This chapter discusses the revised version of IAS 40, which was published in
December 2003, as subsequently updated by various narrow-scope amendments and
minor consequential amendments arising from other standards, including IFRS 16
– Leases (see 1.1 below).
IFRS 17 – Insurance Contracts – will result in further changes to IAS 40 in later
accounting periods (see 13.1 below).
1.1
New leases standard: IFRS 16
In January 2016, the IASB issued the new leases standard, IFRS 16, which supersedes
IAS 17 – Leases, IFRIC 4 – Determining whether an Arrangement contains a Lease,
SIC-15 – Operating Leases – Incentives – and SIC-27 – Evaluating the Substance
of Transactions Involving the Legal Form of a Lease. As a consequence, IFRS 16
amended the scope of IAS 40 by defining investment property to include both
owned investment property and property held by a lessee as a right-of-use asset
(see 2 below). Further, IFRS 16 extensively amended, added and deleted a number
of paragraphs in IAS 40.
Leases of property that meet the definition of investment property in IAS 40 are
included in the scope of IFRS 16.
While lessor accounting is substantially unchanged from previous accounting, IFRS 16
significantly changes the accounting for lessees, requiring them to recognise most leases
in their statement of financial position as lease liabilities with corresponding right-of-
use assets. Under IFRS 16 tenants apply a single model for most leases i.e. they no longer
need to classify leases as finance leases or as operating leases.
IFRS 16 requires a lessee to measure right-of-use assets arising from leased property in
accordance with the fair value model of IAS 40 if the leased property meets the
definition of investment property and the lessee elects the fair value model in IAS 40 as
an accounting policy. This represents a change from the previous requirements of
IAS 40. Under previous requirements, the classification of property held under an
operating lease as an investment property was an accounting policy election that was
available on a property-by-property basis (see 2.1 and 5.1 below).
IFRS 16 and its consequential amendments are effective for annual periods beginning
on or after 1 January 2019. Early application is permitted provided IFRS 15 – Revenue
from Contracts with Customers – has been applied, or is applied, at the same date as
IFRS 16. Further, IFRS 16 adds a new paragraph 84B to IAS 40 so that an entity applying
IFRS 16, and its related amendments to IAS 40, for the first time will apply the transition
requirements in Appendix C of IFRS 16 to its investment property held as a right-of-use
asset (see Chapter 24 at 10). [IAS 40.84B].
For the detailed discussions and requirements of this new standard, see Chapter 24.
2
DEFINITIONS AND SCOPE
An investment property is defined in IAS 40 as property (land or a building – or part of
a building – or both) held by the owner or by the lessee as a right-of-use asset (or, for
Investment
property
1355
entities that have not yet adopted IFRS 16, by the lessee under a finance lease) to earn
rentals or for capital appreciation or both, rather than for:
(a) use in the production or supply of goods or services or for administrative purposes;
or
(b) sale in the ordinary course of business. [IAS 40.5].
This means that any entity, whatever the underlying nature of its business, can hold
investment property assets if its intention on initial recognition (either by acquisition or
change in use – see 9 below) is to hold them for rent or for capital appreciation or both.
Subsequent to initial recognition, assets might be reclassified into and from investment
property (see 9 below). It is also of note that, prior to adoption of IFRS 16, an investment
property could be held under an operating lease (see 2.1 below).
In contrast, ‘owner-occupied’ property is defined as property held by the owner or by
the lessee as a right-of-use asset (or, for entities that have not yet adopted IFRS 16, by
the lessee under a finance lease) for use in the production or supply of goods or services
or for administrative purposes. [IAS 40.5]. Such property falls outside the scope of IAS 40
and is accounted for under IAS 16 (see Chapter 18), together with IFRS 16 (or IAS 17)
(see Chapter 24 or if applicable, Chapter 23), if relevant.
IAS 40 applies to the measurement in a lessor’s financial statements of investment
property provided to a lessee under an operating lease (see 2.3 below). Prior to adoption
of IFRS 16, IAS 40 also applied to the measurement in a lessee’s financial statements of
investment property interests held under a finance lease. However, it did not deal with
other accounting matters that were dealt with in IAS 17 (see Chapter 23), including:
• classification of leases as finance or operating leases;
• recognition of lease income arising from the leasing of investment property;
• measurement in a lessee’s financial statements of property interests held under a
lease accounted for as an operating lease. However, prior to adoption of IFRS 16,
such property interests held under operating leases could be within the scope of
IAS 40 if certain criteria were met (see 2.1 below);
• measurement in a lessor’s financial statements of its net investment in a finance
lease;
• accounting for sale and leaseback transactions; and
• disclosure about finance leases and operating leases.
