aninvestment property (e.g., demolition and rebuilding cost) should ini-tially be capitalized. The effect of remeasuring the asset to fair valuewill result in any gain or loss, measured as the excess of the change infair value over the cost of the redevelopment, being recognized inincome. Disclosures required by IAS 40(76) distinguish between thecost of additions and fair value movements.

Undeveloped land may fall within the definition of investment prop-erty in IAS 40 (see 2.3 above), although this will depend on theparticular circumstances. Where such land is subsequently developedfor future use as an investment property, rather than with a view tosale, the property continues to be recognized as an investment propertywhile the development takes place.

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7 Disposals

An investment property is derecognized (i.e., removed from the statement offinancial position) on disposal or when it is permanently withdrawn from useand no future economic benefits are expected from its disposal. [IAS 40(66)]

The disposal of an investment property may occur through sale of theproperty or through entering into a finance lease (as a lessor). In determiningthe date of disposal for an investment property, the criteria in IAS 18Revenue for recognizing revenue from the sale of goods should be appliedand the related guidance in the appendix to IAS 18 should be considered (seeChapter 21). IAS 17 applies to a disposal effected by entering into a financelease and to a sale and leaseback (see Chapter 16). [IAS 40(67)]

7.1 Consideration, Gains, and Losses on Disposal

The gain or loss on the retirement or disposal of an investment property iscalculated as the difference between the net disposal proceeds and thecarrying value of the property, and is recognized in profit or loss in theperiod of the retirement or disposal. This is subject to the requirements ofIAS 17 in the case of a sale and leaseback transaction. [IAS 40(69)]

The consideration receivable on the disposal of an investment property isrecognized initially at fair value. In particular, if payment is deferred, theconsideration is recognized initially at its cash price equivalent. The differ-ence between this amount and the nominal amount is recognized as interestrevenue under the effective interest method in accordance with IAS 18. [IAS40(70)]

When any liabilities are retained relating to the property after its disposal,IAS 37 Provisions, Contingent Liabilities and Contingent Assets or otherrelevant standards are applied to those liabilities. [IAS 40(71)]

7.2 Compensation for Impairment of Investment Property

The treatment of compensation for impairment and subsequent reconstruc-tion of such property in IAS 40 is the same as that prescribed in IAS 16 forproperty, plant and equipment. Impairments or losses on investment prop-erty, related claims for or payment of compensation from third parties, andany subsequent purchase or construction of replacement assets are separateeconomic events and are accounted for separately. Therefore:

● impairments of investment property are recognized in accordance withIAS 36 (based on a comparison of carrying amount and recoverableamount – see Chapter 14);

● retirements or disposals of investment property are recognized as setout in this section in accordance with paragraphs 66 to 71 of IAS 40;

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● compensation from third parties for investment property that wasimpaired, lost, or given up is recognized in profit or loss when itbecomes receivable; and

● the cost of assets restored, purchased, or constructed as replacements isdetermined as set out in section 4 above in accordance with paragraphs20 to 29 of IAS 40, accounting separately for insurance receipts andsimilar items. [IAS 40(73)]

Example 7.2

Insurance claim

A building carried as an investment property burns downbefore the year-end. A valuation of the building in its dam-aged state is performed at year-end and the insurance com-pany has agreed to the amount of the payment, which issubject only to routine administrative delays. Should the valueof the property in the year-end statement of financial positioninclude any amount receivable from insurance?

The amount receivable from insurance should be recognizedseparately in the statement of financial position as an asset asit is receivable at the year-end. Any value of the propertyrecognized in investment property should not include theinsurance receivable.

8 Disclosure

IAS 1 Presentation of Financial Statements requires that, where material,the aggregate carrying amount of the entity’s investment property should bepresented on the face of the statement of financial position. [IAS 1(54)(b)]

The disclosures required by IAS 40 are made in addition to the disclosuresrequired by IAS 17 on leases entered into by lessees and lessors.

8.1 General Disclosures

An entity is required by IAS 40 to disclose:

● whether it applies the fair value or the cost model;

● whether, and in what circumstances, properties held under operatingleases are classified as investment property when the fair value modelis used;

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● the criteria used to distinguish investment property from owner-occupied property or property held for sale in the normal course ofbusiness, when that classification is difficult;

● the methods and significant assumptions applied in determining the fairvalue of investment property, including a statement of whether thedetermination of fair value was supported by market evidence or wasmore heavily based on other factors, which are disclosed, because ofthe nature of the property and lack of comparable market data;

● the extent to which the fair value of investment property (as measuredor disclosed in the financial statements) is based on a valuation by anindependent valuator who holds a recognized and relevant professionalqualification and has recent experience in the location and category ofthe investment property being valued. If there has been no such valua-tion, that fact should be disclosed;

● the amounts recognized in profit or loss for:

● rental income from investment property;

● direct operating expenses (including repairs and maintenance)arising from investment property that generated rental incomeduring the period;

● direct operating expenses (including repairs and maintenance)arising from investment property that did not generate rentalincome during the period; and

● the cumulative change in fair value recognized in profit or loss ona sale of investment property from a pool of assets, in which thecost model is used, into a pool in which the fair value model isused (see 5.2.1 above);

● the existence and amounts of restrictions on the realizability of invest-ment property or the remittance of income and proceeds of disposal;and

● contractual obligations to purchase, construct, or develop investmentproperty, or for repairs, maintenance, or enhancements. [IAS 40(75)]

8.1.1 Service Charge Income and Expense

Property investment entities often make service charges to theirtenants, e.g., to cover the cost of repairs and maintenance that are theresponsibility of the tenants under the terms of the lease but which arearranged and managed by the lessor. These costs are typically passedon at cost or with a fixed percentage mark-up under the terms of the

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Disclosure 9

lease. Generally, the lessor acts as a principal with regard to theseitems, and accordingly records the related recoveries as revenue in itsfinancial statements. If the lessor is in substance merely acting as agentfor the payment of these costs, the reimbursement will generally not berecognized as revenue under IAS 18. Nevertheless, it would be desir-able to disclose in the notes the amount of such receipts and relatedcosts if they are significant.

