profit or loss, unless it is a sale and leaseback and IFRS 16 (or, if applicable, IAS 17)
requires a different treatment, in the period of retirement or disposal (see also 12.4
below). [IAS 40.69]. Prior to adoption of IFRS 16, IAS 17 allowed only the immediate
recognition of profits and losses on a sale and operating leaseback if the transaction was
established at fair value; no gains would be recognised if the transaction resulted in a
finance leaseback. Refer to Chapter 23 at 7 for a discussion of sale and leaseback under
IAS 17. Note that IFRS 16 superseded IAS 17 when it became effective in 2019 (see 1.1
above). Refer to Chapter 24 at 8 for a discussion of sale and leaseback under IFRS 16.
The amount of consideration to be included in the gain or loss arising from the
derecognition of an investment property is determined in accordance with the
requirements for determining the transaction price in paragraphs 47-72 of IFRS 15.
[IAS 40.70]. Under IFRS 15, an entity is required to consider the terms of the contract and
its customary business practices in determining the transaction price. Transaction price
is defined as the amount of consideration to which an entity expects to be entitled in
exchange for transferring the property to a buyer, excluding amounts collected on
behalf of third parties (e.g. sales taxes). The consideration in a contract may include
fixed amounts, variable amounts, or both. [IFRS 15.47].
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In many cases, the transaction price may be readily determined if the entity receives
payment when it transfers the property and the price is fixed. In other situations, it could be
more challenging as it may be affected by the nature, timing and amounts of consideration.
Determining the transaction price is discussed in detail in Chapter 28 at 6.
Subsequent changes to the estimated amount of the consideration included in the gain
or loss should be accounted for in accordance with the requirements for changes in the
transaction price in IFRS 15. [IAS 40.70]. This is further discussed in Chapter 28 at 7.5.
If an entity retains any liabilities after disposing of an investment property these are
measured and accounted for in accordance with IAS 37 or other relevant standards.
[IAS 40.71]. Accounting for such liabilities depends on specific facts and circumstances as
such a liability may represent a provision or a contingent liability under IAS 37, or a
financial liability under IFRS 9 – Financial Instruments, or a separate performance
obligation or variable consideration under IFRS 15.
Retention of liabilities on sale of goods may indicate that the seller has continuing
involvement to the extent usually associated with ownership. Under IFRS 15, retention
of liabilities or the existence of continuing managerial involvement might indicate that
control of goods has not passed to a buyer, but on their own do not affect whether an
entity can recognise a sale and the associated profit from the transfer of the property.
Instead, an entity might need to consider whether it represents an assurance-type or
service-type warranty or consideration payable to a customer and whether variable
consideration requirements would apply. See also related discussions in Chapter 28
at 6.2.1.B.
10.2 Sale prior to completion of construction
It should be noted that property that is subject to sale prior to completion of construction,
if not previously classified as investment property, is likely to be property intended for
sale in the ordinary course of business (see 2.6 above) and is therefore not likely to be
investment property. Accordingly, the requirements in IFRS 15 should be followed.
If, however, the property subject to sale prior to completion of construction is
previously classified as investment property, guidance in IAS 40 would be followed –
see discussions in 10 and 10.1 above. Any consequent construction services to be
provided by the seller would likely be subjected to the requirements of IFRS 15.
For further discussion of IFRS 15, see Chapter 28.
10.3 Replacement of parts of investment property
When an entity that applies the fair value model wishes to capitalise a replacement part
(provided it meets the criteria at 3 above), the question arises of how to deal with the
cost of the new part and the carrying value of the original. The basic principle in IAS 40
is that the entity derecognises the carrying value of the replaced part. However, the
problem frequently encountered is that even if the cost of the old part is known, its
carrying value – at fair value – is usually by no means clear. It is possible also that the
fair value may already reflect the loss in value of the part to be replaced, because the
valuation reflected the fact that an acquirer would reduce the price accordingly.
[IAS 40.68].
1406 Chapter 19
As all fair value changes are taken to profit or loss, the standard concludes that it is
not necessary to identify separately the elements that relate to replacements from
other fair value movements. Therefore, if it is not practical to identify the amount
by which fair value should be reduced for the part replaced, the cost of the
replacement is added to the carrying amount of the asset and the fair value of the
investment property as a whole is reassessed. The standard notes that this is the
treatment that would be applied to additions that did not involve replacing any
existing part of the property. [IAS 40.68].
