BASIS FOR CONCLUSIONS ON IAS 40 INVESTMENT PROPERTY (2000)
Background	B1
Need for a Separate Standard	B5
Scope	B7
Definition of Investment Property	B30
Subsequent Expenditure	B40
Subsequent Measurement	B43
Transfers	B66
Summary of Changes to E64	B67

Basis for Conclusions onIAS 40 (2000) Investment Property

This Basis for Conclusions accompanies, but is not part of, IAS 40. It was issued by the Board of the former International Accounting Standards Committee (IASC) in 2000. Apart from the deletion of paragraphs B10⁠–⁠B20, B25 and B26, this Basis has not been revised by the IASB—those paragraphs are no longer relevant and have been deleted to avoid the risk that they might be read out of context. However, cross‑references to paragraphs in IAS 40 as issued in 2000 have been marked to show the corresponding paragraphs in IAS 40 as revised by the IASB in 2003 (superseded references are struck through and new references are underlined). Paragraphs are treated as corresponding if they broadly address the same matter even though the guidance may differ. In addition, the text has been annotated where references to material in other standards are no longer valid, following the revision of those standards. Reference should be made to the IASB’s Basis for Conclusions on the amendments made in 2003.

Background

The IASC Board (the “Board”) approved IAS 25 Accounting for Investments in 1986. In 1994, the Board approved a reformatted version of IAS 25 presented in the revised format adopted for International Accounting Standards from 1991. Certain terminology was also changed at that time to bring it into line with then current IASC practice. No substantive changes were made to the original approved text.

IAS 25 was one of the standards that the Board identified for possible revision in E32 Comparability of Financial Statements. Following comments on the proposals in E32, the Board decided to defer consideration of IAS 25, pending further work on Financial Instruments. In 1998, the Board approved IAS 38 Intangible Assets and IAS 39 Financial Instruments: Recognition and Measurement,1 leaving IAS 25 to cover investments in real estate, commodities and tangible assets such as vintage cars and other collectors’ items.

In July 1999, the Board approved E64 Investment Property, with a comment deadline of 31 October 1999. The Board received 121 comment letters on E64. Comment letters came from various international organisations, as well as from 28 individual countries. The Board approved IAS 40 Investment Property in March 2000. Paragraph B67 below summarises the changes that the Board made to E64 in finalising IAS 40.

IAS 40 permits entities to choose between a fair value model and a cost model. As explained in paragraphs B47⁠–⁠B48 below, the Board believes that it is impracticable, at this stage, to require a fair value model for all investment property. At the same time, the Board believes that it is desirable to permit a fair value model. This evolutionary step forward will allow preparers and users to gain greater experience working with a fair value model and will allow time for certain property markets to achieve greater maturity.

Need for a Separate Standard

Some commentators argued that investment property should fall within the scope of IAS 16 Property, Plant and Equipment, and that there is no reason to have a separate standard on investment property. They believe that:

(a)	it is not possible to distinguish investment property rigorously from owner‑occupied property covered by IAS 16 and without reference to management intent. Thus, a distinction between investment property and owner‑occupied property will lead to a free choice of different accounting treatments in some cases; and
(b)	the fair value accounting model proposed in E64 is not appropriate, on the grounds that fair value is not relevant and, in some cases, not reliable in the case of investment property. The accounting treatments in IAS 16 are appropriate not only for owner‑occupied property, but also for investment property.

Having reviewed the comment letters, the Board still believes that the characteristics of investment property differ sufficiently from the characteristics of owner‑occupied property that there is a need for a separate Standard on investment property. In particular, the Board believes that information about the fair value of investment property, and about changes in its fair value, is highly relevant to users of financial statements. The Board believes that it is important to permit a fair value model for investment property, so that entities can report fair value information prominently. The Board tried to maintain consistency with IAS 16, except for differences dictated by the choice of a different accounting model.

Scope

Investment Property Entities

Some commentators argued that the Standard should cover only investment property held by entities that specialise in owning such property (and, perhaps, also other investments) and not cover investment property held by other entities. The Board rejected this view because the Board could find no conceptual and practical way to distinguish rigorously any class of entities for which the fair value model would be less or more appropriate.

Investment Property Reportable Segments

Some commentators suggested that the Board should limit the scope of the Standard to entities that have a reportable segment whose main activity is investment property. These commentators argued that an approach linked to reportable segments would require an entity to adopt the fair value model when the entity considers investment property activities to be an important element of its financial performance and would allow an entity to adopt IAS 16 in other cases.

B9	An approach linked to reportable segments would lead to lack of comparability between investment property held in investment property segments and investment property held in other segments. For this reason, the Board rejected such an approach.

