activities – see 3.1 below.
As set out in 2.3 above, the receipt of rental income from a property would not
necessarily be the deciding factor. Certainly, other than for land (see 2.2 above), IAS 40
provides no explicit ‘default’ classification when the future use of a property has not yet
been determined.
However, this judgement is important because whilst IAS 40 allows property held as
inventory to be reclassified as investment property when there is a change in use and
an operating lease with a third party is entered into, it is more difficult to reclassify
investment property as inventory (see 8, 9 and 9.1 below). Accordingly, an entity should
develop criteria so that it can exercise that judgement consistently in accordance with
the definition of investment property and with the related guidance in IAS 40. Such
criteria are required to be disclosed when classification is difficult (see 12.1 below).
[IAS 40.14].
2.7
Property with dual uses
A property may be used partly to derive rental income and partly as owner-occupied
property. For example, an office could be sub-divided by the owner with some floors
being rented to tenants whilst retaining others for own use.
IAS 40 states that if a property has both investment property and non-investment
property uses, providing the parts of the property could be sold or leased out under a
finance lease separately, they should be accounted for separately. [IAS 40.10].
However, to meet these requirements we consider that a property must actually be in a state
and condition to enable it to be disposed of or leased out separately at the end of the reporting
period. The fact that a property could be divided in future periods if the owner so chose is
insufficient to conclude that the portions can be accounted for separately. Consequently, if a
property requires sub-division before the portions could be disposed of separately, then
those parts should not, in our view, be accounted for as separate portions until such sub-
divisions occur unless sub-division is a non-substantive legal requirement (see below).
In our view, an intention to lease out, or the action of leasing out a portion of a property
under an operating lease is prima facie evidence that, if it so wished, the entity could also
lease out the property under a finance lease – the difference between the two commonly
being just the length of the lease. If however, there is evidence that the property could not
be leased out under a finance lease then IAS 40 could not be applied to that portion.
It also seems clear that ‘separately’ needs to be assessed both in terms of the physical
separation (for example, mezzanine floors and partitioning walls) of the property and
legal separation such as legally defined boundaries.
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In many jurisdictions, properties that are physically sub-divided into different portions
(for example, different floors) are registered in a land or property registry as one single
property and need to be legally sub-divided before a portion can be leased out to a third
party or disposed of. Often, these legal proceedings are undertaken only at or near the
point of sale or the assignment of a lease on that portion of the property concerned. At
the end of the reporting period the legal sub-division may not have occurred.
Accordingly, judgement is required to determine whether legal separation is a substantive
requirement that will restrict the property being considered currently separable or whether
it is a non-substantive requirement where the property is currently separable. For example:
• If the entity owning the property could not be prevented from legally sub-dividing
the property then it is already in a condition to be sold separately and this would not
prevent the portion of the property concerned being accounted for as investment
property. This would be the case where, for example: the process of sub-dividing
the property was entirely within the control of the entity and did not require
permission from a third party (which would include the relevant authorities); or if
permission from a third party was required, but this was no more than a formality.
• Conversely, if the entity was required to obtain the permission of third parties
before legally sub-dividing the property, and such permission could realistically be
withheld, the portions of the property concerned are not accounted for separately
until such legal sub-division occurs.
Therefore, if the portion of the property concerned otherwise meets the definition of
investment property at the end of the reporting period, judgement is required to assess
the legal position of the property in determining whether it is appropriate to account
for a portion separately under IAS 40. Criteria used in the assessment should be
disclosed and applied consistently (see 12.1 below). [IAS 40.14].
In the event that no separation is possible, the property is an investment property only
if an insignificant proportion is used for non-investment property purposes. [IAS 40.10].
The setting of a threshold to evaluate whether or not something is significant or
insignificant depends on judgement and circumstances. In the extract below, PSP Swiss
Property discloses its judgement about dealing with property that it partially uses, but
other entities will need to make their own assessment.
