HKAS 40 - Investment Property

HKAS 40 - Investment Property

1. Objective (Paragraph 1)

The objective of HKAS 40 is to prescribe the accounting treatment for investment property and related disclosure requirements.

2. Scope (Paragraphs 2-4)

Applicability:

Exclusions:

3. Definitions (Paragraph 5)

Carrying amount: The amount at which an asset is recognised in the statement of financial position.

Cost: The amount of cash or cash equivalents paid or the fair value of other consideration given to acquire an asset at the time of its acquisition or construction or, where applicable, the amount attributed to that asset when initially recognised in accordance with the specific requirements of other HKFRSs, eg HKFRS 2 Share-based Payment.

Fair value: 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. (See HKFRS 13 Fair Value Measurement)

Investment property: Property (land or a building—or part of a building—or both) held (by the owner or by the lessee as a right-of-use asset) to earn rentals or for capital appreciation or both, rather than for:

Owner-occupied property: Property held (by the owner or by the lessee as a right-of-use asset) for use in the production or supply of goods or services or for administrative purposes.

4. Classification of Property as Investment Property or Owner-Occupied Property (Paragraphs 6-15)

Key Distinction (Paragraph 7)

Investment property generates cash flows largely independently of the other assets held by an entity. This distinguishes investment property from owner-occupied property.

Examples of Investment Property (Paragraph 8)

Examples of Items NOT Investment Property (Paragraph 9)

Mixed-Use Properties (Paragraph 10)

If portions could be sold separately (or leased out separately under a finance lease), account for the portions separately. If portions could not be sold separately, the property is investment property only if an insignificant portion is held for owner-occupation.

Ancillary Services (Paragraphs 11-13)

Judgement Required (Paragraph 14)

An entity develops criteria to exercise judgement consistently in accordance with the definition of investment property and related guidance.

Business Combination Consideration (Paragraph 14A)

Judgement is needed to determine whether the acquisition of investment property is the acquisition of an asset or a group of assets or a business combination within the scope of HKFRS 3 Business Combinations.

Group Property (Paragraph 15)

Property leased to a parent or another subsidiary does NOT qualify as investment property in consolidated financial statements (owner-occupied from group perspective). However, from the perspective of the entity that owns it, the property IS investment property in its individual financial statements.

5. Recognition (Paragraphs 16-19A)

Recognition Criteria for Owned Investment Property (Paragraph 16)

An owned investment property shall be recognised as an asset when, and only when:

Costs Evaluated (Paragraph 17)

All investment property costs are evaluated at the time they are incurred, including:

Day-to-Day Servicing (Paragraph 18)

Costs of day-to-day servicing are NOT recognised in the carrying amount of an investment property. These costs are recognised in profit or loss as incurred. These include labour, consumables, and minor parts (repairs and maintenance).

Replacement Parts (Paragraph 19)

When parts are replaced, the cost of replacing part of an existing investment property is recognised in the carrying amount at the time the cost is incurred if recognition criteria are met. The carrying amount of replaced parts is derecognised.

Right-of-Use Asset (Paragraph 19A)

An investment property held by a lessee as a right-of-use asset shall be recognised in accordance with HKFRS 16.

6. Measurement at Recognition (Paragraphs 20-29A)

Initial Measurement - Owned Investment Property (Paragraph 20)

An owned investment property shall be measured initially at its cost. Transaction costs shall be included in the initial measurement.

Components of Cost (Paragraph 21)

Cost of a purchased investment property comprises:

Items NOT Included in Cost (Paragraph 23)

The cost of an investment property is NOT increased by:

Deferred Payment (Paragraph 24)

If payment for an investment property is deferred, its cost is the cash price equivalent. The difference between this amount and the total payments is recognised as interest expense over the period of credit.

Exchange Transactions (Paragraphs 27-29)

When investment property is acquired in exchange for a non-monetary asset or assets:

Cost measured at fair value UNLESS:

If not measured at fair value: Cost is measured at the carrying amount of the asset given up.

Commercial Substance Test (Paragraph 28):

An exchange transaction has commercial substance if:

Reliable Measurement of Fair Value (Paragraph 29):

Fair value is reliably measurable if:

If the entity can measure reliably the fair value of either the asset received or the asset given up, then the fair value of the asset given up is used to measure cost unless the fair value of the asset received is more clearly evident.

Right-of-Use Asset (Paragraph 29A)

An investment property held by a lessee as a right-of-use asset shall be measured initially at its cost in accordance with HKFRS 16.

7. Measurement After Recognition (Paragraphs 30-56)

Accounting Policy Choice (Paragraph 30)

With the exception noted in paragraph 32A, an entity shall choose as its accounting policy either:

And shall apply that policy to ALL of its investment property.

Change in Accounting Policy (Paragraph 31)

A voluntary change in accounting policy shall be made only if the change results in the financial statements providing reliable and more relevant information. It is highly unlikely that a change from the fair value model to the cost model will result in a more relevant presentation.