The related measurement of right-of-use assets and other accounting matters for
lessees, as described above, are dealt with in IFRS 16 (see Chapter 24) when it became
effective in 2019 (see 1.1 above).
IAS 40 does not apply to:
• biological assets related to agricultural activity (see IAS 41 – Agriculture – and
IAS 16); and
• mineral rights and mineral reserves such as oil, natural gas and similar non-
regenerative resources. [IAS 40.4].
Biological assets that are physically attached to land (for example, trees in a plantation
forest) are measured at their fair value less estimated point-of-sale costs separately from
1356 Chapter 19
the land. [IAS 41.12]. However, the land related to the agricultural activity is accounted for
either as property under IAS 16 or investment property under IAS 40. [IAS 41.2].
What primarily distinguishes investment property from other types of property interest is
that its cash flows (from rental or sale) are largely independent of those from other assets held
by the entity. By contrast, owner-occupied property used by an entity for administrative
purposes or for the production or supply of goods or services does not generate cash flows
itself but does so only in conjunction with other assets used in the production or supply
process. IAS 16 applies to owned owner-occupied property and IFRS 16 applies to owner-
occupied property held by a lessee as a right-of-use asset. [IAS 40.7]. Note that prior to adoption
of IFRS 16, IAS 40 referred only to IAS 16 for owner-occupied property.
Even with the distinction described above, it may not be easy to distinguish investment
property from owner-occupied proper
ty. The standard therefore gives guidance to help
determine whether or not an asset is an investment property (see 2.1 to 2.10 below).
It is also worthy of note that the Interpretations Committee has discussed the
accounting for a structure that ‘lacks the physical characteristics of a building’, i.e.
whether it should be accounted for as investment property in accordance with IAS 40.
This primarily related to an emerging business model in which an entity owns
telecommunication towers and leases spaces in the towers to telecommunication
operators to which the operators attach their own devices. The entity may also provide
some basic services to the telecommunication operators such as maintenance services.1
The request specifically sought clarification on whether a telecommunication tower
should be viewed as a ‘building’ and thus ‘property’, as described in paragraph 5 of
IAS 40 and how any service element in the leasing agreement and business model of the
entity should be taken into consideration when analysing the issue.
The Interpretations Committee observed that the tower has some of the characteristics
of investment property, in that spaces in the tower were let to tenants to earn rentals
(e.g. leasing of spaces for telecommunication operators to which operators attach their
own devices) but questioned whether the tower qualifies as a ‘building’ because it lacks
features usually associated with a building such as walls, floors and a roof. They also
observed that the same question could arise about other structures, such as gas storage
tanks and advertising billboards.2
The Interpretations Committee observed that there would be merit in exploring
approaches to amending IAS 40 to include structures that lack the physical
characteristics associated with a building.3 However, following research on this issue,
the IASB decided not to pursue this issue because there appeared to be limited demand
for fair value accounting for these types of structures and limited diversity in practice.4
2.1
Property interests held under operating leases
When IFRS 16 became effective in 2019 (see 1.1 above), the classification alternative for a
property interest held under an operating lease, as described further below, is no longer
available. This means that if a leased property meets the definition of investment property
and the lessee elects the fair value model in IAS 40 as an accounting policy, the right-of-
use asset arising from the leased property is measured in accordance with the fair value
model of IAS 40. [IFRS 16.34]. For further discussion, see Chapter 24 at 5.3.1.B.
Investment
property
1357
Prior to adoption of IFRS 16, entities were permitted to treat property interests held
under operating leases as investment property – providing that they would
otherwise meet the definition of investment property and that the fair value model
was applied (see 6 below). This classification alternative was available on a
property-by-property basis so that the entity did not need to classify all property
interests held under operating leases as investment property. However, IAS 40
previously required that once one operating leasehold interest is classified as an
investment property, all property classified as investment property had to be
accounted for using the fair value model. These leasehold interests were subject also
to the same disclosure requirements as other investment properties accounted for
under the fair value method (see 12 below).
