HKAS 40 - Investment Property (Condensed)

Objective, Scope & Definitions

Objective (Para 1)

Prescribe accounting treatment for investment property and related disclosure requirements.

Scope (Paras 2-4)

Applicability: Recognition, measurement and disclosure of investment property.

Exclusions:

• Biological assets related to agricultural activity (HKAS 41, HKAS 16)
• Mineral rights and mineral reserves (oil, natural gas, etc.)

Key Definitions (Para 5)

Classification of Property as Investment Property or Owner-Occupied

Key Distinction (Para 7)

Investment property generates cash flows largely independently of other assets held by entity.

Examples of Investment Property (Para 8)

• Land held for long-term capital appreciation
• Land held for undetermined future use (regarded as held for capital appreciation)
• Building owned (or right-of-use asset) leased out under operating leases
• Vacant building held to be leased out under operating leases
• Property being constructed/developed for future use as investment property

Examples NOT Investment Property (Para 9)

• Property intended for sale in ordinary course (HKAS 2 Inventories)
• Owner-occupied property (HKAS 16, HKFRS 16) including held for future owner-occupation, development for owner-occupation, occupied by employees, awaiting disposal
• Property leased to another entity under finance lease

Mixed-Use Properties (Para 10)

If portions can be sold/leased separately → account separately. If not, entire property is investment property only if insignificant portion is owner-occupied.

Ancillary Services (Paras 11-13)

Insignificant (e.g., security, maintenance) → treat as investment property.
Significant (e.g., owner-managed hotel) → not investment property.

Group Property (Para 15)

Property leased to parent/subsidiary: not investment property in consolidated financial statements (owner-occupied from group perspective). Is investment property in individual financial statements of owning entity.

Recognition & Initial Measurement

Recognition Criteria (Para 16)

Recognise owned investment property as asset when:

• Probable future economic benefits will flow to entity; AND
• Cost can be measured reliably

Costs Evaluated (Para 17)

All costs evaluated at time incurred: initial acquisition costs and subsequent costs to add, replace part, or service.

Initial Measurement - Owned (Para 20)

Measured initially at cost, including transaction costs.

Components of Cost (Para 21)

• Purchase price
• Directly attributable expenditure (professional fees, property transfer taxes, other transaction costs)

Items NOT Included in Cost (Para 23)

• Start-up costs (unless necessary to bring property to operating condition intended by management)
• Operating losses before planned occupancy achieved
• Abnormal amounts of wasted material, labour, or other resources

Deferred Payment (Para 24)

Cost = cash price equivalent. Difference between this and total payments recognised as interest expense over credit period.

Exchange Transactions (Paras 27-29)

Cost measured at fair value unless exchange lacks commercial substance OR fair value of neither asset is reliably measurable. If not at fair value, cost = carrying amount of asset given up.

Measurement After Recognition

Accounting Policy Choice (Para 30)

Choose either fair value model or cost model and apply to ALL investment property.

Fair Value Model (Paras 33-55)

General Rule (Para 33): Measure all investment property at fair value after initial recognition.

Gains/Losses (Para 35): Changes in fair value recognised in P&L.

Fair Value Considerations (Para 40): Reflects rental income from current leases and assumptions market participants would use.

Avoid Double-Counting (Para 50): Do not double-count assets/liabilities recognised separately (e.g., lifts, furniture included in FV; prepaid rent excluded; add back lease liability for right-of-use asset).

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

Rebuttable presumption that FV can be measured reliably. In exceptional cases (inactive market + no alternative reliable measurement):

• Under construction: measure at cost until FV reliably measurable or construction complete
• Other: use cost model (HKAS 16 for owned, HKFRS 16 for right-of-use); residual value assumed zero

Cost Model (Para 56)

Measure at depreciated cost less accumulated impairment losses. Apply HKAS 16 (owned) or HKFRS 16 (right-of-use) unless held for sale (HKFRS 5).

