the prices for residential properties decreased and the entity decided to change its original business plans at
the beginning of 2019. Instead of constructing an apartment building and selling the apartments, the entity
decided to construct an office building that it would lease out to tenants. The entity holds and manages other
investment property as well.
During the first half of 2019, the entity obtained permission from the relevant authorities to commence the
construction and hired an architect to design the office building. The physical construction of the office
building began in August 2019. No operating leases had been agreed with other parties for the lease of office
space. However, negotiations had been held with potential tenants.
The inception of an operating lease is generally evidence of a change in use for a transfer from inventories to
investment property. [IAS 40.57(d)]. However, even in the absence of the inception of an operating lease, there
1400 Chapter 19
may be other circumstances that provide evidence of a change in use. We would generally conclude that there
is sufficient evidence for a change in use from inventory to investment property if all of the following criteria
are met:
• the entity has prepared a business plan that reflects the future rental income generated by the property
and this is supported with evidence that there is demand for rental space;
• the entity can demonstrate that it has the resources, including the necessary financing or capital, to hold
and manage an investment property (which requires different skills than developing a property). If the
entity also owns other investment property, this could be more easily demonstrated. However, if this
property would be the entity’s only investment property, it may be harder to demonstrate this;
• the change in use is legally permissible. That is, the entity has obtained permission from relevant
authorities for the change in use. In cases where the approval of the change in use is merely a routine or
a non-substantive legal requirement (i.e. not at the discretion of the authorities), the entity’s request for
permission may be sufficient evidence; and
• if the property must be further developed for the change in use, development has commenced.
For the scenario described in the fact pattern above, the entity met the above criteria at the point in time when
it obtained permission from the relevant authorities to change the use of the property and commenced
development of the property by hiring an architect. At that time, the land would be transferred from inventory
to investment property.
9.1
Transfers from investment property to inventory
Transfers to inventory are more difficult to deal with by way of the application of a
general principle since IFRS 5 explicitly deals with investment property held for sale.
IAS 40 allows a transfer to inventory only when there is a change in use as evidenced,
for example, by the start of development with a view to subsequent sale. [IAS 40.57].
If an entity decides to dispose of an investment property without development with a
view to sale, it is unlikely to be transferred to inventory as IFRS 5 is applied to property
held for sale to the extent that the requirements therein are met (see 8 above).
The IASB is aware of this inconsistency in the application of IFRS 5 and IAS 2 to
investment property and in 2010 it asked the Interpretations Committee to consider any
necessary interpretation to resolve it. However, the Interpretations Committee decided
to recommend proposals that indicated no change to existing practice.
Consequently, this means that, unless there is development with a view to sale, it may not
be possible to reclassify investment property as inventory even if the entity holding that
property changes its intentions and is no longer holding that property for rental or capital
appreciation. Accordingly, when an entity decides to dispose of an investment property
without development, it should continue to classify the property as an investment
property until it is derecognised (see 10 below) and should not reclassify it as inventory.
Similarly, if an entity begins to redevelop an existing investment property for continued
future use as investment property, the property remains an investment property and is
not reclassified as owner-occupied property during the redevelopment. [IAS 40.58].
9.2
Accounting treatment of transfers
When an entity uses the cost model for investment property, transfers between
investment property, owner-occupied property and inventories do not change the
carrying amount of the property transferred and they do not change the cost of that
property for measurement or disclosure purposes. [IAS 40.59].
Investment
property
1401
Transfers to and from investment property under the fair value model are accounted
for as follows:
• Transfers from inventory: any difference between the fair value of the property at
date of change in use and its previous carrying amount should be recognised in
profit or loss. [IAS 40.63]. This treatment is consistent with the treatment of sales of
inventories. [IAS 40.64].
• Transfers to inventory or owner-occupation: the cost for subsequent accounting
for inventories under IAS 2, or for owner-occupied property under IAS 16 or
IFRS 16, should be the property’s fair value at the date of change in use. [IAS 40.60].
• Transfers from owner-occupation: IAS 16 will be applied for owned property and
IFRS 16 for property held by a lessee as a right-of-use asset up to the date of change
in use. At that date, any difference between the carrying amount under IAS 16 or
IFRS 16 and the fair value should be treated in the same way as a revaluation under
IAS 16. [IAS 40.61].
If the owner-occupied property had not previously been revalued, the transfer does not
imply that the entity has now chosen a policy of revaluation for other property accounted
for under IAS 16 in the same class. The treatment depends on whether it is a decrease or
increase in value and whether the asset had previously been revalued or impaired in value.
