Investment property is property (land or a building or part of a building or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both. [IAS 40.5] Show Examples of investment property: [IAS 40.8]
The following are not investment property and, therefore, are outside the scope of IAS 40: [IAS 40.5 and 40.9]
In May 2008, as part of its Annual improvements project, the IASB expanded the scope of IAS 40 to include property under construction or development for future use as an investment property. Such property previously fell within the scope of IAS 16. Property held under an operating lease. A property interest that is held by a lessee under an operating lease may be classified and accounted for as investment property provided that: [IAS 40.6]
An entity may make the foregoing classification on a property-by-property basis. Partial own use. If the owner uses part of the property for its own use, and part to earn rentals or for capital appreciation, and the portions can be sold or leased out separately, they are accounted for separately. Therefore the part that is rented out is investment property. If the portions cannot be sold or leased out separately, the property is investment property only if the owner-occupied portion is insignificant. [IAS 40.10] Ancillary services. If the entity provides ancillary services to the occupants of a property held by the entity, the appropriateness of classification as investment property is determined by the significance of the services provided. If those services are a relatively insignificant component of the arrangement as a whole (for instance, the building owner supplies security and maintenance services to the lessees), then the entity may treat the property as investment property. Where the services provided are more significant (such as in the case of an owner-managed hotel), the property should be classified as owner-occupied. [IAS 40.13] Intracompany rentals. Property rented to a parent, subsidiary, or fellow subsidiary is not investment property in consolidated financial statements that include both the lessor and the lessee, because the property is owner-occupied from the perspective of the group. However, such property could qualify as investment property in the separate financial statements of the lessor, if the definition of investment property is otherwise met. [IAS 40.15] Investment property should be recognised as an asset when it is probable that the future economic benefits that are associated with the property will flow to the entity, and the cost of the property can be reliably measured. [IAS 40.16] Investment property is initially measured at cost, including transaction costs. Such cost should not include start-up costs, abnormal waste, or initial operating losses incurred before the investment property achieves the planned level of occupancy. [IAS 40.20 and 40.23] IAS 40 permits entities to choose between: [IAS 40.30]
One method must be adopted for all of an entity's investment property. Change is permitted only if this results in a more appropriate presentation. IAS 40 notes that this is highly unlikely for a change from a fair value model to a cost model. Investment property is remeasured at fair value, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. [IAS 40.5] Gains or losses arising from changes in the fair value of investment property must be included in net profit or loss for the period in which it arises. [IAS 40.35] Fair value should reflect the actual market state and circumstances as of the balance sheet date. [IAS 40.38] The best evidence of fair value is normally given by current prices on an active market for similar property in the same location and condition and subject to similar lease and other contracts. [IAS 40.45] In the absence of such information, the entity may consider current prices for properties of a different nature or subject to different conditions, recent prices on less active markets with adjustments to reflect changes in economic conditions, and discounted cash flow projections based on reliable estimates of future cash flows. [IAS 40.46] There is a rebuttable presumption that the entity will be able to determine the fair value of an investment property reliably on a continuing basis. However: [IAS 40.53]
Where a property has previously been measured at fair value, it should continue to be measured at fair value until disposal, even if comparable market transactions become less frequent or market prices become less readily available. [IAS 40.55] After initial recognition, investment property is accounted for in accordance with the cost model as set out in IAS 16 Property, Plant and Equipment – cost less accumulated depreciation and less accumulated impairment losses. [IAS 40.56] Transfers to, or from, investment property should only be made when there is a change in use, evidenced by one or more of the following: [IAS 40.57 (note that this list was changed from an exhaustive list to an non-exhaustive list of examples by Transfers of Investment Property in December 2016 effective 1 January 2018) ]
When an entity decides to sell an investment property without development, the property is not reclassified as inventory but is dealt with as investment property until it is derecognised. [IAS 40.58] The following rules apply for accounting for transfers between categories:
When an entity uses the cost model for investment property, transfers between categories do not change the carrying amount of the property transferred, and they do not change the cost of the property for measurement or disclosure purposes. An investment property should be derecognised on disposal or when the investment property is permanently withdrawn from use and no future economic benefits are expected from its disposal. The gain or loss on disposal should be calculated as the difference between the net disposal proceeds and the carrying amount of the asset and should be recognised as income or expense in the income statement. [IAS 40.66 and 40.69] Compensation from third parties is recognised when it becomes receivable. [IAS 40.72] Both Fair Value Model and Cost Model [IAS 40.75]
Additional Disclosures for the Fair Value Model [IAS 40.76]
Additional Disclosures for the Cost Model [IAS 40.79]
Which of these is the correct definition for market value?Market value (also known as OMV, or "open market valuation") is the price an asset would fetch in the marketplace, or the value that the investment community gives to a particular equity or business.
What are the components of market value?The Elements of Fair Market Value. [1] Price and Change Hands. ... . [2] Willing Buyer. ... . [3] Willing Seller. ... . [4] No Compulsion. ... . [5] Reasonable Knowledge. ... . [6] Able to Trade. ... . [7] Willing to Trade. ... . [8] The Property Itself.. What are the characteristics of market value?Market value is the highest price that a willing buyer will pay for a good or service and the lowest price at which a willing seller will sell it if both the buyer and seller have all the relevant information concerning the purchase and the good or service has been exposed to the market for a reasonable time.
What is market value based on?Ultimately, the fair market value will be determined based on what a buyer is willing to pay for a property.
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