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AASB 140 Investment Property

By Ernest Cunningham,2014-08-11 18:29
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AASB 140 Investment Property

OVERVIEW

    Pending Australian Accounting Standard AASB 140 prescribes the recognition, measurement and disclosure of investment property, and includes Australian only paragraphs in respect of definition, application and measurement.

    AASB 140 has no equivalent in Australian GAAP although investment property is accounted for under AASB 1041 ‘Revaluation of Non-Current Assets’ and AASB 1010

    ‘Recoverable Amount of Non-Current Assets’. The key differences between the

    Pending Standard and the existing Standards are:

     Investment property may be measured either at fair value or cost after initial

    measurement. This is consistent with how these assets would be treated under

    existing standards. Department of Treasury and Finance will be mandating that

    the fair value model be used.

     Investment property at fair value is not depreciated but changes in fair value are

    recognised in the income statement. This differs from the revaluation model where,

    generally, increases in carrying amount are recognised as an increase in asset

    revaluation reserve.

     This Standard applies to measurement of leased investment property interests in a

    limited manner to the lessee in a finance lease and the lessor in an operating lease. Where a property interest held under a lease is classified as an investment property,

    the lease must be accounted for as a finance lease. Therefore, any investment

    property interest held by a lessee under an operating lease may be classified and

    accounted for as investment property if the lessee uses the fair value model. An entity to make a range of disclosures, including whether it applies the fair value

    or cost model.

    INTRODUCTION

    Pending Australian Accounting Standard AASB 140 prescribes the accounting treatment for investment property and related disclosure requirements. This is a new standard for Australia although investment property is presently accounted for under AASBs 1041 and 1010.

    APPLICATION DATE

    The proposed Standard will apply from the first reporting period beginning on or after 1 January 2005.

TRANSITIONAL ISSUES

    All first-time adopters of International Accounting Standards must follow the transitional provisions in AASB 1 ‘First-time Adoption of Australian Equivalents to

    International Financial Reporting Standards’.

    Under AASB 1, agencies with a 30 June year-end must produce an opening balance sheet at 1 July 2004 (unpublished) that is compliant with Australian equivalents to IFRSs. A Treasurer’s Instruction clarifying the application IFRSs will be issued to

    ensure consistency and appropriate reporting in the public sector. While AASB 1 provides an election to use fair value or revaluation as deemed cost, TI 1106 ‘Transition to Australian Equivalents to International Financial Reporting Standards’ will be amended to confirm that the deemed cost election cannot be utilised. This is consistent with TI 954 ‘Revaluation of Non-Current Physical Assets’ which

    requires land and buildings to be measured at fair value.

    POINTS OF INTEREST

    Definition

    Investment property is property (land or building or part of a building or both)

    held (by the owner or the lessee under a finance lease) to earn rentals or for capital

    appreciation or both but excludes properties that are:

     held for sale in the ordinary course of business carried at lower of cost and net

    realisable value under AASB 102 ‘Inventories’;

     used in the production or supply of goods or services (owner-occupied property)

    carried at either depreciated cost or revalued amounts less subsequent depreciation

    under AASB 116 ‘Property, Plant and Equipment’;

     for administrative purposes (AASB 116);

     being constructed or developed for future use as investment property (AASB 116

    applies until construction or development is complete); or

     held by not-for-profit entities (NFPEs) to meet service delivery objectives thereby

    accounted for under AASB 116 ‘Property, Plant and Equipment’, for example:

    ; property held for strategic purposes; and

    ; property held to provide a social service where rental revenue is incidental to

    the purpose for holding the property (paragraph Aus9.1).

    An investment property generates cash flows largely independently of the other assets held by an entity and this distinguishes it from owner-occupied property. Paragraphs 8 to 15 outline examples and further guidance of what constitutes investment property. AASB 140 2 of 6

    Note that where a property includes a portion that is held to earn rentals or for capital appreciation and another portion that is not an investment property: if the portions could be sold separately (or leased out separately under a finance

    lease), an agency accounts for the portions separately; or

     if the portions could not be sold separately, the property is an investment property

    only if an insignificant portion is held for use in the production or supply of goods

    or services or for administrative purposes (paragraph 10).

    Recognition

    Investment property shall be recognised as an asset when it is probable that future economic benefits that are associated with the investment property will flow to the entity, and cost can be measured reliably.

    Measurement

    Initial Recognition

     An investment property shall be measured initially at its cost plus transaction

    costs.

     In the case of NFPEs, where an investment property is acquired at no cost or for

    nominal cost, cost is deemed to be fair value as at the date of acquisition (Aus 20.1). Property interest held under a lease and classified as an investment property is

    recognised at lower of the fair value of the leased property and the present value of

    the minimum lease payments with an equivalent amount recognised as a liability.

    This also applies to the lessee’s interest under an operating lease which is classified

    as investment property.