The treatment required by IAS 40 is as follows. Up to the date when an owner-occupied
property becomes an investment property carried at fair value, an entity depreciates the
property (or the right-of use asset) and recognises any impairment losses that have
occurred. The entity treats any difference at that date between the carrying amount of
the property in accordance with IAS 16 or IFRS 16 and its fair value in the same way as
a revaluation in accordance with IAS 16.
‘In other words:
(a) any resulting decrease in the carrying amount of the property is recognised in profit
or loss. However, to the extent that an amount is included in revaluation surplus
for that property, the decrease is recognised in other comprehensive income and
reduces the revaluation surplus within equity.
(b) any resulting increase in the carrying amount is treated as follows:
(i) to the extent that the increase reverses a previous impairment loss for that
property, the increase is recognised in profit or loss. The amount recognised
in profit or loss does not exceed the amount needed to restore the carrying
amount to the carrying amount that would have been determined (net of
depreciation) had no impairment loss been recognised.
(ii) any remaining part of the increase is recognised in other comprehensive
income and increases the revaluation surplus within equity. On subsequent
disposal of the investment property, the revaluation surplus included in
equity may be transferred to retained earnings. The transfer from revaluation
surplus to retained earnings is not made through profit or loss.’ [IAS 40.62].
IAS 40 also reconfirms that when an entity completes the construction or development of a
self-constructed investment property that will be carried at fair value (i.e. no actual
reclassification to investment property), any difference between the fair value of the property
at that date and its previous carrying amount shall be recognised in profit or loss. [IAS 40.65].
1402 Chapter 19
Prior to adoption of IFRS 16, if a premium is paid for an interest in a property held under
operating lease, e.g. in a lease of land, and the property is occupied by the lessee, the amount
paid as a premium was recognised as prepayment and was amortised over the lease term in
accordance with the expected pattern of consumption of the economic benefits embodied
in the land-use right under IAS 17 (see Chapter 23 at 3.3). However, if subsequently the
occupation of the land ends and the land is leased to third parties, the leasehold will meet
the definition of an investment property and could be transferred to and classified as
investment property provided the fair value model is applied (see 2.1 and 5.1 above).
Prior to adoption of IFRS 16, neither IAS 40 nor IAS 17 specified the accounting
treatment of a resulting gain or loss on such a transfer. Some considered that any result
from such a transfer should be recognised in profit or loss in line with the requirement
in IAS 1 that all items of income and expense should be recognised in profit or loss unless
an IFRS requires or permits otherwise. [IAS 1.88]. However, others may argue that it may
be appropriate to adopt the approach in IAS 40 applicable to the transfer of an owner-
occupied property to an investment property (see discussion above) since strictly, the
property was previously owner-occupied before it becomes an investment property.
Management therefore needed to exercise judgement in determining its policy and
applied it consistently. If significant, clear disclosure of such policy and judgement
would be required by IAS 1. [IAS 1.117, 122].
Under IFRS 16, lessees are required to include any lease payments made at or before
lease commencement date in their initial measurement of the right-of-use asset (which
may include premium paid for a right-of-use asset) (see Chapter 24 at 5.2.1). [IFRS 16.23].
Also, IFRS 16 amended paragraph 61 of IAS 40, as set out above, to include guidance on
transfers to investment property of owner-occupied property held by a lessee as a right-
of-use asset. Accordingly, IFRS 16 will be applied for property held by a lessee as a right-
of-use asset up to the date of change in use. At that date, any difference between the
carrying amount under IFRS 16 and the fair value should be treated in the same way as
a revaluation under IAS 16. [IAS 40.61].
9.3
Transfers of investment property held under operating leases
Prior to adoption of IFRS 16, an entity applying the fair value model was allowed to
classify interests held under operating leases as investment properties in the same
manner as if they were held under finance leases (see 4.5 above). IAS 17 required this
treatment to continue even if the property interest ceases to be classified as an
investment property by the lessee and gave two examples:
• the lessee occupies the property, in which case it is transferred to owner-occupied
property at a deemed cost equal to its fair value at the date of change in use; or
• the lessee grants a sublease that transfers substantially all of the risks and rewards
incidental to ownership of the interest to an unrelated third party. It will treat the
sublease as a finance lease to the third party even though the interest may well be
accounted for as an operating lease by that party. [IAS 17.19].
