An investment property is defined as a “property (land or a building – or part of a building – or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for:

(a) use in the production or supply of goods or services or for administrative purposes; or
(b) sale in the ordinary course of business.”

Not-for-profit entities may hold investment properties to meet service delivery objectives rather than to earn rental income or for capital appreciation purposes.

Where a property is held to meet service delivery objectives it would not meet the definition of an investment property and would be accounted for in accordance with AASB 116.

An investment property may be purchased or constructed or held by a lessee under a finance lease. A property interest that is held by a lessee under an operating lease may be classified and accounted for as investment property if the property would meet the definition of investment property and the lessee uses the fair value model for the asset recognised.

The following are examples of investment property:

• (a) land held for long-term capital appreciation rather than for short term sale in the ordinary course of business;
• (b) land held for a currently undetermined future use (if an entity has not determined that it will use the land as owner-occupied property or for short-term sale in the ordinary course of business, the land is regarded as held for capital appreciation);
• (c) a building owned by the entity (or held by the entity under a finance lease) and leased out under one or more operating leases;
• (d) a building that is vacant but is held to be leased out under one or more operating leases; and
• (e) property that is being constructed or developed for future use as investment property.

Recognition and measurement

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

(a) it is probable that the future economic benefits that are associated with the investment property will flow to the entity; and
(b) the cost of the investment property can be measured reliably.

Investment properties shall be initially measured at cost, including any associated transaction costs.

A not-for-profit entity that acquires an investment property for nil or nominal cost shall recognise the property at its fair value at the date of acquisition and this value becomes the deemed cost of the property.

Subsequent to initial recognition an entity can choose to carry investment properties at either cost or fair value.

Regardless of whether an entity chooses the cost or fair value model, all investment properties held by the entity must be subsequently measured on the same basis. This measurement policy will continue to apply until the property is disposed of or it becomes owner-occupied.

Fair value model

The fair value of an investment property shall reflect market conditions at the end of the reporting period and shall be based on an arm’s length transaction between knowledgeable and willing parties.

Where there is a change in the fair value of an investment property this change in value is recognised in the profit or loss in the period in which it arises. The revaluation of investment properties should occur with sufficient regularity to ensure that the carrying amount does not materially differ from the fair value.

It is assumed that an entity can reliably determine the fair value of an investment property on a continuing basis; unless evidence to the contrary exists.

Investment properties under construction

Where an investment property is under construction and an entity concludes that fair value cannot be determined during this time, but expects to be able to determine fair value once construction has been completed, the property would be carried at cost until the earlier of the entity being able to reliably measure the fair value of the property or construction of the property is complete.

An inability to determine an investment property’s fair value is only expected to arise in rare circumstances. The International Valuation Standards Council released Guidance Note 17 which provides guidance on internationally recognised principles when estimating the value of an investment property under construction in the absence
of directly comparable sales evidence.

Once construction is completed, any difference between the fair value of the property at that date and its previous carrying amount shall be recognised
in profit or loss.

Transfers

Transfers to, or from, an investment property classification are only made when there is a change in use, evidenced by:

(a) commencement of owner-occupation, for a transfer from investment property to owner-occupied property;
(b) commencement of development with a view to sale, for a transfer from investment property to inventories;
(c) end of owner-occupation, for a transfer from owner-occupied property to investment property; or
(d) commencement of an operating lease to another party, for a transfer from inventories to investment property.

An investment property carried at fair value that no longer satisfies the requirements to be classified as an investment property will be subsequently accounted for as property, plant and equipment or inventories. In order to subsequently account for the property, at the date of reclassification the fair value of the property becomes its deemed cost.

Where a previously owner-occupied property becomes an investment property that will be carried at fair value any difference between the carrying amount of the property in accordance with AASB 116 and its fair value at the date of reclassification is treated as follows:

• any decrease in the carrying amount
of the property is recognised in profit
or loss, except to the extent it reverses a previous revaluation increment. In this case the decrease is recognised in other comprehensive income.
• any resulting increase in the carrying amount is treated as follows:
  – 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 shall not exceed the amount needed to restore the carrying amount of the property to the carrying amount that would have been determined (net of depreciation) had no impairment loss been recognised.
  – any remaining increase is recognised in other comprehensive income increasing the revaluation surplus within equity.

For a transfer from inventory to an investment property that will be carried
at fair value, any difference between the fair value of the property at that date and its previous carrying amount is recognised in profit or loss.

Disposals

An investment property is derecognised on disposal or when the investment property is permanently withdrawn from use and no future economic benefits are expected from its disposal.

The disposal of an investment property may occur by sale of the property or by entering into a finance lease.

Any gain or loss on disposal of an investment property is determined as the difference between the net disposal proceeds and the carrying amount of the asset and is recognised in profit or loss unless AASB 117 requires otherwise on
a sale and leaseback transaction.

Disclosures

AASB 140 contains a number of required disclosures which include, for example:

• whether the fair value or cost model has been applied
• if the entity applies the fair value model and in what circumstances property interests held under operating leases are classified and accounted for as investment property
• the methods and significant assumptions applied in determining the fair value of investment property, including whether fair value was determined using market evidence or was more heavily based on other factors
• whether the fair value was based on a valuation by an independent valuer
• amounts recognised in profit and loss
for rental income from investment property
• the fair value of the investment property where it is carried at cost