An entity shall transfer a property to, or from, investment property only when there is a change of use. There must be evidence of a use change; a change in management’s intentions alone is not enough evidence of a use change.

Amendment on transfer of investment property The IASB issued an amendment on the transfer guidance, effective 1 January 2018. The amendment clarified that, to transfer to (or from) investment properties, there must be a change in use. To conclude whether a property has changed use, there should be an assessment of whether the property meets the definition. This change must be supported by evidence. The Board confirmed that a change in intention, in isolation, is not enough to support a transfer. The issue arose from confusion over whether an entity transfers property under development from inventory to investment property when there is evidence of a change in use that was not explicitly included in the standard. The list of evidence was therefore re-characterised as a non-exhaustive list of examples to help illustrate the principle. The examples were expanded to include assets under construction and development, and not only transfers of completed properties. The Board provided two options for transition: 1. Prospective application. Any impact from properties that are reclassified would be treated as an adjustment to opening retained earnings as at the date of initial application. There are also special disclosure requirements if this option is selected. 2. Retrospective application. This option can only be selected without the use of hindsight.

Examples of changes in use include:

From	To	When?	IP under cost model	IP under fair value model
IP	PPE	A transfer is made from investment property to owner-occupied property at the commencement of owner-occupation, or commencement of development with a view to owner-occupation.	The property transfers at the carrying amount. No gain or loss is recorded.	The fair value at the date of transfer becomes the deemed cost for subsequent accounting under IAS 16.
PPE	IP	A transfer is made from owner-occupied property to investment when owner-occupation ceases.	The property transfers at the carrying amount. No gain or loss is recorded.	IAS 16 is applied up to the date of transfer. The property is fair valued at the date of transfer, and any revaluation gain or loss is treated as a revaluation in accordance with IAS 16.
IP	Inventory	A transfer is made from investment property to inventory at the date of commencement of development with a view to sale.	The property transfers at the carrying amount. No gain or loss is recorded.	The fair value at the date of transfer becomes the deemed cost for subsequent accounting under IAS 2.
Inventory	IP	A property is transferred to investment property when an operating lease is granted to a third party on the property held as inventory and upon the inception of the lease.	The property transfers at the carrying amount. No gain or loss is recorded.	The property is fair valued at the date of transfer. Any difference between the fair value and the previous carrying amount at the date of transfer is recognised in the income statement.

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Transfer of inventory (1) Entity A, a property developer with a history of developing properties for sale immediately after completion, constructs a residential property for sale. To increase the possibility of selling the entire property after completion, the entity decides to lease out individual apartments when completed. The tenants move in before the property is completed in its entirety and before it is sold.  How should entity A account for the property? Entity A should continue to classify the property as inventory, as this is consistent with the entity’s principal activities and its strategy for the property, even after the commencement of the leases. The leases are intended to increase the possibility of selling the property, rather than to earn rental income on a continuing basis, and the property is not held for capital appreciation. The entity’s intention to sell the property immediately after completion has not changed, as the property continues to be held exclusively with the view to subsequent disposal in the ordinary course of business; the property does not, therefore, meet the definition of an investment property.

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Transfer of inventory (2) Renting until market activity improves Entity B, a property developer with a history of developing properties for sale immediately after completion, constructs a residential property for sale. However, as property prices are at a multi-year low and there are few buyers/transactions in the market, entity B decides to rent out the property until market activity improves.  How should entity B account for the property? Entity B needs to carefully assess whether the property should continue to be classified as inventory or be transferred to investment properties in accordance with IAS 40. The property should continue to be classified as inventory if this is consistent with entity B’s strategy for this property. However, it should be transferred to investment property if there is a change in management’s intention to hold the property for future rentals or for capital appreciation (for example, until market prices recover). Determining the correct classification of such a property requires judgement. The inception of a lease with third parties, in itself, does not automatically require reclassification as investment property, although it might be indicative of a change in management’s intention. The property can, therefore, continue to be classified as inventory to the extent that it is available for immediate sale in its present condition, at a current market price, in the ordinary course of business. Factors to consider include: ·        Is the property actively marketed for sale? ·        Is the property available for sale at a price that is reasonable relative to its current market value? ·        Does a market exist for properties with sitting tenants, with longer lease terms, such that the property is in a condition to be sold immediately? ·        Where there is no market for properties with sitting tenants, are the terms of any leases less than the length of the period that other similar properties take to be sold in the ordinary course of business under current market conditions? If the entity is unwilling to sell the property at the current depressed market price, it is likely that the property’s intended use has changed to meet the definition of an investment property – that is, held to earn rental income and for capital appreciation. Factors to consider are: ·        Has the board decided to postpone the sale of the property until the market price recovers? ·        Is there a change in the business plan that takes into account the rental income earned and the necessary future maintenance expenses? ·        Is the property no longer actively marketed for sale? ·        Is there still an active market for similar properties? ·        Is the property available for sale only at a price that is not reasonable relative to its current market value?

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Transfer of inventory (3) Entity C, a property developer with a history of developing properties for sale immediately after completion, constructs a residential property for sale. However, as property prices are at a multi-year low, entity C decides not to pursue the plan to sell the property after completion and to reconsider the decision to sell at a later stage when the market improves. The intended change in use is evidenced by a formal decision of the board and a change in entity C’s business plan published in its announcement. Entity C intends to rent the property out to third parties on longer lease terms. However, at the year-end, no lease contract has been signed. How should entity C account for the property? Entity C should transfer the property from inventory to investment property as there has been a change in use. The transfer to investment property is evidenced by the formal decision of the board and the public announcement. This is not just a change in intention.

Transfers do not take place when:

• Investment property sold without development

There has been no change of use where an investment property is to be disposed of without development. The property is not transferred to inventory. It is retained in investment property until disposal or is otherwise de-recognised.

• Investment property developed for continuing future use as an investment property

An investment property that is to be developed for continued future use as an investment property is also retained in investment property and is not transferred to inventory or owner-occupied property. There has been no change of use.

Timing of transfer Entity D is engaged in two lines of business: property development for sale; and investment property held for rental purposes. Two of the properties currently classified as investment property are to be sold in the near future. Property X is going to be redeveloped prior to sale. The redevelopment will significantly improve and enhance the property. Property Y will also be sold, but significant redevelopment is not necessary (although some basic repairs will be undertaken). Entity D wishes to transfer both properties from investment property to inventory at the date when the developments commence. How should entity D account for the properties? Entity D should transfer property X to inventories at the commencement of the redevelopment; property Y should continue to be classified as investment property until the criteria in IFRS 5 are met, at which point the property should be classified as held for sale. An investment property can only be transferred to inventories when the property is being developed with a view to sale. Development, in this context, should substantially modify or otherwise enhance the property; basic repairs typically would not qualify as a substantial modification.

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