contingent rent that is expected to become payable). Accordingly, if a valuation
obtained for a property is net of all payments expected to be made, it will be
necessary to add back any recognised lease liability, to arrive at the carrying amount
of the investment property using the fair value model (see 6.7 below). [IAS 40.50].
6.2
Inability to determine fair value of completed investment
property
It is a rebuttable presumption that an entity can determine the fair value of a property
reliably on a continuing basis, that is, on each subsequent occasion in which it records
the investment property in its financial statements. [IAS 40.53].
The standard emphasises that it is only in exceptional cases and only on initial
recognition (either by acquisition or change in use – see 9 below) that the entity will be
1384 Chapter 19
able to conclude that it will not be able to reliably measure the investment property’s
fair value on a continuing basis. [IAS 40.53].
Additionally, entities are strongly discouraged from arguing that fair value cannot be
reliably measured. It may be a possible argument when, and only when, the market for
comparable properties is inactive (e.g. there are few recent transactions, price quotations
are not current or observed transaction prices indicate that the seller was forced to sell)
and alternative reliable measurements of fair value (for example, based on discounted
cash flow projections) are not available. In such exceptional cases, the property should be
measured using the cost model in IAS 16 for owned investment property, or cost model in
accordance with IFRS 16 for investment property held by a lessee as a right-of-use asset
(see Chapter 24 at 5.3.1), until its disposal and assumed to have a nil residual value.
[IAS 40.53]. This means that an owned investment property has to be carried at cost and the
building and its component parts depreciated over their useful lives (see 7 below). In these
circumstances, IAS 16’s revaluation model, under which assets may be revalued to fair
value, is specifically ruled out. If this exceptional situation occurs, the cost model in IAS 16
or in IFRS 16 should continue to be applied until disposal of such property. Although an
entity measures an individual property at cost for this reason, all other investment
property must continue to be carried at fair value. [IAS 40.54].
The above exception is not permitted for investment property that has been previously
measured using the fair value model. Once a property is initially recognised at its fair
value, it must always be so recognised until disposed of or reclassified for owner-
occupation or development for subsequent sale in the ordinary course of the business,
even if comparable market transactions become less frequent or market prices become
less easily available. [IAS 40.55].
6.3
The fair value of investment property under construction
Entities who wish to measure their completed investment property at fair value will also
need to measure their investment property under construction at fair value (subject to
fair value being reliably determinable). [IAS 40.33, 53].
Determining the fair value of investment property under construction will often be more
judgemental than for completed property because:
• there are generally no observable transactions for investment property under
construction. Where such assets are transacted, this is typically when they are in
the very early stages of development or when they are nearly complete and
substantially let; and
• additional assumptions must be made about the risks and costs of any incomplete
construction.
In January 2009, the International Valuation Standards Board (‘IVSB’) released an
Interim Position Statement – The Valuation of Investment Property under Construction
under IAS 40. This Position Statement acknowledged that few investment properties
under construction are transferred between market participants except as part of a sale
of the owning entity or where the seller is either insolvent or facing insolvency and
therefore unable to complete the project.
Investment
property
1385
Despite this, the Position Statement set out that since the property is being developed for
either income or capital appreciation, the cash flows associated with its construction and
completion should normally be readily identifiable and capable of reliable estimation.
Consequently, the IVSB considered that it would be rare for the fair value of an
investment property under construction not to be capable of reliable determination.
However, this latter comment was excluded from the subsequent draft – Proposed
Guidance Note – The Valuation of Investment Property under Construction – issued in
August 2009 and the IVSB invited views as to whether such a comment is outside of the
scope of the Guidance Note. The IVSB seems to have concluded that it was not its role
to comment on this area because when the final Guidance Note was issued in
February 2010, no comment about the reliability of estimation was included.
It is worth noting that, in light of the requirements of IFRS 13, an entity will have to
determine whether fair value can be reliably measured or not under the requirements
in that standard. This is discussed in Chapter 14 at 2.4.1.
In any event, some entities do consider that not all of their investment property under
construction can be reliably measured and have developed criteria to make that
assessment, see Extract 19.3 above for an example.
