As noted in 2.5 above, prior to 2009, investment property under construction was
subject to IAS 16 until completed at which time it became investment property to
which IAS 40 applied. This meant that only those elements of cost that were allowed
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by IAS 16 could be capitalised and that capitalisation ceased when the asset has
reached the condition necessary for it to be capable of operating in the manner
intended by management. [IAS 16.16(b)].
Although there is no longer a specific reference to IAS 16, we consider that the
principles in IAS 16 must still be applied to the recognition of costs in IAS 40. These
principles are set out in detail in Chapter 18 at 4.
When IFRS 16 became effective in 2019 (see 1.1 above), paragraph 20 of IAS 40 was
amended so that an owned investment property is measured initially at cost as described
above and in effect, it separates the requirement for an investment property held by a
lessee as a right-of-use asset which is measured initially at cost in accordance with
IFRS 16 – see Chapter 24 at 5.2.1. Prior to adoption of IFRS 16, paragraph 20 of IAS 40
referred only to investment property so the requirement of initially measuring at cost
also applied to property interests held under operating lease but using a specified
accounting so that the initial cost for such property interests was in accordance with
IAS 17 (see 4.5 below).
4.1.1
Acquisition of a group of assets that does not constitute a business
(‘the group’)
The purchase price of an investment property may result from an allocation of the price
paid for a group of assets. If an entity acquires a group of assets that do not comprise a
business, the principles in IFRS 3 are applied to allocate the entire cost to individual
items (see Chapter 9 at 2.2.2). In such cases the acquirer should identify and recognise
the individual identifiable assets acquired and liabilities assumed and allocate the cost
of the group to the individual identifiable assets and liabilities on the basis of their
relative fair values at the date of purchase. Such a transaction or event does not give rise
to goodwill. [IFRS 3.2(b)].
In its June 2017 meeting, the Interpretations Committee considered a request for
clarification on how to allocate the transaction price to the identifiable assets acquired
and liabilities assumed when:
(a) the sum of individual fair values of the identifiable assets and liabilities is different
from the transaction price; and
(b) the group includes identifiable assets and liabilities initially measured both at cost
and at an amount other than cost.
The Interpretations Committee noted the requirement of paragraph 2(b) of IFRS 3 as
described above and also noted that other IFRSs include initial measurement
requirements for particular assets and liabilities, including IAS 40 for investment
property. It observed that if an entity initially considers that there might be a difference
as described in (a) above, the entity should first review the procedures it has used to
determine those individual fair values to assess whether such a difference truly exists
before allocating the transaction price.
The Interpretations Committee considered two possible ways of accounting for the
acquisition of the group. These two approaches are discussed in detail in Chapter 9
at 2.2.2.
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Under the first approach an entity:
• identifies the individual identifiable assets acquired and liabilities assumed that it
recognises at the date of the acquisition;
• determines the individual transaction price for each identifiable asset and liability
by allocating the cost of the group based on the relative fair values of those assets
and liabilities at the date of the acquisition; and then
• applies the initial measurement requirements in applicable standards to each
identifiable asset acquired and liability assumed. The entity accounts for any
difference between the amount at which the asset or liability is initially measured
and its individual transaction price applying the relevant requirements.
Applying the second approach, for any identifiable asset or liability initially measured
at an amount other than cost, an entity initially measures that asset or liability at the
amount specified by the applicable standard. The entity deducts from the transaction
price of the group the amounts allocated to the assets and liabilities initially measured
at an amount other than cost, and then allocates the residual transaction price to the
remaining identifiable assets and liabilities based on their relative fair values at the date
of acquisition.10
In its November 2017 meeting, the Interpretations Committee concluded that a
reasonable reading of the requirements in paragraph 2(b) of IFRS 3 on the acquisition
of the group results in one of the two approaches outlined above and that an entity
should apply its reading of the requirements consistently to all acquisitions of a group
of assets that does not constitute a business. An entity would also disclose the selected
approach applying paragraphs 117 to 124 of IAS 1 if that disclosure would assist users of
financial statements in understanding how those transactions are reflected in reported
financial performance and financial position.