B10⁠–B20

[Deleted]

Property Occupied by Another Entity in the Same Group

B21

In some cases, an entity owns property that is leased to, and occupied by, another entity in the same group. The property does not qualify as investment property in consolidated financial statements that include both entities, because the property is owner‑occupied from the perspective of the group as a whole. However, from the perspective of the individual entity that owns it, the property is investment property if it meets the definition set out in the Standard.

B22

Some commentators believe that the definition of investment property should exclude properties that are occupied by another entity in the same group. Alternatively, they suggest that the Standard should not require investment property accounting in individual financial statements for properties that do not qualify as investment property in consolidated financial statements. They believe that:

(a)	it could be argued (at least in some such cases) that the property does not meet the definition of investment property from the perspective of a subsidiary whose property is occupied by another entity in the same group—the subsidiary’s motive for holding the property is to comply with a directive from its parent and not necessarily to earn rentals or to benefit from capital appreciation. Indeed, the intragroup lease may not be priced on an arm’s length basis;
(b)	this requirement would lead to additional valuation costs that would not be justified by the limited benefits to users. For groups with subsidiaries that are required to prepare individual financial statements, the cost could be extensive as entities may create a separate subsidiary to hold each property;
(c)	some users may be confused if the same property is classified as investment property in the individual financial statements of a subsidiary and as owner‑occupied property in the consolidated financial statements of the parent; and
(d)	there is a precedent for a similar exemption (relating to disclosure, rather than measurement) in paragraph 4(c) of IAS 24 Related Party Disclosures, which does not require disclosures in a wholly‑owned subsidiary’s financial statements if its parent is incorporated in the same country and provides consolidated financial statements in that country.2

B23

Some commentators believe that the definition of investment property should exclude property occupied by any related party. They argue that related parties often do not pay rent on an arm’s length basis, that it is often difficult to establish whether the rent is consistent with pricing on an arm’s length basis and that rental rates may be subject to arbitrary change. They suggest that fair values are less relevant where property is subject to leases that are not priced on an arm’s length basis.

B24

The Board could find no justification for treating property leased to another entity in the same group (or to another related party) differently from property leased to other parties. Therefore, the Board decided that an entity should use the same accounting treatment, regardless of the identity of the lessee.

B25⁠–B26

[Deleted]

Government Grants

B27

IAS 20 Accounting for Government Grants and Disclosure of Government Assistance permits two methods of presenting grants relating to assets—either setting up a grant as deferred income and amortising the income over the useful life of the asset or deducting the grant in arriving at the carrying amount of the asset. Some believe that both of those methods reflect a historical cost model and are inconsistent with the fair value model set out in this Standard. Indeed, Exposure Draft E65 Agriculture, which proposes a fair value model for biological assets, addresses certain aspects of government grants, as these are a significant factor in accounting for agriculture in some countries.

B28

Some commentators urged IASC to change the accounting treatment of government grants related to investment property. However, most commentators agreed that IASC should not deal with this aspect of government grants now. The Board decided not to revise this aspect of IAS 20 in the project on Investment Property.

B29

Some commentators suggested that IASC should begin a wider review of IAS 20 as a matter of urgency. In early 2000, the G4+1 group of standard setters published a Discussion Paper Accounting by Recipients for Non‑Reciprocal Transfers, Excluding Contributions by Owners: Their Definition, Recognition and Measurement. The Board’s work plan does not currently include a project on the accounting for government grants or other forms of non‑reciprocal transfer.

Definition of Investment Property

B30

The definition of investment property excludes:

(a)	owner‑occupied property—covered by IAS 16 Property, Plant and Equipment. Under IAS 16, such property is carried at either depreciated cost or revalued amount less subsequent depreciation. In addition, such property is subject to an impairment test; and
(b)	property held for sale in the ordinary course of business—covered by IAS 2 Inventories. IAS 2 requires an entity to carry such property at the lower of cost and net realisable value.

B31	These exclusions are consistent with the existing definitions of property, plant and equipment in IAS 16 and inventories in IAS 2. This ensures that all property is covered by one, and only one, of the three Standards.

B32

Some commentators suggested that property held for sale in the ordinary course of business should be treated as investment property rather than as inventories (covered by IAS 2). They argued that:

(a)	it is difficult to distinguish property held for sale in the ordinary course of business from property held for capital appreciation; and
(b)	it is illogical to require a fair value model for land and buildings held for long‑term capital appreciation (investment property) when a cost model is still used for land and buildings held for short‑term sale in the ordinary course of business (inventories).

B33

The Board rejected this suggestion because:

(a)

if fair value accounting is used for property held for sale in the ordinary course of business, this would raise wider questions about inventory accounting that go beyond the scope of this project; and

(b)

it is arguably more important to use fair value accounting for property that may have been acquired over a long period and held for several years (investment property) than for property that was acquired over a shorter period and held for a relatively short time (inventories). With the passage of time, cost‑based measurements become increasingly irrelevant. Also, an aggregation of costs incurred over a long period is of questionable relevance.

