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IAS 40 - Investment Property

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 Definition of investment property

Investment property is property (land or a


building or part of a building or both) held (by
the owner or by the lessee under a finance
lease) to earn rentals or for capital appreciation
or both.

Registered with the Department of Economic Development, Dubai (#101627) a Partnership Firm
Member Crowe Horwath International

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Examples of investment property:

I. land held for long-term capital appreciation


II. land held for a currently undetermined future use
III. building leased out under an finance lease
IV. vacant building held to be leased out under an
operating lease property that is being constructed
or developed for future use as investment
property

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The following are not investment property:
I. property held for use in the production or supply of goods
or services or for administrative purposes
II. property held for sale in the ordinary course of business or
in the process of construction of development for such sale
(IAS 2 Inventories)
III. property being constructed or developed on behalf of third
parties (IAS 11 Construction Contracts)
IV. property leased by lessor to another entity under a finance
lease

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Recognition:
Investment property should be recognised as an asset when it
is probable that the future economic benefits that are
associated with the property will flow to the entity, and the cost
of the property can be reliably measured.
Initial measurement:

Investment property is initially measured at cost, including


transaction costs. Such cost should not include start-up costs,
abnormal waste, or initial operating losses incurred before the
investment property achieves the planned level of occupancy.

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Measurement subsequent to initial recognition
IAS 40 permits entities to choose between:
 a fair value model,
Investment property is remeasured at fair value, which is the amount for which the property
could be exchanged between knowledgeable, willing parties in an arm's length transaction.
[IAS 40.5] Gains or losses arising from changes in the fair value of investment property must
be included in net profit or loss for the period in which it arises
and

 a cost model.
After initial recognition, investment property is accounted for in accordance with the cost
model as set out in IAS 16 Property, Plant and Equipment – cost less accumulated
depreciation and less accumulated impairment losses.

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Disposal
 An investment property should be derecognised on disposal or when the
investment property is permanently withdrawn from use and no future
economic benefits are expected from its disposal. The gain or loss on
disposal should be calculated as the difference between the net disposal
proceeds and the carrying amount of the asset and should be
recognised as income or expense in the income statement.

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Disclosure:
 Both Fair Value Model and Cost Model
 whether the fair value or the cost model is used
 the methods and significant assumptions applied in
determining the fair value of investment property
 the extent to which the fair value of investment
property is based on a valuation by a qualified
independent valuer; if there has been no such
valuation, that fact must be disclosed

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Disclosure (continued):
 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
 contractual obligations to purchase, construct, or develop
investment property or for repairs, maintenance or
enhancements

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Question 1
 One of our clients is in the real estate, leasing and
property development business. In the year ending
December 31, 2013.
 The entity has the fair value gain of AED 2 million
approx. The gain was not recorded through profit
and loss account. The entity has transferred all the
gain to shareholders current account.
 What action taken by the auditor?

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Answer
 Audit opinion was qualified.

 “investment properties were stated at fair value but the


resulting fair value gain has been accounted for in the
shareholder's current account instead of statement of profit
or loss and other comprehensive income. As a result of this
treatment, the Entity's profit for the year should have
increased by AED 2 million.”

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Question 2
 The client is in the construction business and
having the land in his home country on his personal
name. Recognizing in the books at cost model.
 What would be the treatment?

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Answer
 The entity is recognising the land as an investment property
in the books at cost model. Since it is a land hence, no
depreciation is required.
 Without modifying the audit opinion we have highlighted this
matter under emphasis of matter paragraph.

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Question 3
 Company B is constructing a property for future use as investment
property. B applies the fair value model under IAS 40.

 On 1 july 2010, the carrying amount of the property is AED 1000. During
the year ended 30 june 2011, B capitalizes construction costs of AED
400. The fair value of the property is estimated as AED1800. During the
year the entity incurred AED 100 as borrowing cost for that property,
AED 100 paid for legal fees to increase number of levels.

 What would be the fair value gain?


A. 200
B. 400
C. 250

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Answer

 The gain is: 200

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Question 4
 Previously the company was using the cost model under ias
40.
 Now the company is changing to fair value mode. 1 july 2009 the
carrying amount of the property is AED 750 and the fair value of the
property is 1000. During the year end 30 june 2010 company capalizes
maintenance costs of AED 400 and borrowing costs of AED 100. Now
the carrying cost is AED 1250. The fair value of the property at 30 june
2010 is AED1400.
 Calclaute the gain or loss.

A. 650
B. 150
C. 550
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Answer

 The gain is: 650

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Question 5

 Is it possible to change the policy from fair


value to cost model?

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Answer
 The IAS notes that this highly unlikely for a change from a fair value
model to a cost model.
 the fair value of the investment property is not reliably measurable on a
continuing basis.
 This arises when, and only when, the market for comparable properties
is inactive (eg 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.

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Question 6
 If an owner-occupied property becomes an
investment property, what would be the
treatment?

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Answer
 This will be carried at fair value, an entity shall apply IAS 16
up to the date of change in use. The entity shall treat any
difference at that date between the carrying amount of the
property in accordance with IAS 16 and its fair value in the
same way as a revaluation in accordance with IAS 16.

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