There were persistent concerns that, in some situations, the fair value of investment
property under construction could not be measured reliably. Where an entity that
chooses the fair value model for its investment property determines that the fair value
of an investment property under construction is not reliably measurable but it expects
the fair value to be reliably measurable when construction is complete, the IASB
decided to allow such investment property under construction to be measured at cost
until such time as the fair value becomes reliably measurable or construction is
completed (whichever comes earlier). [IAS 40.53].
IAS 40 also sets out the following:
• Once an entity becomes able to measure reliably the fair value of an investment
property under construction that it has previously measured at cost (see 7 below),
it should measure that property at its fair value. [IAS 40.53A].
• Once construction of such property is complete, it is presumed that fair value can be
measured reliably. If this is not the case, and this will be only in exceptional situations,
the property should be accounted for using the cost model in accordance with IAS 16
for owned investment property (see 7 below) or cost model in accordance with
IFRS 16 for investment property held by a lessee as a right-of-use asset (see
Chapter 24 at 5.3.1), together with the other requirements discussed in 6.2 above, i.e.
use the cost model until disposal of the property (even if subsequently its fair value
becomes reliably determinable) and assume that it has a nil residual value. [IAS 40.53A].
• The presumption that the fair value of investmen
t property under construction can
be measured reliably can be rebutted only on initial recognition. Therefore, an
entity that has measured an item of investment property under construction at fair
value may not subsequently conclude that the fair value of the completed
investment property cannot be measured reliably. [IAS 40.53B].
1386 Chapter 19
6.4
Transaction costs incurred by the reporting entity on acquisition
An issue that arises in practice is whether transaction costs that have been incurred by
the reporting entity on purchase of an investment property should be taken into account
in determining the subsequent fair value of the property when applying the fair value
model. This is illustrated in the following example:
Example 19.2: The fair value model and transaction costs incurred at acquisition
On 1 January 2019 Entity A acquired an investment property for a purchase price of €10,000. In addition,
Entity A incurred legal costs of €200 in connection with the purchase and paid property transfer tax of €400.
Accordingly, the investment property was initially recorded at €10,600. Entity A applies the fair value model
for subsequent measurement of investment property:
Appraised
Cost of
Development of prices in
market value of
property initially
property market
property
recognised Difference
€
€ €
Scenario 1
Unchanged
10,000
10,600
(600)
Scenario 2
Slightly increased
10,250
10,600
(350)
Scenario 3
Significantly increased
11,000
10,600
400
Scenario 4
Decreased
9,500
10,600
(1,100)
The issue that arises in practice is whether or not the acquisition-related transaction costs that were incurred
by Entity A on 1 January 2019 can be considered in determining the fair value of the investment property at
the next reporting date.
In our view, the acquisition-related transaction costs incurred by Entity A may not be considered separately
in determining the fair value of an investment property. In the example above, on the next reporting date the
carrying value to be recorded in the statement of financial position is its fair value. Changes from the initial
carrying amount to the appraised market value at the subsequent reporting date (reflected in the ‘Difference’
column in the table) are recognised in profit or loss.
Although IAS 40 states that transaction costs incurred by a purchaser on the acquisition of an investment
property are included in the cost of the investment property at initial recognition, [IAS 40.21], if an entity
applies the fair value model, the same investment property that was recorded at cost on initial recognition is
subsequently measured at fair value in accordance with IFRS 13. The fact that the cost of the investment
property recorded on initial recognition included legal and other transaction costs is irrelevant to the
subsequent fair valuation of the asset.
IFRS 13 clarifies that ‘[t]he price in the principal (or most advantageous) market
used to measure the fair value of the asset or liability shall not be adjusted for
transaction costs. Transaction costs shall be accounted for in accordance with other
IFRSs. Transaction costs are not a characteristic of an asset or a liability; rather,
they are specific to a transaction and will differ depending on how an entity enters
into a transaction for the asset or liability.’ [IFRS 13.25]. See Chapter 14 at 9.1.2 for
further discussion.
