ACCA AAA INT Syllabus D. Audit of Historical Financial Information - Investment property - Notes 10 / 41
So here we are dealing with a situation where a company owns a building (or land) but doesn’t use it . Instead it is just an investment for them
It stands alone and makes the company some cash:
From Rental Income
- no surprise here - throw it in the income statement. No problemo
From Capital appreciation
- As the asset is not used, but rather held for investment purposes, then historic cost becomes particularly useless (you could argue).
Much better is a market based fair value. So each property is revalued and the difference is added to the asset and the other side goes to the income statement
What if the property is ours but only under an Operating Lease?
This is fine but the property must be measured using the FV model (see later)
IAS 40 lists the following as examples of investment property:
Land held for long-term capital appreciation rather than short-term sale
Land held for a currently undetermined future use
A building owned by the entity (or held under a finance lease) and leased to a third party under an operating lease
A building which is vacant but is held to be leased out under an operating lease
Property being constructed or developed for future use as an investment property
The following are NOT investment property
Property intended for sale in the ordinary course of business (IAS 2)
Property being constructed or developed on behalf of third parties (IAS 11)
Owner-occupied property (IAS 16)
Property leased to another entity under a finance lease (IAS 17)
An investment property should be recognised when:
It is probable that the future economic benefits will flow; and
The cost of the investment property can be measured reliably.
Initially measured at cost .
This includes:
Purchase price
Directly attributable costs, for example transaction costs (professional fees, property transfer taxes)
This does not include Start up costs