Financial Reporting of Investment Property

IFRS defines investment property as property that is owned (or, in some cases, leased under a finance lease) to earn rentals or capital appreciation, or both.

Cost Model and Fair Value Model

IFRS allows companies to value investment properties either using a cost model or a fair value model. If a company uses the fair value model, it must make additional disclosures about how it determines the fair value. In addition, it must provide a reconciliation between the beginning and ending carrying amounts of investment property. If the cost model is used, the company must make additional disclosures similar to those for property, plant, and equipment (PPE). Lastly, the company must disclose the fair value of the investment property.

Whereas the cost model is similar to the cost model used for PPE, the fair value model is different from the revaluation model that is used for PPE. Under the revaluation model, whether or not an asset revaluation affects net income is dependent on whether the revaluation initially increases or decreases the carrying amount of the asset. Under the fair value model, however, all changes in the fair value of the asset affect net income.

A company must apply its chosen model (cost or fair value) to all of its investment property.

If a company’s chosen model for investment property is the cost model, and it changes the use of the property such that it moves from being an investment property to owner-occupied property or part of the inventory, the carrying amount of the property transferred, will not be changed. However, if the chosen model is the fair value model, the transfers will be made at a fair value.

If a company’s chosen model for investment property is the fair value model, and it transfers a property from owner-occupied to investment property, the change in the measurement of the property from depreciated cost to fair value will be treated as a revaluation. Additionally, if the chosen model is the fair value model, and a company transfers a property from inventory to investment property, then the difference between the inventory carrying amount and the property’s fair value at the time of transfer is recognized as profit or loss.

Question 1

If a company’s chosen model for investment property is the fair value model, which of the following statements is the least accurate?

1. The company must provide a reconciliation between the beginning and ending carrying amounts of investment property.
2. If the company transfers a property from owner-occupied to investment property, the change in measurement of the property from depreciated cost to fair value will be treated like a revaluation.
3. If the company changes the use of the property such that it moves from being an investment property to an owner-occupied property, the carrying amount of the property transferred will not be changed.

Solution

The correct answer is C.

If the company changes the use of the property such that it moves from being an investment property to an owner-occupied property, the transfers will be made at fair value.

Question 2

An investment property would least likely:

1. Earn rent.
2. Be held for capital appreciation.
3. Be used in the production of goods and services.

Solution

The correct answer is C.

Property, plant, and equipment are used in the production of goods and services. Investment properties are held for the purpose of earning rentals or capital appreciation, or both.