In the light of its analysis, the Interpretations Committee decided not to add this matter to
its standard-setting agenda. However, the Interpretations Committee observed that the
forthcoming amendment to the definition of a business in IFRS 3 (see 3.3.1 above) is likely
to increase the population of transactions that constitute the acquisition of a group of assets
so this matter will be monitored after such forthcoming amendment become effective.11
For investment properties acquired as part of the group, the first approach could mean
that a revaluation gain or loss may need to be recognised in profit or loss at the date of
acquisition of the group to account for the difference between the allocated individual
transaction price and the fair value of the investment property acquired. Using the
second approach, investment properties are recorded at fair value as at acquisition date
with no immediate impact on profit or loss at the date of the acquisition.
4.1.2
Deferred taxes when acquiring a ‘single asset’ entity that is not a
business
In many jurisdictions, it is usual for investment property to be bought and sold by
transferring ownership of a separate legal entity formed to hold the asset (a ‘single asset’
entity) rather than the asset itself.
When an entity acquires all of the shares of another entity that has an investment
property as its only asset (i.e. the acquisition of a ‘single asset’ entity that is not a
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business) and the acquiree had recognised in its statement of financial position a
deferred tax liability arising from measuring the investment property at fair value as
allowed by IAS 40, a specific issue arises as to whether or not the acquiring entity should
recognise a deferred tax liability on initial recognition of the
transaction.
This specific situation was considered by the Interpretations Committee and, in its
March 2017 meeting, it was concluded that the initial recognition exception in
paragraph 15(b) of IAS 12 applies because the transaction is not a business
combination. Accordingly, on acquisition, the acquiring entity recognises only the
investment property and not a deferred tax liability in its consolidated financial
statements. The acquiring entity therefore allocates the entire purchase price to the
investment property.12
For an example and further discussions on the application of the initial recognition
exception to assets acquired in the circumstances described above, see Chapter 29
at 7.2.9.
4.2
Start-up costs and self-built property
IAS 40 specifies that start-up costs (unless necessary to bring the property into working
condition) and operating losses incurred before the investment property achieves the
planned occupancy level, are not to be capitalised. [IAS 40.23(a), 23(b)].
IAS 40 therefore prohibits a practice of capitalising costs until a particular level of
occupation or rental income is achieved because at the date of physical completion the
asset would be capable of operating in the manner intended by management. This
forestalls an argument, sometimes advanced in the past, that the asset being constructed
was not simply the physical structure of the building but a fully tenanted investment
property, and its cost correspondingly included not simply the construction period but
also the letting period.
If a property is self-built by an entity, the same general principles apply as for an
acquired property (see 4.1 above). However, IAS 40 prohibits capitalisation of abnormal
amounts of wasted material, labour or other resources incurred in constructing or
developing the property. [IAS 40.23(c)].
4.3 Deferred
payments
If payment for a property is deferred, the cost to be recognised is the cash price
equivalent (which in practice means the present value of the deferred payments due) at
the recognition date. Any difference between the cash price and the total payments to
be made is recognised as interest expense over the credit period. [IAS 40.24].
4.4
Reclassifications from property, plant and equipment (‘PP&E’) or
from inventory
When an entity uses the cost model, transfers between investment property, owner-
occupied property and inventories do not change the carrying amount of the property
transferred and they do not change the cost of that property for measurement or
disclosure purposes. [IAS 40.59].
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The treatment of transfers of properties measured using the revaluation option in IAS 16
to investment property is set out in 9.2 below.
4.5
Initial measurement of property held under a lease
When IFRS 16 became effective in 2019 (see 1.1 above), a new paragraph 29A to IAS 40
was added so that an investment property held by a lessee as a right-of-use asset is
measured initially at its cost in accordance with IFRS 16 (see Chapter 24 at 5.2.1). [IAS 40.29A].
The treatment of initial direct costs by a lessee applying IFRS 16 is discussed at 4.9 below.
Prior to adoption of IFRS 16, the same accounting was applied both to property acquired
under finance leases and to operating leases where the property interests otherwise
meet the definition of investment properties and had been classified as such. For an
entity that does not yet apply IFRS 16, this means that a property interest that was held
by a lessee under an operating lease and classified as an investment property had to be
accounted for as if it were a finance lease and be measured using the fair value model
(see 6 below). [IAS 17.19].
At the commencement of the lease term, an entity that does not yet apply IFRS 16
recognised the property asset and related liability in its statement of financial position
in accordance with IAS 17, at amounts equal to the fair value of the leased property or,
if lower, at the present value of the minimum lease payments, each determined at the
inception of the lease (see Chapter 23 at 4). The entity’s initial direct costs were added
to the asset – these might include similar costs to those described in 4.1 above, such as
professional fees. [IAS 17.20].
