As at
As at
1 January
Journal
Journal
Journal
31 December
2019
(1)
(2)
(3)
2019
Investment property
10.5
–
(9.3)
9.31
10.51
Cash 9.5
–
–
–
9.5
Deferred Income
(9.5)
0.19
–
–
(9.31)
Net Assets
10.5
0.19
(9.3)
9.31
10.7
Share capital
10.0
–
–
–
10.0
Retained profit
0.5
0.19
(9.3)
9.31
0.7
Total Equity
10.5
0.19
(9.3)
9.31
10.7
Journals:
(1) Amortise rent (one year of the £9.5m received for 50 years).
(2) Write down investment property to £1.2m external valuation.
(3) Write up the book value of property by the amount of unamortised deferred revenue in the statement of
financial position (£9.31m).
Investment
property
1389
An example of an entity dealing with this in practice can be seen in Extract 19.5 below:
Extract 19.5: The Crown Estate (2018)
Notes to the Group and Parent consolidated financial statements [extract]
18. Investment
properties [extract]
2018
Properties
Investment
under
property
development
Total
Group
£m
£m
£m
At opening valuation (before lease incentives)
10,939.7 175.6
11,115.3
Acquisitions
129.5 – 129.5
Capital expenditure
69.1 72.1 141.2
Capital receipts
(8.1) –
(8.1)
Transfer to other categories
134.3
(134.3) –
Transfer from owner occupied properties
47.0
– 47.0
Disposals
(290.3) – (290.3)
Revaluation
774.5 (6.1) 768.4
Impairment of discontinued operation
–
– –
At closing valuation (before lease incentives)
11,795.7
107.3 11,903.0
Deferred income from lease premia received
1,633.1 – 1,633.1
Net finance lease payable
2.5
– 2.5
Closing fair value – as reported
13,431.3
107.3
13,538.6
Reconciliation to valuation
At closing valuation (before lease incentives)
11,795.7 107.3
11,903.0
Lease incentives
17.0 –
17.0
Market
value 11,812.7 107.3
11,920.0
6.7
Valuation adjustment to the fair value of properties held under a
lease
IAS 40 states that the fair value of investment property held by a lessee as a right-of-
use asset will reflect expected cash flows, including variable lease payments that are
expected to become payable (or, for entities that have not yet adopted IFRS 16, the fair
value of investment property held under a lease reflects expected cash flows, including
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. [IAS 40.50(d)].
Therefore, if the entity obtains a property valuation net of the valuer’s estimate of the
present value of future lease obligations (which is usual practice), to the extent that the
lease obligations have already been accounted for in the statement of financial position
as a lease obligation, an amount is to be added back to arrive at the fair value of the
investment property for the purposes of the financial statements.
1390 Chapter 19
Where an entity subsequently measures its investment properties using the fair value
model, there is no difference in accounting for investment property held under a finance
lease or a right-of-use asset that meets the definition of investment property (or,
investment property held under an operating lease, if IFRS 16 is not yet adopted – see
also 4.5 above).
The valuation adjustment referred to above is achieved by adjusting for the finance
lease obligation recognised in the financial statements.
This is illustrated using the information in the following example:
Example 19.4: Valuation of a property held under a finance lease
Entity A pays €991,000 for a 50-year leasehold interest in a property which is classified as an investment
property using the fair value model. In addition, a ground rent of €10,000 is payable annually during the lease
term, the present value of which is calculated at €99,000 using a discount rate of 10% which reflects the rate
implicit in the lease at that time. The company has initially recognised the investment property at the
following amount:
€’000
Amount paid
991
Present value of the ground rent obligation on acquisition
99
Cost recorded for financial reporting purposes
1,090
Assume at the next reporting date the leasehold interest in the property has a fair value of €1,006,000
measured (based on market participant assumptions) as follows:
€’000
Present value of estimated future lease income
1,089
Less: Present value of the ground rent obligation at the reporting date *
(83)
Fair value
1,006
* The market required yield has changed to 12%. Therefore, the present value of the ground rent obligations
of €10,000 per annum for the remaining 49 years is now €83,000.
At the same time the ground rent finance lease liability has reduced to €98,000 as payments are made.
This would give the following results:
€’000
Fair value
1,006
Add recognised finance lease liability
98
Carrying value for financial reporting purposes
1,104
The statement of financial position of Entity A would therefore contain the following items:
Investment property
Finance lease liability
€’000
€’000
On acquisition
1,090
99
End of year 1
1,104
98
Investment
property
1391
An example of this in practice can be seen in Extract 19.6 below:
Extract 19.6: Land Securities Group PLC (201
8)
Notes to the financial statements [extract]
Section 3 – Properties [extract]
14. Investment
properties [extract]
The market value of the Group’s investment properties, as determined by the Group’s external valuer, differs from the
net book value presented in the balance sheet due to the Group presenting lease incentives, tenant finance leases and head leases separately. The following table reconciles the net book value of the investment properties to the market value.
2018
Group (excl.
joint ventures)
£m
Net book value
12,336
Plus: tenant lease incentives
337
Less: head leases capitalised
(31)
Plus: properties treated as finance leases
241
Market value
12,883
Net (deficit)/surplus on revaluation of
investment
properties
(98)
6.8
Future capital expenditure and development value (‘highest and
best use’)
It is common for the value of land to reflect its potential future use and the value of land
may increase in the event that the owner obtains any required permissions for a change
in the use of that land.
It may be, for example, that a permission to change from an industrial to residential use
will increase the value of the property as a whole, notwithstanding that the existing
industrial buildings are still in place. This increase in value is typically attributable to the
land, rather than the buildings.