Therefore, on transfer, the treatment of interests held under operating leases mirrored
that of other ownership interests.
See also the discussion in Chapter 23 at 3.3.3.
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property
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Note that when IFRS 16 became effective in 2019, the guidance above and IAS 17 in its
entirety, was superseded (see 1.1 above). Under IFRS 16, lessees apply a single model for
most leases and recognise most rental contracts in their statement of financial position
as lease liabilities with corresponding right-of-use assets. Subsequent to initial
recognition, the IASB indicated that a lease liability should be accounted for in a manner
similar to other financial liabilities (i.e. on amortised cost basis). [IFRS 16.BC182]. For
further discussion on subsequent measurements of lease liabilities and right-of-use
assets, see Chapter 24 at 5.3.
10
DISPOSAL OF INVESTMENT PROPERTY
IAS 40 requires that an investment property should be removed from the statement of
financial position (‘derecognised’) on disposal or when it is permanently withdrawn
from use and no future economic benefits are expected from its disposal. [IAS 40.66].
A disposal of an investment property may be achieved by:
• its sale;
• when it becomes the subject of a finance lease (the owner becoming the lessor); or
• when it becomes the subject of a sale and leaseback deal resulting in an operating
lease (the original owner becoming the lessee). [IAS 40.67].
These derecognition rules also apply to a part of the investment property that has been
replaced (see 10.3 below).
IFRS 16 (or if applicable, IAS 17) applies if a property is disposed of by the owner
becoming a lessor in a finance lease, or if a property is the subject of a sale and leaseback
transaction (see Chapter 24 or if applicable, Chapter 23). [IAS 40.67].
If disposal of investment property is achieved by sale, the determination of the
timing of recognition of any gain or loss should be in accordance with IFRS 15.
Consequently, the date of disposal for investment property that is sold is the date
the recipient obtains control of the investment property in accordance with the
requirements for determining when a performance obligation is satisfied in IFRS 15.
[IAS 40.67]. IFRS 15 requires revenue (and a gain or loss on disposal of a non-current
asset not in the ordinary course of business) to be recognised when a performance
obligation is satisfied, which will be when control of the asset is transferred to the
customer. Control may be transferred at a point in time or over time. [IFRS 15.31, 32].
Accordingly, entities that dispose of an investment property through sale should
recognise a gain or loss on disposal when control of the property transfers, which
may be at a point in time. In many cases, control will transfer when the buyer obtains
legal title and physical possession of the asset. However, this may occur prior to
legal settlement if it can be demonstrated that control has passed to
the buyer before
that date. For the detailed discussion and requirements of IFRS 15 on satisfaction of
performance obligations, see Chapter 28 at 8.
Prior to adoption of IFRS 15, similar principles were applied in practice. While the sale
might be recognised when legal title passed, in some jurisdictions the risks and rewards
of ownership passed to the buyer before legal title had passed. In such cases, provided
that the seller had no further substantial acts to complete under the contract, entities
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considered that it might be appropriate to recognise the sale. Capital & Counties
Properties PLC has taken this approach.
Extract 19.12: Capital & Counties Properties PLC (2017)
Notes to the accounts [extract]
1
PRINCIPAL ACCOUNTING POLICIES [extract]
Revenue recognition [extract]
Where revenue is obtained by the sale of property, it is recognised when the significant risks and rewards have been
transferred to the buyer. This will normally take place on exchange of contracts unless there are conditions that
suggest insufficient probability of future economic benefits flowing to the Group. For conditional exchanges, sales
are recognised when these conditions are satisfied.
10.1 Calculation of gain or loss on disposal
Gains and losses on retirement or disposal of investment property are calculated based
on the difference between the net disposal proceeds (after deducting direct costs of
disposal) and the carrying amount of the asset. [IAS 40.69]. IAS 40 does not give guidance
on how to determine the carrying amount of the asset. Possible alternatives would
include the use of (i) the carrying amount in the financial statements of the last full
period of account, or (ii) the carrying amount in the latest interim financial statements,
or (iii) the updated carrying amount at the date of disposal. In our view, this is a policy
choice for an entity to make and is primarily a matter of income statement presentation
to the extent that an entity presents gains and losses on disposal separately from gains
and losses on revaluation. This choice is illustrated in Extract 19.3 above where Unibail-
Rodamco uses the ‘full period of account’ approach.
Gains and losses on retirement or disposal of investment property are recognised in
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 276