B34

Some commentators suggested requiring (or at least permitting) entities, particularly financial institutions such as insurance companies, to use the fair value model for their owner‑occupied property. They argued that some financial institutions regard their owner‑occupied property as an integral part of their investment portfolio and treat it for management purposes in the same way as property leased to others. In the case of insurance companies, the property may be held to back policyholder liabilities. The Board believes that property used for similar purposes should be subject to the same accounting treatment. Accordingly, the Board concluded that no class of entities should use the fair value model for their owner‑occupied property.3

B35

Some commentators suggested that the definition of investment property should exclude property held for rentals, but not for capital appreciation. In their view, a fair value model may be appropriate for dealing activities, but is inappropriate where an entity has historically held rental property for many years and has no intention of selling it in the foreseeable future. They consider that holding property for long‑term rental is a service activity and the assets used in that activity should be treated in the same way as assets used to support other service activities. In their view, holding an investment in property in such cases is similar to holding “held‑to‑maturity investments”, which are measured at amortised cost under IAS 39.4

B36

In the Board’s view, the fair value model provides useful information about property held for rental, even if there is no immediate intention to sell the property. The economic performance of a property can be regarded as being made up of both rental income earned during the period (net of expenses) and changes in the value of future net rental income. The fair value of an investment property can be regarded as a market‑based representation of the value of the future net rental income, regardless of whether the entity is likely to sell the property in the near future. Also, the Standard notes that fair value is determined without deducting costs of disposal—in other words, the use of the fair value model is not intended as a representation that a sale could, or should, be made in the near future.5

B37

The classification of hotels and similar property was controversial throughout the project and commentators on E64 had mixed views on this subject. Some see hotels essentially as investments, while others see them essentially as operating properties. Some requested a detailed rule to specify whether hotels (and, perhaps, other categories of property, such as restaurants, bars and nursing homes) should be classified as investment property or as owner‑occupied property.

B38

The Board concluded that it is preferable to distinguish investment property from owner‑occupied property on the basis of general principles, rather than have arbitrary rules for specific classes of property. Also, it would inevitably be difficult to establish rigorous definitions of specific classes of property to be covered by such rules. Paragraphs 9⁠–⁠11 11⁠–⁠13 of the Standard discuss cases such as hotels in the context of the general principles that apply when an entity provides ancillary services.

B39

Some commentators requested quantitative guidance (such as a percentage) to clarify whether an “insignificant portion” is owner‑occupied (paragraph 8 10) and whether ancillary services are “significant” (paragraphs 9⁠–⁠11 11⁠–⁠13 of the Standard). As for similar cases in other Standards, the Board concluded that quantitative guidance would create arbitrary distinctions.

Subsequent Expenditure

B40

Some believe that there is no need to capitalise subsequent expenditure in a fair value model and that all subsequent expenditure should be recognised as an expense. However, others believe—and the Board agreed—that the failure to capitalise subsequent expenditure would lead to a distortion of the reported components of financial performance. Therefore, the Standard requires that an entity should determine whether subsequent expenditure should be capitalised using a test similar to the test used for owner‑occupied property in IAS 16.

B41

Some commentators suggested that the test for capitalising subsequent expenditure should not refer to the originally assessed standard of performance. They felt that it is impractical and irrelevant to judge against the originally assessed standard of performance, which may relate to many years in the past. Instead, they suggested that subsequent expenditure should be capitalised if it enhances the previously assessed standard of performance—for example, if it increases the current market value of the property or is intended to maintain its competitiveness in the market. The Board saw some merit in this suggestion.

B42

Nevertheless, the Board believes that a reference to the previously assessed standard of performance would require substantial additional guidance, might not change the way the Standard is applied in practice and might cause confusion. The Board also concluded that it was important to retain the existing reference to the originally assessed standard of performance6 to be consistent with IAS 16 and IAS 38.

Subsequent Measurement

Accounting Model

B43

Under IAS 25, an entity was permitted to choose from among a variety of accounting treatments for investment property (depreciated cost under the benchmark treatment in IAS 16 Property, Plant and Equipment, revaluation with depreciation under the allowed alternative treatment in IAS 16, cost less impairment under IAS 25 or revaluation under IAS 25).7

B44

E64 proposed that all investment property should be measured at fair value. Supporters of the fair value model believe that fair values give users of financial statements more useful information than other measures, such as depreciated cost. In their view, rental income and changes in fair value are inextricably linked as integral components of the financial performance of an investment property and measurement at fair value is necessary if that financial performance is to be reported in a meaningful way.

