Investment property is recognised when it is probable that the future economic benefits associated with the property will flow to the entity and the cost of the property to the entity can be reliably measured.

Judgment is required when determining the unit of account; that is how individual items are identified and the extent to which items are aggregated. These judgements might include whether individual items are aggregated or whether large items should be recognised as separate components.

Land and building elements of a property are considered separately for lease classification in IFRS 16. If the lessee’s interests in both land and buildings are classified as investment property and the fair value model is adopted, they are treated together as one unit of account.

Disaggregation or componentisation is the separation of an asset into its significant components. Each component of an investment property with a cost that is significant concerning the total cost of the property is identified and treated separately. These components might include lifts or an air-conditioning system that have a shorter useful life than the rest of the property. The components are considered separately for depreciable life and method if the entity follows the cost model.

The costs of day-to-day servicing and maintenance of a property are not recognised as an asset, because they do not add to the future economic benefits of the item. These costs maintain the asset’s potential to deliver the future economic benefits that were expected when the asset was originally acquired. Day-to-day servicing costs include costs of labour and consumables and could include the cost of small replacement parts.

Initial measurement

Initial measurement will depend on whether the property is owned or held under a lease.

Distinguishing the acquisition of an investment property asset (or assets) from a business combination

When an entity acquires investment property:

• judgement is required to determine whether the acquisition is the acquisition of an asset or a group of assets, or a business combination in the scope of IFRS 3; and
• this judgement should be based on the guidance in IFRS 3 rather than on the requirements in IAS 40.

The Standard notes that the requirements in IAS 40 provide guidance for distinguishing between investment property and owner-occupied property and not for determining whether the acquisition of property is a business combination. When an entity acquires property, it is necessary to determine separately whether the transaction is a business combination (using the principles of IFRS 3) and whether the property acquired is investment property (using the principles of IAS 40).

Subsequent costs

Appropriate application of the recognition principle set out results in:

• the immediate expensing of the costs of the day-to-day servicing of a property (e.g. the costs of labour, consumables and minor parts used for repairs and maintenance); and
• costs incurred to replace parts of the original property being recognised in the investment property if they meet the recognition criteria.

When the costs of replacement parts are capitalised, the carrying amounts of the replaced parts are derecognised.

If the entity has been using the cost model to measure its investment property, but the replaced part was not being depreciated separately, and the carrying amount of the replaced part cannot be determined, the cost of the replacement may be used as an indication of what the cost of the replaced part would have been at acquisition.

When the fair value model is being used, the carrying amount of the investment property may already reflect the deterioration in value of the replaced part. In other cases it may be difficult to discern how much fair value should be reduced for the part being replaced. An alternative to reducing fair value for the replaced part, when it is not practical to do so, is to include the cost of the replacement in the carrying amount of the investment property, and then to reassess the fair value of the property (i.e. in the same way as would be required for additions not involving replacement).

Investment property in the course of construction IAS 40 does not deal specifically with the recognition of the cost of a self-constructed investment property. The appropriate accounting for such property is therefore determined in accordance with general principles. Over the period of construction, the costs of construction will be capitalised as part of the cost of the investment property in accordance with the general principle outlined. IAS 16 provide guidance as to what is appropriately included within such costs. The capitalisation of borrowing costs is considered in accordance with the general requirements of IAS 23. IAS 23 provides an optional exemption from the requirement to capitalise borrowing costs for qualifying assets that are measured at fair value (which would include investment property under construction if an entity follows the fair value model for investment property). Therefore, entities can choose, as a matter of accounting policy, whether to capitalise borrowing costs in respect of such assets. When relevant to an understanding of the financial statements, that accounting policy should be disclosed. If an entity follows the fair value model in accounting for its investment property, provided that the fair value of the property under construction can be measured reliably, the costs capitalised during the course of construction do not affect the carrying amount of the investment property under construction, which is remeasured to fair value at the end of each reporting period. Therefore, any costs capitalised during the reporting period simply reduce the amount recognised in profit or loss for any gain (or increase the amount recognised for any loss) arising on remeasurement to fair value at the end of the reporting period. Although the amount reported in the statement of financial position is not affected, it is important to capitalise construction costs when appropriate, because this may affect the classification of amounts in the statement of comprehensive income (e.g. any gain on remeasurement may be overstated and property expenses overstated by the same amount).

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