Transfers

When Transfers Occur (Para 57)

Transfer to/from investment property only when there is a change in use evidenced by observable actions.

Examples of Evidence of Change in Use

Cost Model Transfers (Para 59)

No change in carrying amount or cost for measurement/disclosure purposes.

Fair Value Model Transfers

From investment property at FV to owner-occupied/inventories (Para 60): Deemed cost = fair value at date of change in use.

From owner-occupied to investment property at FV (Paras 61-62): Difference between carrying amount and FV treated as revaluation under HKAS 16. Decrease: P&L (or OCI if revaluation surplus exists). Increase: reverse impairment in P&L first, remainder in OCI (revaluation surplus).

From inventories to investment property at FV (Para 63): Difference recognised in P&L.

Disposals

Derecognition (Para 66)

Derecognise investment property on disposal or when permanently withdrawn from use and no future economic benefits expected.

Date of Disposal (Para 67)

Date recipient obtains control in accordance with HKFRS 15.

Gain or Loss on Disposal (Para 69)

Gain/loss = Net disposal proceeds - Carrying amount. Recognised in P&L (unless HKFRS 16 requires otherwise on sale and leaseback).

Separate Economic Events (Para 73)

Impairments, retirements/disposals, compensation, and replacement costs are separate events and accounted for separately:

• Impairments → HKAS 36
• Retirements/disposals → Paras 66-71
• Compensation from third parties → recognised in P&L when receivable (Para 72)
• Cost of replacements → Paras 20-29

Disclosure

General Disclosures (Para 75)

• Whether fair value model or cost model applied
• Criteria used to distinguish investment property from owner-occupied and property held for sale (when classification difficult)
• Extent fair value based on independent valuer (or disclose if not)
• Amounts in P&L: rental income, direct operating expenses (for properties generating and not generating rental income), cumulative change in FV on sale between pools
• Restrictions on realisability or remittance of income/proceeds
• Contractual obligations to purchase, construct, develop, or repair/maintain/enhance

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

Reconciliation (Para 76): Carrying amounts at beginning and end of period showing additions, disposals, FV adjustments, exchange differences, transfers, other changes.

Valuation Adjustments (Para 77): If valuation adjusted significantly, disclose reconciliation showing lease liabilities added back and other adjustments.

Inability to Measure FV (Para 78): Disclose description, explanation, range of estimates, and on disposal: fact, carrying amount, gain/loss.

Cost Model - Additional Disclosures (Para 79)

• Depreciation methods, useful lives/rates
• Gross carrying amount and accumulated depreciation at beginning and end
• Reconciliation of carrying amount
• Fair value (or if cannot be measured reliably: description, explanation, range of estimates)

Transitional Provisions & Effective Date

Fair Value Model (Paras 80-82)

Previously applied SSAP 13 (Para 80): Effect of first-time election to classify property interests under operating leases as investment property recognised as adjustment to opening retained earnings.

Other investment properties (Para 80A): Effect reported as adjustment to opening retained earnings.

Reclassification (Para 82): Includes reclassification of any amount held in revaluation surplus.

Cost Model (Paras 83-83B)

HKAS 8 applies to change in accounting policies. May deem carrying amount immediately before applying Standard as cost. Depreciation on deemed cost from first application.

Exchange Transactions (Para 84)

Requirements applied prospectively to future transactions.

Business Combinations (Para 84A)

Apply prospectively for acquisitions from beginning of first period amendment adopted.

HKFRS 16 (Para 84B)

Apply transition requirements in Appendix C of HKFRS 16 to investment property held as right-of-use asset.

Transfers (Paras 84C-84E)

Apply amendments to changes in use on or after beginning of annual reporting period of first application. Reassess classification at date of initial application.

Effective Date (Paras 85-85H)

Original Standard: annual periods beginning on or after 1 January 2005. Various amendments have different effective dates.

Withdrawal of SSAP 13 (Para 86)

Supersedes SSAP 13 Accounting for Investment Properties (revised 2000).