B45

Supporters of the fair value model also note that an investment property generates cash flows largely independently of the other assets held by an entity. In their view, the generation of independent cash flows through rental or capital appreciation distinguishes investment property from owner‑occupied property. The production or supply of goods or services (or the use of property for administrative purposes) generates cash flows that are attributable not merely to property, but also to other assets used in the production or supply process. Proponents of the fair value model for investment property argue that this distinction makes a fair value model more appropriate for investment property than for owner‑occupied property.

B46

Those who oppose measurement of investment property at fair value argue that:

(a)	there is often no active market for investment property (unlike for many financial instruments). Real estate transactions are not frequent and not homogeneous. Each investment property is unique and each sale is subject to significant negotiations. As a result, fair value measurement will not enhance comparability because fair values are not determinable on a reliable basis, especially in countries where the valuation profession is less well established. A depreciated cost measurement provides a more consistent, less volatile, and less subjective measurement;
(b)	IAS 39 8 does not require fair value measurement for all financial assets, even some that are realised more easily than investment property. It would be premature to consider extending the fair value model until the Joint Working Group on financial instruments has completed its work;
(c)	a cost basis is used for “shorter term” assets (such as inventories) for which fair value is, arguably, more relevant than for “held for investment” assets; and
(d)	measurement at fair value is too costly in relation to the benefits to users.

B47

This is the first time that the Board has proposed requiring a fair value accounting model for non‑financial assets. The comment letters on E64 showed that although many support this step, many others still have significant conceptual and practical reservations about extending a fair value model to non‑financial assets, particularly (but not exclusively) for entities whose main activity is not to hold property for capital appreciation. Also, some entities feel that certain property markets are not yet sufficiently mature for a fair value model to work satisfactorily. Furthermore, some believe that it is impossible to create a rigorous definition of investment property and that this makes it impracticable to require a fair value model at present.

B48

For those reasons, the Board believes that it is impracticable, at this stage, to require a fair value model for investment property. At the same time, the Board believes that it is desirable to permit a fair value model. This evolutionary step forward will allow preparers and users to gain greater experience working with a fair value model and will allow time for certain property markets to achieve greater maturity.

B49

IAS 40 permits entities to choose between a fair value model and a cost model. An entity should apply the model chosen to all its investment property. [This choice is not available to a lessee accounting for an investment property under an operating lease as if it were a finance lease—refer to the IASB’s Basis for Conclusions on the amendments made in 2003.] The fair value model is the model proposed in E64: investment property should be measured at fair value and changes in fair value should be recognised in the income statement. The cost model is the benchmark treatment9 in IAS 16 Property, Plant and Equipment: investment property should be measured at depreciated cost (less any accumulated impairment losses). An entity that chooses the cost model should disclose the fair value of its investment property.

B50

Under IAS 8 Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies,10 a change in accounting policies from one model to the other model should be made only if the change will result in a more appropriate presentation of events or transactions.11 The Board concluded that this is highly unlikely to be the case for a change from the fair value model to the cost model and paragraph 25 31 of the Standard reflects this conclusion.

B51

The Board believes that it is undesirable to permit three different accounting treatments for investment property. Accordingly, if an entity does not adopt the fair value model, the Standard requires the entity to use the benchmark treatment in IAS 16 and does not permit the use of the allowed alternative treatment. However, an entity may still use the allowed alternative for other properties covered by IAS 16.12

Guidance on Fair Value13

B52

The valuation profession will have an important role in implementing the Standard. Accordingly, in developing its guidance on the fair value of investment property, the Board considered not only similar guidance in other IASC literature, but also International Valuation Standards (IVS) issued by the International Valuation Standards Committee (IVSC). The Board understands that IVSC intends to review, and perhaps revise, its Standards in the near future.

B53

The Board believes that IASC’s concept of fair value is similar to the IVSC concept of market value. IVSC defines market value as “the estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion”. The Board believes that the guidance in paragraphs 29⁠–⁠30 36, 37 and 32⁠–⁠38 39⁠–⁠44 of the Standard is, in substance (and largely in wording as well), identical with guidance in IVS 1.14

B54

Paragraphs 31 38 and 39⁠–⁠46 45⁠–⁠52 have no direct counterpart in the IVSC literature. The Board developed much of this material in response to commentators on E64, who asked for more detailed guidance on determining the fair value of investment property. In developing this material, the Board considered guidance on fair value in other IASC Standards and Exposure Drafts, particularly those on financial instruments (IAS 32 and IAS 39 15), intangible assets (IAS 38) and agriculture (E65).16

Independent Valuation

B55

Some commentators believe that fair values should be determined on the basis of an independent valuation, to enhance the reliability of the fair values reported. Others believe, on cost‑benefit grounds, that IASC should not require (and perhaps not even encourage) an independent valuation. They believe that it is for preparers to decide, in consultation with auditors, whether an entity has sufficient internal resources to determine reliable fair values. Some also believe that independent valuers with appropriate expertise are not available in some markets.