Fair Value Measurement Requirement (Paragraph 32)

All entities must measure the fair value of investment property for either:

Entities are encouraged, but not required, to use an independent valuer.

Different Models for Different Categories (Paragraphs 32A-32C)

Paragraph 32A: An entity may:

Paragraph 32C: If different models are chosen for the two categories, sales of investment property between pools of assets measured using different models shall be recognised at fair value and the cumulative change in fair value shall be recognised in profit or loss. If an investment property is sold from a pool using the fair value model into a pool using the cost model, the property's fair value at the date of sale becomes its deemed cost.

Fair Value Model (Paragraphs 33-55)

General Rule (Paragraph 33):

After initial recognition, an entity that chooses the fair value model shall measure ALL of its investment property at fair value, except in the cases described in paragraph 53.

Gains and Losses (Paragraph 35):

A gain or loss arising from a change in the fair value of investment property shall be recognised in profit or loss for the period in which it arises.

Fair Value Measurement Considerations (Paragraph 40):

When measuring fair value in accordance with HKFRS 13, the fair value reflects, among other things:

Right-of-Use Asset (Paragraph 40A):

When a lessee uses the fair value model to measure an investment property held as a right-of-use asset, it shall measure the right-of-use asset, and NOT the underlying property, at fair value.

Initial Fair Value of Right-of-Use Asset (Paragraph 41):

When lease payments are at market rates, the fair value of an investment property held by a lessee as a right-of-use asset at acquisition, net of all expected lease payments (including those relating to recognised lease liabilities), should be zero. Remeasuring a right-of-use asset from cost to fair value should not give rise to any initial gain or loss, unless fair value is measured at different times.

Avoiding Double-Counting (Paragraph 50):

In determining the carrying amount of investment property under the fair value model, an entity does NOT double-count assets or liabilities that are recognised as separate assets or liabilities. Examples:

Onerous Contracts (Paragraph 52):

If the present value of payments relating to an investment property (other than payments relating to recognised liabilities) exceeds the present value of related cash receipts, apply HKAS 37 to determine whether to recognise a liability.

Inability to Measure Fair Value Reliably (Paragraphs 53-55)

Rebuttable Presumption (Paragraph 53):

There is a rebuttable presumption that an entity can reliably measure the fair value of an investment property on a continuing basis.

Exceptional Cases:

In exceptional cases, when there is clear evidence at first acquisition (or when an existing property first becomes investment property after a change in use) that fair value is NOT reliably measurable on a continuing basis. This arises when, and only when:

Treatment:

Paragraph 53A:

Once an entity becomes able to measure reliably the fair value of an investment property under construction previously measured at cost, measure at fair value. Once construction is complete, it is presumed fair value can be measured reliably.

Paragraph 53B:

The presumption that fair value of investment property under construction can be measured reliably can be rebutted only on initial recognition. An entity that has measured an item of investment property under construction at fair value may NOT conclude that the fair value of the completed investment property cannot be measured reliably.

Paragraph 54:

In exceptional cases when an entity must use the cost model for one investment property, it shall continue to measure all other investment property using the fair value model.

Paragraph 55:

If an entity has previously measured an investment property at fair value, it shall continue to measure at fair value until disposal (or until it becomes owner-occupied property or the entity begins to develop for subsequent sale) even if comparable market transactions become less frequent or market prices become less readily available.

Cost Model (Paragraph 56)

After initial recognition, an entity that chooses the cost model shall measure investment property:

8. Transfers (Paragraphs 57-65)

When Transfers Occur (Paragraph 57)

An entity shall transfer a property to, or from, investment property when, and only when, there is a change in use. A change in use occurs when the property meets, or ceases to meet, the definition of investment property and there is evidence of the change in use.

Important: In isolation, a change in management's intentions for the use of a property does NOT provide evidence of a change in use.

Examples of Evidence of Change in Use:

Continued Treatment as Investment Property (Paragraph 58)

Cost Model Transfers (Paragraph 59)

When using the cost model, transfers between investment property, owner-occupied property and inventories do NOT change the carrying amount of the property transferred and do NOT change the cost for measurement or disclosure purposes.

Fair Value Model Transfers

Transfer from Investment Property at Fair Value to Owner-Occupied Property or Inventories (Paragraph 60):

The property's deemed cost for subsequent accounting shall be its fair value at the date of change in use.

Transfer from Owner-Occupied Property to Investment Property at Fair Value (Paragraphs 61-62):

Apply HKAS 16 (for owned) or HKFRS 16 (for right-of-use asset) up to the date of change in use. Treat any difference between carrying amount and fair value as a revaluation in accordance with HKAS 16:

Transfer from Inventories to Investment Property at Fair Value (Paragraph 63):

Any difference between the fair value of the property at that date and its previous carrying amount shall be recognised in profit or loss.

Completion of Self-Constructed Investment Property (Paragraph 65):

When construction or development of a self-constructed investment property that will be carried at fair value is completed, any difference between fair value at that date and previous carrying amount shall be recognised in profit or loss.

