03 IAS 40 Advanced - Slides - Copy

© 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-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. IAS 40 - 1

IAS 40Investment PropertyAdvanced Baseline


Learning objectives

By the end of this session you should know:How to identify an investment propertyHow investment property should be measuredThe key disclosure requirements


Investment Property - Definition

Property = land or a building (or part of a building) or bothInvestment property is property held for

RentalsCapital appreciation

Not property held forUse in production, supply of goods / services or for administrationSale in ordinary course of business


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, andLessee uses the fair value model.

Option available on a property-by-property basis


Not investment property (1)

Sale in ordinarycourse of business Owner-occupied Constructed for

third party

InventoryIAS 2

PropertyIAS 16

ContractIAS 11



Property under finance lease

Employee occupiedproperty

LeaseIAS 17

PropertyIAS 16



Biological assets Mineral rights, exploration/extraction

IAS 41 IFRS 6


Examples of investment property

Land held for long-term capital appreciationLand held for undetermined future useBuilding 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 redevelopedFor continued use as investment property


Dual purpose – Able to split

IAS 16

Owneroccupied

IAS 40

Rentalincome


Dual purpose – Unable to split

IAS 16owneroccupied

rentalincome

IAS 40

owne

roc

cupi

ed

rental income


Ancillary services

IAS 16services rentalincome

IAS 40

serv

ices

rental income


Hotels

Owner-managed = owner-occupied IAS 163rd-Party-managed = involves judgment:

Passive investor = investment propertySignificant exposure to operating cash flow variation= owner-occupied IAS 16

Disclose classification criteria


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


Initial measurement

Initially, measured at cost (transaction costs included):Purchased or self-constructed investment property:

Purchase priceAny 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


Subsequent measurement (1)

Fair value Changes in profit or lossExemption if cannot reliably determine on ongoing basis

Cost modelAs per IAS 16DepreciateImpairment losses

Apply choice to all investment propertyChange from FV option to cost option not allowed


Subsequent measurement (2)

Property under construction / development:Fair value model

If fair value is determinable reliably, then it should be followedIf 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 modelFollow IAS 16 requirements


Measurement of fair value, if no active market

IncludeCurrent market conditionsCurrent lease arrangements and expected cash inflows and outflows

ExcludeEstimates based on atypical arrangementsTransaction cost of saleDouble-count of assets and liabilitiesExpected cash outflows for improvementExpected cash inflows after improvement


Transfers to investment property carried at fair value

InventoryIAS 2

InvestmentProperty at FV

FV adjustment=

Profit or loss

Owner occupiedIAS 16


FV adjustment=

Revaluationunder IAS 16

Investment Property at cost


Change in policy=

Equity


Transfers from investment property carried at fair value

InvestmentProperty

InventoryIAS 2

Owner occupiedIAS 16

Fair valuebecomes

new cost basis


Retirements and disposals

Eliminate items of investment propertyOn 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


Case study


Key disclosures – Both models

Criteria to distinguish between investment property and owner-occupied property and inventoryMethods, significant assumptions to determine fair valueExtent to which independent valuer involved and any adjustments to the valuation obtainedRental incomeDirect operating expenses

From investment property generating rental incomeFrom vacant investment property

Material contractual obligations, including repairs, maintenance


Key disclosures

Fair value modelReconciliationInformation on property for which fair value cannot be determinedWhether properties held under operating leases have been classified as investment property

Cost modelReconciliationFair value, orInformation on property for which fair value cannot be determined


Key learning points

Investment property is held for rentals or capital appreciationTypical classification issues: dual-use property / ancillary servicesRecognised initially at costSubsequently all investment property should be measured using either the fair value model or the cost modelFair value model with changes in fair value recognised in profit or lossDisclosure of the fair value of all investment property is required, regardless of the measurement model used

Documents

03 IAS 40 Advanced - Slides - Copy