    Measurement after Initial Recognition

     An entity shall choose either the fair value model or cost model and apply that

    policy to all its investment property (paragraph 30). AASB 1008 ‘Accounting

    Policies, Changes in Accounting Estimates and Errors’ states that a voluntary

    change in accounting policy be made only if the change will result in a more

    appropriate presentation. AASB 140 states that it is highly unlikely that a change

    from the fair value model to the cost model will result in a more appropriate

    presentation.

     TI 954 ‘Revaluation of Non-Current Physical Assets’ presently requires land and

    buildings to be measured at fair value. TI 954 is to be amended (this will be

    advised in the background of TI 1106) that the fair value model is mandated for

    land and buildings that are investment property under AASB 140.

     The Standard requires all entities to determine fair value of investment property

    for the purpose of either measurement or disclosure.

    AASB 140 3 of 6

Paragraphs 36 to 52 give considerable guidance on fair value determination. An

    entity that chooses the fair value model must measure all its investment property at

    fair value. AASB 140 qualifies the definition of fair value e.g. fair value shall reflect

    market conditions at the reporting date. Implicit in AASB 140 is that fair value

    must be determined at each reporting date.

     Changes in fair value are recognised in the income statement and not the

    revaluation reserve as previously required under the revaluation model in AASB

    1041. The investment property is not depreciated.

     There is a rebuttable presumption that an entity can reliably determine the fair

    value of an investment property on a continuing basis. However, where

    comparable market transactions are infrequent and alternative reliable estimates of

    fair value are not available, then an entity shall measure that investment property

    at cost under AASB 116 until its disposal. The residual value is assumed to be zero.

    The entity shall continue to measure all its other investment property at fair value

    (paragraph 53).

     If an entity has previously measured an investment property at fair value, it shall

    continue to do so until disposal (or if it ceases to meet the definition of investment

    property) even if comparable market transactions become less frequent or market

    prices become less readily available (paragraph 55).

    Leases

    AASB 140 applies to measurement of investment property provided by the lessor under an operating lease and investment property held by the lessee under a finance lease.

    Further, where a lessee holds a property interest under an operating lease and it is classified as an investment property, then the interest must be accounted for as a finance lease. This arises if, and only if, the property would otherwise meet the definition of investment property, and the lessee uses the fair value model for the asset recognised. Once this classification is selected, all property classified as investment property shall be accounted for using the fair value model and disclosures made under AASB 140 and AASB 117.

    Transfers

    Transfers to, or from, investment property shall be made when there is a change in use as identified in paragraph 57.

    The following transfer issues arise for investment property on the fair value basis: In the case of a transfer from investment property carried at fair value to owner-

    occupied property or inventories, the property’s deemed cost shall be its fair value

    at the date of change in use.

    AASB 140 4 of 6

     When an owner-occupied property becomes an investment property that will be

    carried at fair value, an entity shall apply AASB 116 up to the date of change in use,

    and any difference between carrying amount under AASB 116 and fair value shall

    be accounted for as a revaluation in accordance with AASB 116.

     A transfer from inventories to investment property that will be carried at fair value,

    any difference between fair value and its previous carrying amount shall be

    recognised in profit or loss.

    Disposals

    An investment property shall be derecognised (i.e. eliminated from the balance sheet) on disposal or when the investment property is permanently withdrawn from use and no future economic benefits are expected from its disposal. Any gain or loss arising from retirement or disposal of an investment property shall be recognised in profit or loss as the difference between net disposal proceeds and the carrying amount of the asset (paragraph 69). Compensation from third parties for investment property that was impaired, lost or given up shall be recognised in profit or loss. Disclosure

    Paragraph 75 outlines the general disclosure requirements while paragraph 76-78 and 79 state additional disclosure requirements under the fair value and cost models respectively. There are further disclosures for leased investment properties under AASB 117.

    IMPACT OF DIFFERENCES

    Effect on general reporting in the public sector

    Agencies should review all land and buildings held (or leased) and consider the possible classifications:

     owner-occupied (AASB 116);

     held for strategic purposes or to provide a social service (AASB 116); investment property (AASB 140);

     held for sale (AASB 5); or

     inventories (AASB 102).

    Agencies that have investment properties currently revalued under AASB 1041 will be subject to AASB 140. There is an option to use the cost model or fair value model under this Standard, however TI 954 ‘Revaluation of Non-Current Physical Assets’

    presently requires land and buildings to be measured at fair value. TI 954 is to be amended (this will be advised in the background of TI 1106) that the fair value model is mandated for land and buildings that are investment property under AASB 140. On AASB 140 5 of 6

    first time adoption if the fair value model is adopted, any initial change in value is recognised in accordance with AASB 116 (i.e. asset revaluation reserve). All future changes will be recognised in the income statement.

    AASB 140 6 of 6

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