Prior to adoption of IFRS 16, if the entity paid a premium for the lease, this was part of
the minimum lease payments and was included in the cost of the asset; however, it was,
of course, excluded from the liability as it had already been paid.
IFRS 16 also added a new paragraph 40A to IAS 40 so that when a lessee uses the fair
value model to measure an investment property that is held as a right-of-use asset, it will
measure the right-of-use asset, and not the underlying property, at fair value. [IAS 40.40A].
Prior to adoption of IFRS 16, IAS 40 emphasised that the property interest, the fair value of
which is to be determined, was the leasehold interest and not the underlying property.
When the fair value was used as cost for initial recognition purposes, guidance on measuring
the fair value of a property interest as set out for the fair value model in IAS 40 (see 6 below)
and in IFRS 13 – Fair Value Measurement (see Chapter 14) had to be followed.
4.6
Initial measurement of assets acquired in exchange transactions
The requirements of IAS 40 for investment properties acquired in exchange for non-
monetary assets, or a combination of monetary and non-monetary assets, are the same as
those of IAS 16. [IAS 40.27-29]. These provisions are discussed in detail in Chapter 18 at 4.4.
4.7
Initial recognition of tenanted investment property
subsequently measured using the cost model
During the development of the current IFRS 3 the IASB considered whether it would
be appropriate for any favourable or unfavourable lease aspect of an investment
property to be recognised separately.
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The IASB concluded that this was not necessary for investment property that will be
measured at fair value because the fair value of investment property takes into account
rental income from leases and therefore the contractual terms of leases and other
contracts in place.
However, a different position has been taken for investment property measured using
the cost model. In this case the IASB observed that the cost model requires:
• the use of a depreciation or amortisation method that reflects the pattern in which
the entity expects to consume the asset’s future economic benefits; and
• each part of an item of property, plant and equipment that has a cost that is
significant in relation to the total cost of the item to be depreciated separately.
Therefore, an acquirer of investment property in a business combination that is
subsequently measured using the cost model will need to adjust the depreciation
method for the investment property to reflect the timing of cash flows attributable to
the underlying leases. [IFRS 3.BC148].
In effect, therefore, this requires that the favourable or unfavourable lease aspect of the
investment property – measure
d with reference to market conditions at the date of the
business combination – be separately identified in order that it may be subsequently
depreciated or amortised, usually over the remaining lease term. Any such amount is
not presented separately in the financial statements.
This approach has also been extended to acquisition of all property, i.e. including those
acquired outside a business combination (see 7.1.2 below).
4.8 Borrowing
costs
IAS 23 – Borrowing Costs – generally mandates capitalisation of borrowing costs in
respect of qualifying assets. However, application of IAS 23 to borrowing costs directly
attributable to the acquisition, construction or production of qualifying assets that are
measured at fair value, such as investment property, is not required because it would
not affect the measurement of the investment property in the statement of financial
position; it would only affect presentation of interest expense and fair value gains and
losses in the income statement. Nevertheless, IAS 23 does not prohibit capitalisation of
eligible borrowing costs to such assets as a matter of accounting policy.
To the extent that entities choose to capitalise eligible borrowing costs in respect of
such assets, in our view, the methods allowed by IAS 23 should be followed.
The treatment of borrowing costs is discussed further in Chapter 21.
4.9
Lease incentives and initial costs of leasing a property
Lease incentives are defined as ‘payments made by a lessor to a lessee associated with
a lease, or the reimbursement or assumption by a lessor of costs of a lessee’.
[IFRS 16 Appendix A].
When IFRS 16 became effective in 2019, it superseded SIC-15 which provided guidance
on operating leases incentives (see 1.1 above). However, lessors’ treatment of lease
incentives paid or payable to lessees did not change. Accordingly, for operating leases,
lessors should defer the cost of any lease incentives paid or payable to the lessee and
1374 Chapter 19
recognise that cost as a reduction to lease income over the lease term. It is also
important to consider the requirement to adjust the fair value of an investment property
to avoid ‘double counting’ in circumstances where a lease incentive exists and is
recognised separately – see discussion in 6.6.1 below.
For lessees, lease incentives received are deducted from lease payments and reduce the
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 270