If the investment property is carried under the cost model, then the entity should
derecognise the carrying amount of the original part. A replaced part may not have been
depreciated separately, in which case, if it is not practicable to determine the carrying
amount of the replaced part, the standard allows the entity to use the cost of the
replacement as an indication of an appropriate carrying value. This does not mean that
the entity has to apply depreciated replacement cost, rather that it can use the cost of
the replacement as an indication of the original cost of the replaced part in order to
reconstruct a suitable carrying amount for the replaced part. [IAS 40.68].
10.4 Compensation from third parties
IAS 40 applies the same rules as IAS 16 to the treatment of compensation from third
parties if property has been impaired, lost or given up (see Chapter 18 at 5.7). It stresses
that impairments or losses of investment property, related claims for or payments of
compensation from third parties and any subsequent purchase or construction of
replacement assets are separate economic events that have to be accounted for
separately. [IAS 40.73].
Impairment of investment property will be recorded automatically if the fair value
model is used; but if the property is accounted for using the cost model, it is to be
calculated in accordance with IAS 36 (see Chapter 20). If the entity no longer owns the
asset, for example because it has been destroyed or subject to a compulsory purchase
order, it will be derecognised (see 10 above). Compensation from third parties (for
example, from an insurance company) for property that was impaired, lost or given up
is recognised in profit or loss when it becomes receivable. The cost of any replacement
&n
bsp; asset is accounted for wholly on its own merits according to the recognition rules
covered in 3 above. [IAS 40.72, 73].
11
INTERIM REPORTING AND IAS 40
IAS 34 – Interim Financial Reporting – requires the use of the same principles for the
recognition and the definitions of assets, liabilities, income and expenses for interim
periods as will be used in annual financial statements.
IAS 40 requires, for those entities using the fair value model, investment property to be
presented at fair value at the end of the reporting period. Accordingly, investment
property measured using the fair value model should also be measured at fair value in
any interim financial reports. IAS 34 expects this as it includes the following guidance
in Part C of the illustrative examples accompanying the standard:
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‘IAS 16 Property, Plant and Equipment allows an entity to choose as its accounting
policy the revaluation model whereby items of property, plant and equipment are
revalued to fair value. Similarly, IAS 40 requires an entity to measure the fair value of
investment property. For those measurements, an entity may rely on professionally
qualified valuers at annual reporting dates though not at interim reporting date.’
[IAS 34 IE Example C7].
The United Kingdom regulator made a similar point in its 2009 report on its activities.
It stated that:
‘A key principle of IAS 34, “Interim Financial Reporting”, is that interim accounts should
be prepared applying the same accounting policies as those applied to the annual accounts.
IAS 40, “Investment Property” requires companies applying the fair value model to carry
their properties at fair value with changes reported in the income statement. Properties are
therefore required to be carried at fair value at the half-year stage.’22
For those entities using the cost model in annual financial statements, IAS 40 requires
the disclosure of the fair value of investment property (see 12.3 below). For interim
financial statements prepared under IAS 34, there is no such explicit disclosure
requirement. Preparers of the financial statements should therefore consider the
principle of IAS 34 which is that:
‘Timely and reliable interim financial reporting improves the ability of investors,
creditors, and others to understand an entity’s capacity to generate earnings and cash
flows and its financial condition and liquidity.’ [IAS 34 Objectives].
It is likely that an understanding of the fair value of investment property at the end of
an interim reporting period would help this purpose.
In addition, Part C of the illustrative examples to IAS 34 sets out that IAS 40 requires an
entity to estimate the fair value of investment property. It does not distinguish between
those entities that measure investment property at fair value and those entities that use
the cost model and disclose fair value.
Consequently, it is our view that the fair value of investment property at the end of the
interim period should usually be disclosed in interim financial reports for those entities
using the cost model in IAS 40.
IAS 34 is discussed in more detail in Chapter 37.
12
THE DISCLOSURE REQUIREMENTS OF IAS 40
For entities that adopt the fair value option in IAS 40, attention will focus on the
judgemental and subjective aspects of property valuations, because they will be
reported in profit or loss. IAS 40 requires significant amounts of information to be
disclosed about these judgements and the cash-related performance of the investment
property, as set out below.