Likewise, when measuring the fair value of an investment property, it is not appropriate
to add the acquisition-related transaction costs incurred by the purchaser to fair value,
as these have no relevance to the fair value of the property. Therefore, some or all of
the transaction costs incurred when acquiring the investment property that were
capitalised in accordance with IAS 40 will effectively be expensed as part of the
subsequent fair value gain or loss.
Investment
property
1387
6.5
Fixtures and fittings subsumed within fair value
Fixtures and fittings such as lifts or air conditioning units are usually reflected within the
fair value of the investment property rather than being accounted for separately.
[IAS 40.50(a)]. In other cases, additional assets may be necessary in order that the property
can be used for its specific purposes. The standard refers to furniture within a property
that is being let as furnished offices, and argues that this should not be recognised as a
separate asset if it has been included in the fair value of the investment property.
[IAS 40.50(b)].
The entity may have other assets that have not been included within the valuation, in
which case these will be recognised separately and accounted for in accordance with
IAS 16.
6.6
Prepaid and accrued operating lease income
6.6.1
Accrued rental income and lease incentives
The requirement in IAS 40 not to double-count assets or liabilities recognised
separately is most commonly encountered when the carrying value of an investment
property is reduced below its fair value to the extent that a separate asset arises
under IFRS 16 (or SIC-15, if IFRS 16 is not yet adopted). For example, when an entity
offers an initial rent-free period to a lessee, it will recognise an asset in the rent-free
period and then amortise it over the remaining lease term, thereby spreading the
reduction in rental income over the term of the lease. The amount of the separate
asset should therefore be deducted from the carrying value of the investment
property in order to avoid double counting and therefore ensure the carrying value
does not exceed fair value. [IAS 40.50(c)].
The British Land Company PLC explains the treatment in its accounting policies:
Extract 19.4: The British Land Company PLC (2015)
NOTES TO THE ACCOUNTS [extract]
1
Basis of preparation, significant accounting policies and accounting judgements [extract]
Net rental income [extract]
Where a rent-free period is included in a lease, the rental income foregone is allocated evenly over the period from
the date of lease commencement to the earliest termination date.
Rental income from fixed and minimum guaranteed rent reviews is recognised on a straight-line basis to the earliest
termination date. Where such rental income is recognised ahead of the related cash flow, an adjustment is made to
ensure that the carrying value of the related property including the accrued rent does not exceed the external valuation.
This treatment can also be seen in Extracts 19.5 and 19.6 below.
6.6.2
Prepaid rental income
The same principles are applied when rental income arising from an operating lease is
received in advance. This is demonstrated in the example below:
1388 Chapter 19
Example 19.3: Investment property and rent received in advance
A company owns land
with an estimated value of £10m as at 1 January 2018 that is accounted for as
investment property. The company applies the fair value option in IAS 40 and has a reporting period ending
on 31 December each year.
The land was not let until, on 30 December 2018, a lease of 50 years was granted for consideration of £9.5m.
The lease is considered to be an operating lease. No rental income was recognised in 2018 as it was considered
immaterial. An external valuer estimated that, after the grant of the 50 year lease, the fair value of the
company’s interest in the land as at 31 December 2018 was £1m. As at 31 December 2019 the external valuer
estimated the fair value of the interest in the property was £1.2m.
The resultant accounting entries are summarised below.
Extracts from the ledgers for the year ended 31 December 2018
As at
As at
1 January
Journal
Journal
Journal
31 December
2018
(1)
(2)
(3)
2018
Investment property
10.0
–
(9.0)
9.5
10.5
Cash
–
9.5
–
–
9.5
Deferred Income
–
(9.5)
–
–
(9.5)
Net Assets
10.0
–
(9.0)
9.5
10.5
Share capital
10.0
–
–
–
10.0
Retained profit
–
–
(9.0)
9.5
0.5
Total Equity
10.0
–
(9.0)
9.5
10.5
Journals:
(1) Issue of lease (£9.5m received on issue of lease).
(2) Write down investment property to £1m external valuation.
(3) Write up book value of property by the amount of unamortised deferred revenue in the statement of
financial position.
Extracts from the ledgers for the year ended 31 December 2019
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 273