Extract 19.1: PSP Swiss Property Ltd (2017)
Notes to the consolidated 2017 financial statements [extract]
2
Summary of significant accounting policies[extract]
2.6
Accounting and valuation principles [extract]
Own-used properties
In accordance with IAS 16, properties used by the Company itself are stated at historical cost and depreciated over
their economically useful life according to their significant components. Depreciable life (linear) is 40 years for
buildings and 20 years for facilities (such as air-conditioning, elevators, ventilation etc.). Land belonging to the
property is not depreciated. Where the Company uses only part of a property it owns, utilisation of less than 25% is
regarded as immaterial, which means that the whole property is stated at market value as an investment property.
Investment
property
1361
2.8
Property with the provision of ancillary services
If the owner supplies ancillary services to the user of the investment property, the
property will not qualify as an investment property unless these services are an
insignificant component of the arrangement as a whole. For example, security and
maintenance services are described by the standard as being insignificant. [IAS 40.11].
The crucial issue is the extent to which the owner retains significant exposure to the
risks of running a business. The standard uses the example of a hotel. An owner-
managed hotel, for example, would be precluded from being an investment property as
the services provided to guests are a significant component of the commercial
arrangements. [IAS 40.12-13].
However, the nature of the asset in question is not the key factor; rather it is the nature
of the owner’s interest in the asset. If the owner’s position is, in substance, that of a
passive investor, any pro
perty may be treated as investment property. If, in contrast, the
owner has outsourced day-to-day functions while retaining significant exposure to
variation in the cash flows generated by the operations that are being executed in the
building, a property should rather be treated as owner-occupied property. [IAS 40.13].
The standard refers to owner-managed hotels as being precluded from being investment
property. Hotel properties that are leased on arm’s length terms to hotel operators may,
however, fall to be accounted for as investment property. This is more likely to be the
case when:
• the payments under the lease are not significantly determined by the results of the
hotel operator (see 2.9 below), rather they reflect the general market for such
properties; and
• the nature of the owner’s rights in the arrangements with the operator is not
divergent from those usually expected under a property lease.
The standard acknowledges that this question of significance can require judgements to
be made. It specifies that an entity should develop consistent criteria for use in such
instances that reflect the provisions described above. These criteria must be disclosed
in those cases where classification is difficult. [IAS 40.14].
See also 3.3 below where the question of classification of a property as a business or as
an asset is considered.
2.9
Property where rentals are determined by reference to the
operations in the property
It may also be inappropriate to consider a property as investment property if the owner
is significantly exposed to the operation of the business in the property through a
linkage between the rentals charged and the performance of the business.
A common example is the incidence of turnover- or profit-related rents in retail leases. If
the turnover- or profit-related element is a very significant proportion of total rental then
consideration should be given to whether the landlord is so exposed to the performance of
the underlying retail business as to make classification of the property as investment
property inappropriate. This will be a matter of judgement, including the consideration of
any other facts and circumstances (for example, the length of the lease to the tenant).
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2.10 Group of assets leased out under a single operating lease
It is sometimes the case in practice that a group of assets comprising land, buildings and
‘other assets’ is leased out by a lessor under a single lease contract in order to earn
rentals. In such a case, the ‘other assets’ would generally comprise assets that relate to
the manner in which the land and buildings are used under the lease. The issue that
arises is under what circumstances the ‘other assets’ should be regarded by the lessor as
part of an investment property rather than as a separate item of property, plant and
equipment. This is illustrated in the following example:
Example 19.1: Definition of an investment property: a group of assets leased out
under a single operating lease
A lessor enters into the following two single contract leases in order to earn rentals. All the individual assets
subject to the leases meet the test of being classified as an operating lease. The lessor applies the fair value
measurement model for subsequent measurement of investment property.
Lease 1: Vineyard and winery
A vineyard including a winery is leased out under an operating lease. The vineyard comprises the following assets:
• land;
• vineyard infrastructure (e.g. trellises);
• winery building structures;
• winery plant and machinery (crushing equipment, distilling equipment); and
• vines (grapes are excluded, as they belong to the lessee).
Lease 2: Port
A port is leased out under an operating lease. The port comprises the following assets:
• land;
• warehouses;
• transport infrastructure to and from the port (roads, rail tracks, bridges);
• wharves;
• light towers (that enable the 24-hour operation of the port); and
• specialised container cranes (to be able to move containers around).