9. Disposals (Paragraphs 66-73)

Derecognition (Paragraph 66)

An investment property shall be derecognised (eliminated from the statement of financial position) on disposal or when the investment property is permanently withdrawn from use and no future economic benefits are expected from its disposal.

Date of Disposal (Paragraph 67)

The date of disposal for investment property that is sold is the date the recipient obtains control of the investment property in accordance with HKFRS 15.

Replacement Parts (Paragraph 68)

When the cost of a replacement for part of an investment property is recognised in the carrying amount, derecognise the carrying amount of the replaced part.

Gain or Loss on Disposal (Paragraph 69)

Gains or losses arising from the retirement or disposal of investment property shall be determined as:

Net disposal proceeds - Carrying amount of the asset

And shall be recognised in profit or loss (unless HKFRS 16 requires otherwise on a sale and leaseback) in the period of the retirement or disposal.

Consideration (Paragraph 70)

The amount of consideration included in the gain or loss is determined in accordance with HKFRS 15 (paragraphs 47-72). Subsequent changes to estimated consideration shall be accounted for in accordance with HKFRS 15.

Retained Liabilities (Paragraph 71)

An entity applies HKAS 37 or other Standards to any liabilities retained after disposal.

Compensation from Third Parties (Paragraph 72)

Compensation from third parties for investment property that was impaired, lost or given up shall be recognised in profit or loss when the compensation becomes receivable.

Separate Economic Events (Paragraph 73)

Impairments or losses of investment property, related claims for or payments of compensation, and any subsequent purchase or construction of replacement assets are separate economic events and are accounted for separately:

10. Disclosure (Paragraphs 74-79)

General Disclosures (Paragraph 75)

An entity shall disclose:

Fair Value Model - Additional Disclosures (Paragraphs 76-78)

Reconciliation (Paragraph 76):

A reconciliation between the carrying amounts of investment property at the beginning and end of the period, showing:

Valuation Adjustments (Paragraph 77):

When a valuation obtained is adjusted significantly (e.g., to avoid double-counting), disclose a reconciliation between the valuation obtained and the adjusted valuation, showing separately:

Inability to Measure Fair Value (Paragraph 78):

In exceptional cases when using the cost model (paragraph 53), the reconciliation shall disclose amounts relating to that investment property separately. In addition, disclose:

Cost Model - Additional Disclosures (Paragraph 79)

An entity applying the cost model shall disclose:

11. Transitional Provisions (Paragraphs 80-84E)

Fair Value Model (Paragraphs 80-82)

Paragraph 80 - Previously Applied SSAP 13:

An entity that has previously applied SSAP 13 (2000) and elects for the first time to classify and account for some or all eligible property interests held under operating leases as investment property shall recognise the effect of that election as an adjustment to the opening balance of retained earnings for the period in which the election is first made.

Paragraph 80A - Other Investment Properties:

An entity that has previously applied SSAP 13 for investment properties other than those dealt with under paragraph 80 and chooses to use the fair value model shall report the effect as an adjustment to the opening balance of retained earnings for the period in which this Standard is first applied.

Paragraph 82:

When an entity first applies this Standard, the adjustment to the opening balance of retained earnings includes the reclassification of any amount held in revaluation surplus for investment property.

Cost Model (Paragraphs 83-83B)

Paragraph 83:

HKAS 8 applies to any change in accounting policies when an entity first applies this Standard and chooses to use the cost model. The effect includes the reclassification of any amount held in revaluation surplus for investment property.

Paragraph 83A:

An entity that has previously applied SSAP 13 (2000) or has taken advantage of the exemption under SSAP 13 and chooses to use the cost model is permitted to deem the carrying amount of an investment property immediately before applying this Standard as the cost of that property. Any adjustments, including reclassification of any amount previously held in revaluation reserve, shall be made to the opening balance of retained earnings. Depreciation on deemed cost commences from the time this Standard is first applied.

Exchange Transactions (Paragraph 84)

The requirements of paragraphs 27-29 regarding initial measurement of an investment property acquired in an exchange of assets transaction shall be applied prospectively only to future transactions.

Business Combinations (Paragraph 84A)

Annual Improvements Cycle 2011–2013 added paragraph 14A. Apply prospectively for acquisitions of investment property from the beginning of the first period for which the amendment is adopted.

HKFRS 16 (Paragraph 84B)

An entity applying HKFRS 16 for the first time shall apply the transition requirements in Appendix C of HKFRS 16 to its investment property held as a right-of-use asset.

Transfers of Investment Property (Paragraphs 84C-84E)

Apply amendments to paragraphs 57-58 to changes in use that occur on or after the beginning of the annual reporting period in which the entity first applies the amendments. At the date of initial application, reassess the classification of property held at that date.

12. Effective Date (Paragraphs 85-85H)

13. Withdrawal of SSAP 13 (Paragraph 86)

This Standard supersedes SSAP 13 Accounting for Investment Properties (revised in 2000).

Key Takeaways Summary Table

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