B56

The Board concluded that an independent valuation is not always necessary. Therefore, as proposed in E64, the Standard encourages, but does not require, an entity to determine the fair value of all investment property on the basis of a valuation by an independent valuer who holds a recognised and relevant professional qualification and who has recent experience in the location and category of the investment property being valued. This approach is consistent with the approach to actuarial valuations in IAS 19 Employee Benefits (see IAS 19, paragraph 57).17

Inability to Measure Fair Value Reliably

B57

E64 included a rebuttable presumption that an entity will be able to determine reliably the fair value of property held to earn rentals or for capital appreciation. E64 also proposed a reliability exception: IAS 16 should be applied if evidence indicates clearly, when an entity acquires or constructs a property, that fair value will not be determinable reliably on a continuing basis.

B58

Some commentators opposed various aspects of this proposal, on one or more of the following grounds:

(a)	the rebuttable presumption underestimates the difficulties of determining fair value reliably. This will often be impossible, particularly where markets are thin or where there is not a well‑established valuation profession;
(b)	the accounting model under IAS 16 includes an impairment test under IAS 36. However, it is illogical to rely on an impairment test when fair value cannot be determined using cash flow projections, because an impairment test under IAS 36 is also difficult in such cases;
(c)	where fair value cannot be determined reliably, this fact does not justify charging depreciation. Instead, the property in question should be measured at cost less impairment losses; and
(d)	to avoid the danger of manipulation, all efforts should be made to determine fair values, even in a relatively inactive market. Even without an active market, a range of projected cash flows is available. If there are problems in determining fair value, an entity should measure the property at the best estimate of fair value and disclose limitations on the reliability of the estimate. If it is completely impossible to determine fair value, fair value should be deemed to be zero.

B59

The Board concluded that the rebuttable presumption and the reliability exception should be retained, but decided to implement them in a different way. In E64, they were implemented by excluding a property from the definition of investment property if the rebuttable presumption was overcome. Some commentators felt that it was confusing to include such a reliability exception in a definition. Accordingly, the Board moved the reliability exception from the definition to the section on subsequent measurement (paragraphs 47⁠–⁠49 53⁠–⁠55).

B60

Under E64, an entity should not stop using the fair value model if comparable market transactions become less frequent or market prices become less readily available. Some commentators disagreed with this proposal. They argued that there may be cases when reliable estimates are no longer available and that it would be misleading to continue fair value accounting in such cases. The Board decided that it is important to keep the E64 approach, because otherwise entities might use a reliability exception as an excuse to discontinue fair value accounting in a falling market.18

B61

In cases where the reliability exception applies, E64 proposed that an entity should continue to apply IAS 16 until disposal of the property. Some commentators proposed that an entity should start applying the fair value model once the fair value becomes measurable reliably. The Board rejected this proposal because it would inevitably be a subjective decision to determine when fair value has become measurable reliably and this subjectivity could lead to inconsistent application.

B62

E64 proposed no specific disclosure where the reliability exception applies. Some commentators felt that disclosure would be important in such cases. The Board agreed and decided to include disclosures consistent with paragraph 170(b) of IAS 3919 (see paragraphs 68 and 69(e) 78 and 79(e) of IAS 40). Paragraph 170(b) of IAS 39 requires disclosures for financial assets whose fair value cannot be reliably measured.

Gains and Losses on Remeasurement to Fair Value

B63

Some commentators argued that there should be either a requirement or an option to recognise changes in the fair value of investment property in equity, on the grounds that:

(a)	the market for property is not liquid enough and market values are uncertain and variable. Investment property is not as liquid as financial instruments and IAS 39 allows an option for available‑for‑sale investments;20
(b)	until performance reporting issues are resolved more generally, it is premature to require recognition of fair value changes in the income statement;
(c)	recognition of unrealised gains and losses in the income statement increases volatility and does not enhance transparency, because revaluation changes will blur the assessment of an entity’s operating performance. It may also cause a presumption that the unrealised gains are available for distribution as dividends;
(d)	recognition in equity is more consistent with the historical cost and modified historical cost conventions that are a basis for much of today’s accounting. For example, it is consistent with IASC’s treatment of revaluations of property, plant and equipment under IAS 16 and with the option available for certain financial instruments under IAS 39;21
(e)	for properties financed by debt, changes in the fair value of the properties resulting from interest rate changes should not be recognised in the income statement, since the corresponding changes in the fair value of the debt are not recognised under IAS 39;
(f)	under paragraphs 92 and 93 of the Framework,22 income should be recognised only when it can be measured with sufficient certainty. For example, IAS 11 Construction Contracts23 requires certain conditions before an entity can use the percentage‑of‑completion method. These conditions are not normally met for investment property; and
(g)	results from operations should be distinguished from changes in values. For example, under IAS 21, unrealised exchange differences on a foreign entity24 are recognised in equity.