To what extent can the ‘other assets’ included in the leases (but which are not considered to constitute a piece
of land or a building) be included in the investment property definition under IAS 40?
The consequence of including plant and equipment in the definition of investment property is that if the
investment property is accounted for at fair value, changes in the fair value of that plant and equipment will,
like changes in the fair value of the land and buildings, be recognised in profit or loss.
From a literal reading of the definition of an investment property in paragraph 5 of IAS 40, it could be
argued that an investment property can consist only of a building (or part of a building), a piece of land,
or both and cannot include ‘other assets’. However, such an interpretation is inconsistent with
paragraph
50 of IAS
40, which implies that a broader interpretation is more appropriate.
Paragraphs 50(a) and (b) of IAS 40 read as follows:
‘In determining the carrying amount of investment property under the fair value model, an entity does not
double-count assets or liabilities that are recognised as separate assets or liabilities. For example:
(a) equipment such as lifts or air-conditioning is often an integral part of a building and is generally included in
the fair value of the investment property, rather than recognised separately as property, plant and equipment.
(b) if an office is leased on a furnished basis, the fair value of the office generally includes the fair value of the
furniture, because the rental income relates to the furnished office. When furniture is included in the fair value
of investment property, an entity does not recognise that furniture as a separate asset.’ [IAS 40.50(a), 50(b)].
Investment
property
1363
Although paragraph 50 addresses the fair valuation of investment property, it nevertheless implies that other assets
that are integral to the land and buildings or are otherwise required to be included in the lease in order to generate
rental income under the lease concerned should also be regarded as being part of the investment property.
Consequently, in our view, an item other than a piece of land or a building should be regarded by a lessor as
being part of an investment property if this item is an integral part of it, that is, it is necessary for the land and
buildings to be used by a lessee in the manner intended and is leased to the lessee on the same basis (e.g. as
a package with the same lease term) as the land and buildings. The determination as to whether or not an item
constitutes an integral part of an investment property requires judgement and will depend on the particular
facts and circumstances. However, it is our view that in order for all the assets to be classified as investment
property, the following conditions should be present:
• the land and buildings should be the ‘dominant assets’ that form the investment property;
• the ‘other assets’ are leased to the lessee together with the land and building as a whole; and
• the entire group of assets is generating the income stream from the lease contract.
This means that, in the case of Lease 1, the investment property comprises the land, the vineyard
infrastructure, the winery building structures and the winery plant and machinery. Vines, which meet the
definition of biological assets, are subject to the requirements of IAS 41. They are excluded because
‘biological assets related to agricultural activity’ are outside the scope of IAS 40. [IAS 40.4(a)].
In the case of Lease 2, the investment property comprises all of the assets, i.e. the land, the warehouses, the
transport infrastructure, the wharves, the light towers, and the specialised container cranes.
3 RECOGNITION
An owned investment property should be recognised as an asset when, and only when,
it is probable that the future economic benefits that are associated with the investment
property will flow to the entity and its cost can be measured reliably. [IAS 40.16].
These recognition criteria apply for any costs incurred, whether initially or
subsequently. This means that all costs related to investment property, whether on
initial recognition or thereafter (for example, to add to, or replace part of, or service a
property) must meet the recognition criteria at the point at which the expenditure is
incurred if they are to be capitalised. [IAS 40.17].
When IFRS 16 became effective in 2019 (see 1.1 above), a new paragraph 19A to IAS 40
was added so that an investment property held by a lessee as a right-of-use asset is
recognised in accordance with IFRS 16. [IAS 40.19A]. Prior to adoption of IFRS 16,
paragraph 16 of IAS 40 referred only to investment property so the recognition criteria
described above also applied to property interests held under operating lease.
3.1
Expenditure prior to planning permissions/zoning consents
In many jurisdictions, permissions from relevant authorities are required prior to
development of new or existing property, and the ability to start physical construction
of the development depends on these permissions.
Application for such permissions supports the entity’s intention as to the use of the
property and may be considered as a factor in classifying the asset. However, unless an
entity is considering a number of possible uses of the asset at its initial recognition, the
uncertainty in obtaining relevant permission would usually not affect the classification
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 268