Note also that the disclosures below apply in addition to those in IFRS 16 (or if
applicable, IAS 17) which require the owner of an investment property to provide
lessors’ disclosures about leases into which it has entered (see Chapter 24 at 6.7 or if
applicable, Chapter 23 at 9.3). IAS 40 also requires a lessee that holds an investment
1408 Chapter 19
property as a right-of-use asset will provide lessees’ disclosures as required by IFRS 16
and lessors’ disclosures as required by IFRS 16 for any operating leases into which it has
entered (or, for entities that have not yet adopted IFRS 16, an entity that holds an
investment property under a lease was also required to provide lessees’ disclosures for
finance leases and lessors’ disclosures for any operating leases into which it has entered).
[IAS 40.74].
12.1 Disclosures under both fair value and cost models
Whichever model is chosen, fair value or cost, IAS 40 requires all entities to disclose
the fair value of their investment property. Therefore, the following disclosures are
required in both instances:
• whether the entity applies the cost model or the fair value model;
• for entities that have not yet adopted IFRS 16, if it applies the fair value model,
whether, and in what circumstances, property interests held under operating leases
are classified and accounted for as investment property (note that when IFRS 16
became effective in 2019 (see 1.1 above), this disclosure is no longer required
because IFRS 16 removes the classification alternative for property interests held
under operating leases – as discussed in 2.1 and 5.1 above);
• when classification is difficult, the criteria it uses to distinguish investment
property from owner-occupied property and from property held for sale in the
ordinary course of business;
• the extent to which the fair value of investment property (as measured or disclosed
in the financial statements) is based on a valuation by an independent valuer who
holds a recognised and relevant professional qualification and has recent
experience in the location and category of the investment property being valued.
If there has been no such valuation, that fact shall be disclosed (e.g. a statement
that the fair value of investment property is based on internal appraisals rather than
on a valuation by an independent valuer as described above);
• the amounts recognised in profit or loss for:
• rental income from investment property;
• direct operating expenses (including repairs and maintenance) arising from
investment property that generated rental income during the period
(see 12.1.3 below);
• direct operating expenses (including repairs and maintenance) arising from
investment property that did not generate rental income during the period
(see 12.1.3 below); and
• the cumulative change in fair value recognised in profit or loss on sale of an
investment property from a pool of assets in which the cost model is used into
a pool in which the fair value model is used (see 5.2 above);
• the existence and amounts of restrictions on the realisability of investment
property or the remittance of income and proceeds of disposal; and
• contractual obligations to purchase, construct or develop investment property or
for repairs, maintenance or enhancements. [IAS 40.75].
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12.1.1
Methods and assumptions in fair value estimates
IFRS 13 includes a fair val
ue hierarchy which prioritises the inputs used in a fair value
measurement. The hierarchy is defined as follows:
• Level 1 inputs – Quoted prices (unadjusted) in active markets for identical assets
or liabilities that the entity can access at the measurement date;
• Level 2 inputs – Inputs other than quoted prices included with Level 1 that are
observable for the asset or liability, either directly or indirectly; and
• Level 3 inputs – Unobservable inputs for the asset or liability. [IFRS 13 Appendix A].
IFRS 13 also uses its fair value hierarchy to categorise each fair value measurement in
its entirety for disclosure purposes. Categorisation within the hierarchy is based on the
lowest level input that is significant to the fair value measurement as a whole. This is
discussed further in Chapter 14 at 16.2.
Significant differences in disclosure requirements apply to fair value measurements
categorised within each level of the hierarchy to provide users with insight into the
observability of the fair value measurement (the full disclosure requirements of IFRS 13
are discussed further in Chapter 14 at 20).
In our view, due to the lack of an active market for identical assets, it would be rare for
real estate to be categorised within Level 1 of the fair value hierarchy.
In market conditions where similar real estate is actively purchased and sold, and the
transactions are observable, the fair value measurement might be categorised within
Level 2. This categorisation will be unusual for real estate, but that determination will
depend on the facts and circumstances, including the significance of adjustments to
observable data.
In this regard, IFRS 13 provides a real-estate specific example stating that a Level 2 input
would be the price per square metre for the property interest derived from observable
market data, e.g. multiples derived from prices in observed transactions involving
comparable (i.e. similar) property interests in similar locations. [IFRS 13.B35(g)].
Accordingly, in active and transparent markets for similar assets (perhaps those that
exist in some of the capital cities of developed economies), real estate valuations might
be able to be categorised within Level 2, provided that no significant adjustments have
been made to the observable data.
However, and likely to be much more common for real estate, if an adjustment to an
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 277