B64	Some commentators suggested that increases should be recognised in equity and decreases should be recognised in profit or loss. This is similar to the revaluation model that forms the allowed alternative treatment25 in IAS 16 (except for the lack of depreciation).

B65

As proposed in E64, the Board concluded that, in a fair value model, changes in the fair value of investment property should be recognised in the income statement as part of profit or loss for the period. The arguments for this approach include the following:

(a)

the conceptual case for the fair value model is built largely on the view that this provides the most relevant and transparent view of the financial performance of investment property. Given this, it would be inconsistent to permit or require recognition in equity;

(b)

recognition of fair value changes in equity would create a mismatch because net rental income would be recognised in the income statement, whereas the related consumption of the service potential (recognised as depreciation under IAS 16) would be recognised in equity. Similarly, maintenance expenditure would be recognised as an expense while related increases in fair value would be recognised in equity;

(c)

using this approach, there is no need to resolve some difficult and controversial issues that would arise if changes in the fair value of investment property were recognised in equity. These issues include the following:

(i)	should fair value changes previously recognised in equity be transferred (“recycled”) to profit or loss on disposal of investment property; and
(ii)	should fair value changes previously recognised in equity be transferred (“recycled”) to profit or loss when investment property is impaired? If so, how should such impairment be identified and measured; and

(d)

given the difficulty in defining investment property rigorously, entities will sometimes have the option of applying the investment property standard or either of the two treatments in IAS 16. It would be undesirable to include two choices in the investment property standard, as this would give entities a choice (at least occasionally) between four different treatments.

Transfers

B66

When an owner‑occupied property carried under the benchmark treatment under IAS 16 becomes an investment property, the measurement basis for the property changes from depreciated cost to fair value. The Board concluded that the effect of this change in measurement basis should be treated as a revaluation under IAS 16 at the date of change in use. The result is that:

(a)	the income statement excludes cumulative net increases in fair value that arose before the property became investment property. The portion of this change that arose before the beginning of the current period does not represent financial performance of the current period; and
(b)	this treatment creates comparability between entities that had previously revalued the property under the allowed alternative treatment in IAS 16 and those entities that had previously used the IAS 16 benchmark treatment.26

Summary of Changes to E64

B67

The most important change between E64 and the final Standard was the introduction of the cost model as an alternative to the fair value model. The other main changes are listed below.

(a)

The guidance on determining fair value was expanded, to clarify the following:27

(i)	the fair value of investment property is not reduced by transaction costs that may be incurred on sale or other disposal (paragraph 30 37 of the Standard). This is consistent with the measurement of financial assets under paragraph 69 of IAS 39.28 E64 was silent on the treatment of such costs;
(ii)	measurement is based on valuation at the balance sheet date (paragraph 31 38);
(iii)	the best evidence of fair value is normally given by current prices on an active market for similar property in the same location and condition and subject to similar lease and other contracts (paragraph 39 45). In the absence of such evidence, fair value reflects information from a variety of sources and an entity needs to investigate reasons for any differences between the information from different sources (paragraphs 40⁠–⁠41 46 and 47);
(iv)	market value differs from value in use as defined in IAS 36 Impairment of Assets (paragraph 43 49);
(v)	there is a need to avoid double counting of investment property and separately recognised assets and liabilities. Integral equipment (such as elevators or air‑conditioning) is generally included in the investment property, rather than recognised separately (paragraph 44 50);
(vi)	the fair value of investment property does not reflect future capital expenditure that will improve or enhance the asset and does not reflect the related future benefits from this future expenditure (paragraph 45 51);
(vii)	an entity uses IAS 37 to account for any provisions associated with investment property (paragraph 46 52); and
(viii)	in the exceptional cases when fair value cannot be determined reliably, measurement is under the IAS 16 benchmark treatment29 only (in such cases, revaluation under IAS 16 would also not be reliable) and residual value is assumed to be zero (given that fair value cannot be determined reliably) (paragraphs 47⁠–⁠48 53 and 54).

