Recognition of cost ceases once investment property is in the condition to be used as intended by management. An entity might incur further costs on that asset at a later date. Subsequent costs are capitalised only if they meet the recognition criteria as an asset. All other subsequent costs are recognised as an expense in the period in which they are incurred.

Subsequent expenditure Question: Entity D acquired a property that required renovation. The initial price was C1m, which reflected the need for renovation. Renovation work is carried out and costs a further C500,000. How much would the investment property be initially recognised for? Answer: The property would be initially recognised at cost of acquisition of C1m. The subsequent renovation work of C500,000 would be capitalised on the cost of the property as incurred. The renovation costs give rise to additional future economic benefits that can be reliably measured. This meets the recognition criteria of an asset and therefore can also be capitalised. Any components of the initial cost of the investment property that are being replaced as part of the renovation would need to be derecognised.

An asset might consist of several different significant components. Each component is treated separately for depreciation purposes and depreciated over its individual useful life. If the useful life and pattern of consumption are similar, the components can be grouped for depreciation purposes. When a significant component is replaced or restored, the old component is de-recognised and the new component capitalised, if its cost is recoverable.

The costs of a replacement component are recognised as an asset if they meet the recognition criteria. The carrying amount of the part or parts that are replaced is de-recognised; cost and accumulated depreciation of the replaced parts are eliminated. If the cost and depreciation of the replaced part or component cannot be identified, the cost of the replacement is a reasonable proxy for the cost of the replaced part.

Change of roof under cost method Entity A acquired an investment property on 1 January 20X0. Entity A accounts for its investment properties at cost. During 20X9, entity A spent a significant amount of money installing a modern upgraded glass roof on the property. Entity A’s management believes that it is important for the property to have a modern roof system, to attract and retain tenants and to resist downward pressure on rents. It also enables management to reduce electricity costs. The new roof is capitalised, as a roof is usually replaced during the life of a building and the roof of the building is a separate component that is depreciated separately. It is considered likely that the new roof will provide future economic benefits for entity A. The carrying value of the existing roof would be de-recognised. If the cost is not known, management could use an estimated cost.

Components are unlikely to be separately identified and accounted for if the investment property is measured at fair value. The loss in value of any components will be reflected in the fair value measurement.

Measurement after initial recognition

An entity that applies IFRS 16 can choose to adopt either the fair value model or the cost model as its accounting policy. Once chosen, the policy applies to all of the entity’s investment property

Disclosure of fair value under the cost model An entity is required to make disclosure of the fair value of its investment property, even when it adopts the cost model. This ensures that fair value information is available for all investment property entities. The standard requires disclosure of the extent to which an independent professional valuer, who holds a recognised and relevant professional qualification and has recent experience in the location and category of the investment property being valued, has been involved. If there has been no independent valuation, that fact is disclosed.

An entity can choose either the fair value model or the cost model for all investment property-backing liabilities that pay a return linked directly to the fair value of, or returns from, specified assets, including that investment property, regardless of its choice of policy for all other investment property.

An entity that applies the cost model under IAS 40 can still adopt a policy of revaluation for its owner-occupied property because these properties are accounted for under IAS 16.

An entity that has adopted the fair value model should generally not subsequently change to the cost model, because it is unlikely to provide reliable and more relevant information.

Entities are encouraged, but not required, to have valuations carried out by an independent, professionally qualified valuer with recent experience of the location and category of the properties being valued.

Investment property-backing liabilities Where an entity holds investment property that is linked to liabilities, it can choose either the fair value model or the cost model for: ·        all investment property-backing liabilities that pay a return linked directly to the fair value of, or returns from, specified assets including that investment property; and ·        all other investment property, regardless of the choice made in the first bullet point. This policy choice will be applicable mainly to insurers and similar entities. Its purpose is to mitigate the accounting mismatch that arises where such an entity uses different measurement bases for assets and liabilities. Such entities are able to elect to fair value investment property assets where the investment return on such assets is directly linked to returns on policyholder liabilities, without having to fair value all investment properties. Some insurers and other entities operate an internal property fund that issues notional units, with some units held by investors in linked contracts and others held by the entity. The standard does not permit an entity to measure the property held by the fund partly at cost and partly at fair value. Instead, a consistent policy must be applied to all investment property where returns are directly linked to liabilities. Sales of investment property between pools of assets measured using different models are recognised at fair value, and the cumulative change in fair value is recognised in the income statement. Consequently, if an investment property is sold from a pool in which the fair value model is used into a pool in which the cost model is used, the property’s fair value at the date of the sale becomes its deemed cost.

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