It is therefore important to note that IFRS 13 requires consideration of all relevant
factors in determining whether the highest and best use of a property can be something
other than its current use at the measurement date. IFRS 13 presumes that an entity’s
current use of an asset is generally its highest and best use unless market or other factors
suggest that a different use of that asset by market participants would maximise its value.
[IFRS 13.29]. IFRS 13 states:
1392 Chapter 19
‘A fair value measurement of a non-financial asset takes into account a market
participant’s ability to generate economic benefits by using the asset in its highest and best
use or by selling it to another market participant that would use the asset in its highest and
best use. The highest and best use of a non-financial asset takes into account the use of
the asset that is physically possible, legally permissible and financially feasible, as follows:
(a) A use that is physically possible takes into account the physical characteristics of
the asset that market participants would take into account when pricing the asset
(e.g. the location or size of a property).
(b) A use that is legally permissible takes into account any legal restrictions on the use
of the asset that market participants would take into account when pricing the asset
(e.g. the zoning regulations applicable to a property).
(c) A use that is financially feasible takes into account whether a use of the asset that
is physically possible and legally permissible generates adequate income or cash
flows (taking into account the costs of converting the asset to that use) to produce
an investment return that market participants would require from an investment in
that asset put to that use.’ [IFRS 13.27-28].
Considerable judgement may then have to be applied in determining when an
anticipated change is legally permissible. For example, if approval is required for
rezoning land or for an alternative use of existing property interests, it may be necessary
to assess whether such approval is a substantive legal requirement or not. See
Chapter 14 at 10.1 for further discussion on determining highest and best use and the
assessment of ‘legally permissible’.
If management determines that the highest and best use of an asset is something other
than its current use, certain valuation matters must be considered. Appraisals that reflect
the effect of a reasonably anticipated change in what is legally permissible should be
carefully evaluated. If the appraised value assumes that a change in use can be obtained,
the valuation must also reflect the cost associated with obtaining approval for the change
in use and transforming the asset, as well as capture the risk that the approval might not
be granted (that is, uncertainty regarding the probability and timing of the approval).
Expectations about future improvements or modifications to be made to the property to
reflect its highest and best use may be considered in the appraisal, such as the renovation
of the property or the conversion of an office into condominiums, but only if and when
other market participants would also consider making these investments and reflect only
the cash flows that market participants would take into account when assessing fair value.
See Chapter 14 at 10 for further discussion on application of IFRS 13 requirements to
non-financial assets which includes determining highest and best use.
6.9
Negative present value
In some cases, an entity expects that the present value of its payments relating to an
investment property (other than payments relating to recognised liabilities) will exceed
the present value of the related cash receipts. An entity should apply IAS 37 –
Provisions, Contingent Liabilities and Contingent Assets – to determine whether a
liability should be recognised and, if so, how that liability should be measured. [IAS 40.52].
Investment
property
1393
6.10 Deferred taxation for property held by a ‘single asset’ entity
It is common in many jurisdictions 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. In addition to the issue on initial recognition discussed
in 4.1.2 above, this matter created diversity in practice when determining the expected
manner of recovery of the asset for the purposes of IAS 12, i.e. whether or not the parent
entity should reflect the fact that an asset held by a single asset entity is likely to be
disposed of by selling the shares of the entity rather than the asset itself, and if so,
whether the deferred taxation would be recognised with reference to the shares rather
than the underlying property.
The Interpretations Committee clarified in its July 2014 meeting that IAS 12 requires the
parent to recognise in its consolidated financial statements both the deferred tax related
to the property inside the single asset entity and the deferred tax related to the shares
of that single asset entity (the outside), if:
• tax law attributes separate tax bases to the asset inside and to the shares;
• in the case of deferred tax assets, the related deductible temporary differences can
be utilised; and
• no specific exceptions in IAS 12 apply.20
Accordingly, in determining the expected manner of recovery of a property held by a
single asset entity for the purposes of IAS 12, the parent entity should have regard to the
asset itself. In line with this, it would not be appropriate to measure deferred taxation
&nb
sp; with reference to selling the shares of the single asset entity or include the related effects
of tax in the valuation of the underlying property.
For further discussions on recognition of deferred taxes for investment property and for
single asset entities, see Chapter 29 at 8.4.7 and 8.4.10, respectively.
7
THE COST MODEL
Except in the cases described in 8 below, the cost model requires that investment
property held by a lessee as a right-of-use asset be measured after initial recognition in
accordance with IFRS 16 and under the cost model set out in IAS 16 for owned
investment property. [IAS 40.56].
For further discussion of IFRS 16, see Chapter 24.
Under IAS 16, this means that the owned asset must be recognised at cost, depreciated
systematically over its useful life and impaired when appropriate. [IAS 16.30]. The residual
value and useful life of each owned investment property must be reviewed at least at
each financial year-end and, if expectations differ from previous estimates, the changes
must be accounted for as a change in accounting estimate in accordance with IAS 8.
[IAS 16.51].
If an entity adopts the cost model, the fair value of its investment property must be
disclosed (see 12.3 below).
1394 Chapter 19
7.1 Initial
recognition
7.1.1
Identification of tangible parts
The cost of the property must be analysed into appropriate significant components,
each of which will have to be depreciated separately (see also Chapter 18 at 5.1).
The analysis into significant components is rarely a straightforward exercise since
properties typically contain a large number of components with varying useful lives.
Klépierre, which adopted the cost model for investment property prior to 2016 (see 7.2
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 274