(b)

In relation to the scope of the Standard and the definition of investment property:

(i)	paragraph 3 4 now clarifies that the Standard does not apply to forests and similar regenerative natural resources and to mineral rights, the exploration for and extraction of minerals, oil, natural gas and similar non‑regenerative resources. This wording is consistent with a similar scope exclusion in IAS 16 Property, Plant and Equipment. The Board did not wish to prejudge its decision on the treatment of such items in the current projects on Agriculture and the Extractive Industries;
(ii)	land held for a currently undetermined future use is a further example of investment property (paragraph 6(b) 8(b)), on the grounds that a subsequent decision to use such land as inventory or for development as owner‑occupied property would be an investment decision;
(iii)	new examples of items that are not investment property are: property held for future use as owner‑occupied property, property held for future development and subsequent use as owner‑occupied property, property occupied by employees (whether or not the employees pay rent at market rates) and owner‑occupied property awaiting disposal (paragraph 7(c) 9(c));
(iv)	property that is being constructed or developed for future use as investment property is now covered by IAS 16 and measured at cost, less impairment losses, if any (paragraph 7(d) 9(d)). E64 proposed that investment property under construction should be measured at fair value; and
(v)	the reference to reliable measurement of fair value (and the related requirements in paragraphs 14⁠–⁠15 of E64) was moved from the definition of investment property into the section on subsequent measurement (paragraphs 47⁠–⁠49 53⁠–⁠55).

(c)

New paragraph 20 23 deals with start up costs, initial operating losses and abnormal wastage (based on paragraphs 17 and 18 of IAS 1630). The Board considered adding guidance on the treatment of incidental revenue earned during the construction of investment property. However, the Board concluded that this raised an issue in the context of IAS 16 and decided that it was beyond the scope of this project to deal with this.

(d)

There is an explicit requirement on determining gains or losses on disposal (paragraph 62 69). This is consistent with IAS 16, paragraph 56.31 There are also new cross‑references to:

(i)	IAS 17 Leases [Note:paragraphs 67 and 69 of IAS 40 now refer to IFRS 16 rather than to IAS 17] and IAS 18 Revenue,32 as guidance for determining the date of disposal (paragraph 61 67); and
(ii)	IAS 37 Provisions, Contingent Liabilities and Contingent Assets, for liabilities retained after disposal (paragraph 64 71).

(e)

The Standard states explicitly that an entity should transfer an investment property to inventories when the entity begins to develop the property for subsequent sale in the ordinary course of business (paragraphs 51(b) and 52 57(b) and 58). E64 proposed that all transfers from investment properties to inventories should be prohibited. The Standard also deals more explicitly than E64 with certain other aspects of transfers.

(f)

New disclosure requirements include:33

(i)	extension of the required disclosure on methods and significant assumptions, which are now to include disclosure of whether fair value was supported by market evidence, or whether the estimate is based on other data (which the entity should disclose) because of the nature of the property and the lack of comparable market data (paragraph 66(b) 75(d));
(ii)	disclosures of rental income and direct operating expenses (paragraph 66(d) 75(f)); and
(iii)	disclosures in the exceptional cases when fair value is not reliably determinable (paragraphs 68 and 69(e) 78 and 79(e)).

(g)

E64 proposed a requirement to disclose the carrying amount of unlet or vacant investment property. Some commentators argued that this disclosure was impracticable, particularly for property that is partly vacant. Some also felt that this is a matter for disclosure in a financial review by management, rather than in the financial statements. The Board deleted this disclosure requirement. It should be noted that some indication of vacancy levels may be available from the required disclosure of rental income and from the IAS 17 requirement to disclose cash flows from non‑cancellable operating leases (split into less than one year, one to five years and more than five years) [Note:IFRS 16, which replaced IAS 17, requires a maturity analysis in accordance with IFRS 7].

(h)

E64 included no specific transitional provisions, which means that IAS 8 would apply. There is a risk that restatement of prior periods might allow entities to manipulate their reported profit or loss for the period by selective use of hindsight in determining fair values in prior periods. Accordingly, the Board decided to prohibit restatement in the fair value model, except where an entity has already publicly disclosed fair values for prior periods (paragraph 70 80).

Footnotes

1	IFRS 9 Financial Instruments replaced IAS 39. IFRS 9 applies to all items that were previously within the scope of IAS 39. This paragraph refers to matters relevant when IAS 40 was issued. (back)

2	IAS 24 Related Party Disclosures as revised by the IASB in 2003 no longer provides the exemption mentioned in paragraph B22(d). (back)

IFRS 17 Insurance Contracts amended the subsequent measurement requirements in IAS 16 by permitting entities to elect to measure owner-occupied properties in specified circumstances as if they were investment properties measured at fair value through profit or loss in accordance with IAS 40. The Board’s considerations in providing that exemption are set out in paragraph BC65(c) of the Basis for Conclusions on IFRS 17. (back)

4	IFRS 9 Financial Instruments eliminated the held-to-maturity category. This paragraph discusses matters relevant when IAS 40 was issued. (back)

5	IFRS 13 Fair Value Measurement, issued in May 2011, defines fair value [Refer:IFRS 13 Appendix A] and contains the requirements for measuring fair value. (back)

IAS 16 Property, Plant and Equipment as revised by the IASB in 2003 requires all subsequent costs to be covered by its general recognition principle and eliminated the requirement to reference the originally assessed standard of performance. IAS 40 was amended as a consequence of the change to IAS 16. (back)