8.2 Fair Value Model

8.2.1 Reconciliation of Movements in Carrying Values

In addition to the disclosures at 8.1 above, an entity that applies the fairvalue model is required to disclose a reconciliation between the carryingamounts of investment property at the beginning and end of the period,showing the following:

● additions, disclosing separately those additions resulting frompurchases, those resulting from subsequent expenditure recognized inthe carrying amount of an asset, and those resulting from acquisitionsthrough business combinations;

● assets classified as held for sale, or included in a disposal group classi-fied as held for sale, in accordance with IFRS 5 and other disposals;

● net gains or losses from fair value adjustments;

● the net exchange differences arising on the translation of the financialstatements into a different presentation currency and on translation of aforeign operation into the presentation currency of the entity (seeIAS 21 for a discussion of these matters);

● transfers to and from inventories and owner-occupied property; and

● other changes. [IAS 40(76)]

8.2.2 Reconciliation of Adjustments to Valuation of Property

When a valuation obtained for investment property is adjusted significantlyfor the purpose of the financial statements (e.g., to avoid double counting ofassets or liabilities that are recognized as separate assets and liabilities), theentity is required to disclose a reconciliation between the valuation obtainedand the adjusted valuation included in the financial statements, showingseparately the aggregate amount of any recognized lease obligations thathave been added back, and any other significant adjustments. [IAS 40(77)]

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8.2.3 Details about Property when Fair Value is Not ReliablyDeterminable

In the exceptional cases referred to at 5.2.1.2 above, when an entity applyingthe fair value model measures investment property using the cost model inIAS 16, the reconciliation described at 8.2.1 should disclose amountsrelating to that investment property separately from amounts relating toother investment property. In addition, the following should be disclosed:

● a description of the investment property;

● an explanation of why fair value cannot be determined reliably; and

● if possible, the range of estimates within which fair value is highlylikely to lie.

On disposal of such investment property not carried at fair value, the fol-lowing should be disclosed:

● the fact that the entity has disposed of investment property not carriedat fair value;

● the carrying amount of that investment property at the time of sale; and

● the amount of gain or loss recognized. [IAS 40(78)]

8.3 Cost Model

The disclosures for the cost model are identical to those for each class ofproperty, plant and equipment under the cost model in IAS 16 with the onenotable exception: IAS 40 requires the disclosure of the fair value of theclass of investment properties. In addition to the disclosures at 8.1 above, anentity that applies the cost model is required to disclose:

● the depreciation methods used;

● the useful lives or the depreciation rates used;

● the gross carrying amount and the accumulated depreciation (aggre-gated with accumulated impairment losses) at the beginning and end ofthe period;

● a reconciliation of the carrying amount of investment property at thebeginning and end of the period, showing the following:

● additions, disclosing separately those additions resulting fromacquisitions and those resulting from subsequent expenditure rec-ognized as an asset;

● additions resulting from acquisitions through business combina-tions;

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● assets classified as held for sale, or included in a disposal groupclassified as held for sale, in accordance with IFRS 5 and otherdisposals;

● depreciation;

● the amount of impairment losses recognized, and the amount ofimpairment losses reversed, during the period in accordance withIAS 36;

● the net exchange differences arising on the translation of thefinancial statements into a different presentation currency, and ontranslation of a foreign operation into the presentation currency ofthe entity;

● transfers to and from inventories and owner-occupied property;

● other changes; and

● the fair value of investment property. In the exceptional cases describedat 5.2.1.2 above, when an entity cannot determine the fair value of theinvestment property reliably, it should disclose:

● a description of the investment property;

● an explanation of why fair value cannot be determined reliably;and

● if possible, the range of estimates within which fair value is highlylikely to lie. [IAS 40(79)]

9 Implications for Canadian Preparers

The implications of IAS 40 are fairly easy to sum up since it allows avaluation approach that is significantly different from current CanadianGAAP. Affected entities must consider the merits of applying the fairvalue model in their own circumstances and the practical considera-tions involved in implementing (and then in continuing to apply) thismodel.

Also, as noted in 1.1, the use of the fair value model could causesignificant change to both internal and external performance measure-ment. In contemplating the use of this model, Canadian companiesmust remain alert to the operational implications for matters such askey covenants that might be affected by the use of the model, and ofthe impact on other key disclosures such as those in the MD&A.

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Draft - cch.ca · Filename: D:\books\iGAAP\master\ch09.sgm Style: D:\books\iGAAP\fmt\ebook.bst Format: Seq: 2 Free lead: 270D Next lead: 0D Comment: 9 Investment Property IAS 40 represents