Objective

This chapter addresses the IFRS requirements for investment property as follows:

• Classification as an investment property.
• Initial recognition and measurement.
• Subsequent measurement
• De-recognition.

Scope

Properties that meet the definition of investment property are in the scope of IAS 40. The scope is wide and does not only apply to investment property entities. Investment property held by entities whose main activity is something other than investment holding and management is still in the scope of IAS 40.

Investment property is land or a building that an entity owns or leases intending to earn rent or hold for capital appreciation. A building that is held for use in the production or supply of goods or for administrative purposes is not an investment property and is in the scope of IAS 16. Properties constructed and sold in the ordinary course of business are in the scope of IAS 2, ‘Inventory’. Investment properties that meet the criteria to be classified as held for sale (or are included in a disposal group that is classified as held for sale) are measured following IFRS 5.

Land used for production or supply of goods or services An entity purchases land that it cultivates for agricultural purposes. The land will be used to grow various crops such as sugar cane, cotton and corn. The entity’s business plan is to continue with agricultural activity for a number of years, which will achieve two strategic objectives: first, to generate cash flows to fund investments; and, secondly, to demonstrate the viability of the land for agricultural purposes. The land is classified as property, plant and equipment while it is used for agricultural purposes. A transfer to investment property, inventory or noncurrent assets held for sale is only made at the time when the transfer criteria in IAS 40 are met.

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Land used to earn rentals Entity A purchases vacant land which is to be used for the construction of a shopping mall. Permissions and administrative approvals, which need to be obtained prior to the commencement of construction, are expected to take up to 18 months to obtain. Entity A uses the land for agricultural activity for the period prior to it obtaining the required approvals. The agricultural use of the land can be seen as incidental to the principal objective of building a shopping mall. Classification of the land as investment property might be appropriate from initial recognition.

IAS 40 does not include:

• Biological assets related to agricultural activity, which are dealt with by IAS 41.
• Mineral rights and mineral reserves, such as oil, natural gas and similar non-regenerative assets.

Investment property acquired under a lease is recognised and initially measured based on the guidance in IFRS 16 ‘Leases’. IAS 40 applies to all aspects of subsequent measurement for investment property acquired under a lease.

A right-of-use asset relating to property which is held to earn rentals and/or for capital appreciation is an investment property in the scope of IAS 40.

Management should assess whether its acquisition of an investment property meets the definition of a business in IFRS 3. Acquisition of a business is accounted for in accordance with IFRS.

Classification as an investment property

Investment property includes:

• Land held for long-term appreciation in value, rather than for short-term sale in the ordinary course of business.

• Land whose future use has not yet been determined.
• A building owned or held under a lease and leased out under an operating lease.
• A building that is vacant, but held to be leased out under an operating lease.

• Property that is being constructed or developed for future use as investment property.

Land with undetermined use Entity A is a supplier of industrial products. In 20X3, it purchased a plot of land on the outskirts of a major city. The area has mainly low-cost public housing and very limited public transport facilities. The government has plans to develop the area as an industrial park in five years’ time, and the land is expected to greatly appreciate in value if the government proceeds with the plan. Entity A’s management has not yet decided what to do with the property. How should management classify a property that is held for undetermined future use? Management should classify the property as an investment property. Although management has not determined a use for the property after the development of the industrial park takes place, in the medium term the land is held for capital appreciation. Land is held for capital appreciation if an entity has not determined that it will use the land either as owner-occupied property or for short-term sale in the ordinary course of business.

Investment property excludes:

• Property intended for sale in the ordinary course of business or for development and resale.
• Owner-occupied property, including property held for such use or for redevelopment prior to such use.
• Property that is leased to another entity under a finance lease.

Owner-occupied property is property held by the owner, or a right-of-use asset relating to property held by a lessee, for use in the production or supply of goods or services or for administrative purposes.

Owner-occupied property is used in conjunction with the other assets of the entity, such as plant and machinery and inventory. It does not generate cash flows independently of the other assets of the entity. By contrast, investment property is held to earn rentals and for capital appreciation. It generates cash flows independently of the other assets of the entity.

The purchase of a property that is to be demolished immediately (or shortly after acquisition) and redeveloped for resale is not treated as an investment property. The property was not acquired for its rental potential or for a capital gain on its disposal.