7	IAS 16 Property, Plant and Equipment as revised by the IASB in 2003 eliminated all references to ‘benchmark’ treatment and ‘allowed alternative’ treatments. They are replaced with cost model and revaluation model. (back)

8	IFRS 9 Financial Instruments replaced IAS 39. IFRS 9 applies to all items that were previously within the scope of IAS 39. This paragraph refers to matters relevant when IAS 40 was issued. (back)

9	IAS 16 Property, Plant and Equipment as revised by the IASB in 2003 eliminated all references to ‘benchmark’ treatment and ‘allowed alternative’ treatments. (back)

10	revised by the IASB in 2003 as IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (back)

11	The IASB conformed the terminology used in paragraph 31 to the terminology used in IAS 8 by Improvements to IFRSs issued in May 2008. (back)

12	IAS 16 Property, Plant and Equipment as revised by the IASB in 2003 eliminated all references to ‘benchmark’ treatment and ‘allowed alternative’ treatments. (back)

13	IFRS 13, issued in May 2011, contains the requirements for measuring fair value. (back)

14	The requirements for measuring fair value in IFRS 13, issued in May 2011, differ in some respects from the guidance for measuring market value in accordance with IVS 1. IFRS 13 deleted paragraphs 36, 37 and 42⁠–⁠44 of IAS 40. (back)

15	IFRS 9 Financial Instruments replaced IAS 39. IFRS 9 applies to all items that were previously within the scope of IAS 39. This paragraph refers to matters relevant when IAS 40 was issued. (back)

16	IFRS 13, issued in May 2011, defines fair value [Refer:IFRS 13 Appendix A] and contains the requirements for measuring fair value. As a consequence paragraphs 38, 45⁠–⁠47, 49 and 51 of IAS 40 have been deleted. (back)

17	Paragraph 57 was renumbered as paragraph 59 when IAS 19 was amended in 2011. (back)

18	IFRS 13, issued in May 2011, discusses the measurement of fair value when the volume or level of activity for an asset has significantly decreased. [Refer:IFRS 13 paragraph B37] (back)

19	In August 2005, the IASB relocated all disclosures relating to financial instruments to IFRS 7 Financial Instruments: Disclosures. (back)

20	IFRS 9 Financial Instruments eliminated the category of available-for-sale financial assets. (back)

21	IFRS 9 Financial Instruments replaced IAS 39. IFRS 9 applies to all items that were previously within the scope of IAS 39. This paragraph refers to matters relevant when IAS 40 was issued. (back)

22	The reference to the Framework is to the IASC’s Framework for the Preparation and Presentation of Financial Statements, adopted by the Board in 2001 and in effect when the Standard was developed. (back)

23	IFRS 15 Revenue from Contracts with Customers, issued in May 2014, replaced IAS 11 Construction Contracts. (back)

24	In IAS 21 The Effects of Changes in Foreign Exchange Rates, as revised by the IASB in 2003, the term ‘foreign entity’ was replaced by ‘foreign operation’. (back)

25	IAS 16 Property, Plant and Equipment as revised by the IASB in 2003 eliminated all references to ‘benchmark’ treatment and ‘allowed alternative’ treatments. (back)

26	IAS 16 Property, Plant and Equipment as revised by the IASB in 2003 eliminated all references to ‘benchmark’ treatment and ‘allowed alternative’ treatments. (back)

27	IFRS 13, issued in May 2011, contains the requirements for measuring fair value and for disclosing information about fair value measurements. As a consequence paragraphs 37, 38, 45⁠–⁠47, 49, 51 and 75(d) of IAS 40 have been deleted. (back)

28	Paragraph 69 was replaced by paragraph 46 when the Board revised IAS 39 in 2003. IFRS 9 Financial Instruments deleted paragraph 46 of IAS 39. (back)

29	IAS 16 Property, Plant and Equipment as revised by the IASB in 2003 eliminated all references to ‘benchmark’ treatment and ‘allowed alternative’ treatments. (back)

30	In IAS 16 Property, Plant and Equipment as revised by the IASB in 2003, paragraphs 17 and 18 were replaced by paragraphs 19⁠–⁠22. (back)

31	In IAS 16 Property, Plant and Equipment as revised by the IASB in 2003, paragraph 56 was replaced by paragraphs 68 and 71. (back)

32	IFRS 15 Revenue from Contracts with Customers, issued in May 2014, replaced IAS 18 Revenue and amended paragraph 67 of IAS 40 for consistency with the requirements in IFRS 15. (back)

33	IFRS 13, issued in May 2011, contains the requirements for measuring fair value and for disclosing information about fair value measurements. As a consequence paragraphs 37, 38, 45⁠–⁠47, 49, 51 and 75(d) of IAS 40 have been deleted. (back)

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