2.2 Land
Land is investment property if it is held to earn rentals or for capital appreciation or for
both; or for a currently undetermined future use. This is in contrast to land that is held
for sale in the ordinary course of business (typically in the shorter term) or held for the
production or supply of goods and services or for administrative purposes. [IAS 40.7, 8].
If, on initial recognition, land is held for a currently undetermined future use, i.e. if an
entity has not determined whether it will use the land as owner-occupied property or
for sale in the ordinary course of business, it is deemed to be held for capital
appreciation and must be classified as investment property. [IAS 40.8].
2.3
Property leased to others
Properties leased to third parties under one or more operating lease are generally
investment properties, whether they are owned freehold by the reporting entity or are
right-of-use assets relating to properties held by the reporting entity (or if IFRS 16 is not
yet adopted, whether they are held by the reporting entity under a leasehold interest).
This will also apply if the property is currently vacant while tenants are being sought.
[IAS 40.8].
However, in our opinion, an exception should be made in those cases where, despite
being leased out, properties have been held for sale in the ordinary course of business
since their initial recognition (either by acquisition or change in use – see 9 below).
Leasing of property prior to sale is a common practice in the real estate industry in order
to minimise cash outflows whilst the entity seeks a buyer and because prospective
buyers may view the existence of such lease contracts positively, especially those that
wish to acquire property for investment purposes.
In those circumstances – and notwithstanding that they are leased to tenants under
operating leases – they should be accounted for as inventory under IAS 2 – Inventories
– as long as it remains the intention to hold such properties for short-term sale in the
ordinary course of business. The rent received would be recorded in profit or loss and
would not be treated as a reduction in the cost of inventory.
Property that is leased to a third party under a finance lease is not an investment
property but is accounted for under IFRS 16 (see Chapter 24) or, if not yet adopted,
IAS 17 (see Chapter 23). [IAS 40.9].
1358 Chapter 19
2.4
Property held for own use (‘owner-occupied’)
As noted above, owner-occupied property, that is property held for use in the
production or supply of goods or services or for administrative purposes, is specifically
excluded from being treated as investment property and is subject to the provisions of
IAS 16 and IFRS 16. Owner-occupied property includes:
• property that is going to be owner-occupied in the future (whether or not it has
first to be redeveloped);
• property occupied by employees (whether or not they pay rent at market rates);
and
• owner-occupied property awaiting disposal. [IAS 40.9].
Note that the treatment in the consolidated accounts can be different from the
treatment by individual group entities. For example, it may be the case that a property
owned by one group company is held for occupation by another group company. This
will be owner-occupied from the perspective of the group as a whole but can be
classified as an investment property in the accounts of the individual entity that owns
it, provided it meets the definition of an investment property. [IAS 40.15]. This
classification in the individual entity’s financial statements will apply even if the rental
is not at arm’s leng
th and the individual entity is not in a position to benefit from capital
appreciation. The IASB concluded that the more significant factor is that the property
itself will generate cash flows that are largely independent from other assets held by the
entity. [IAS 40.7].
Associates and joint ventures are not part of the group. Therefore, a property owned by
the group but occupied by an associate or a joint venture would be accounted for as
investment property in the consolidated financial statements (provided, of course, it
meets the investment property definition).
2.5
Investment property under construction
Prior to 1 January 2009, IAS 16 applied to property that was being constructed or
developed for future use as investment property until construction or development was
complete, at which time the property became investment property. Amendments to
IAS 40 with effect from 1 January 2009 brought investment property under construction
within the scope of IAS 40. [IAS 40.8].
The fair value of investment property under construction is further discussed in 6.3 below.
2.6
Property held or under construction for sale in the ordinary
course of business
Property held, or being constructed, with the intention of sale in the ordinary course of
business is not an investment property. This includes property acquired exclusively for
sale in the near future or for development and resale (such property is accounted for as
inventory under IAS 2 (see Chapter 22)). [IAS 40.9].
In practice, the classification between investment property and property intended for
sale in the ordinary course of business is often a difficult judgement. There is only a fine
line between:
Investment
property
1359
• a property held for capital appreciation, and therefore classified as investment
property; and
• a property intended for sale in the ordinary course of business, which would be
classified as inventory. This might be the case where, for example, the owner will
undertake activities to increase the property’s value prior to sale or where there is
uncertainty in obtaining permits required from relevant authorities prior to
commencing construction activities. In the latter case, the property, e.g. land, may
continue to appreciate in value during the period where there are no development
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 267
