DMB Finance & Advisory © 2013 - 2014

About | Legal and Privacy

Overview

IPSAS 16 is based on IAS 40 Investment Property (Revised 2003).


IPSAS 16 prescribes the accounting treatment for property (land and/or buildings) held to earn rentals or for capital appreciation (or both). Investment properties are initially measured at cost except when the investment property is derived from a non-exchange transaction, than it is initially measured at fair value. Subsequently investment properties shall be measured using a cost model or fair value model, with changes in the fair value under the fair value model being recognised in profit or loss.


IPSAS 16 was reissued in December 2006 and applies to annual periods beginning on or after 1 January 2008.



History of IPSAS 16











Effective date

Annual periods beginning on or after 1 January 2008.


Full text

Refer to IFAC website here


Summary of IPSAS 16 Investment Property


Objective


IPSAS 16 prescribes the accounting treatment for investment property and the related disclosures [IPSAS 16.1].


Scope

This standard applies to entities that prepare and present financial statements under the accrual basis of accounting [IPSAS 16.2]. IPSAS 16 applies to all public sector entities other than GBEs [IPSAS 16.3].


Following items are excluded from the scope of the standard - covered by IPSAS 13 Leases:

(a) Classification of leases as finance leases or operating leases

(b) Recognition of lease revenue from investment property (see also IPSAS 9, Revenue from Exchange Transactions)

(c) Measurement in a lessee’s financial statements of property interests held under a lease accounted for as an operating lease

(d) Measurement in a lessor’s financial statements of its net investment in a finance lease

(e) Accounting for sale and leaseback transactions

(f) Disclosure about finance leases and operating leases.


Following items are excluded from the scope of the standard:

(a) Biological assets related to agricultural activity (IPSAS 27 Agriculture)

(b) Mineral rights and mineral reserves such as oil, natural gas, and similar non-regenerative resources


Investment property

Definition Investment property: property (land or a building or part of a building or both) held to earn rentals or for capital appreciation or both [IPSAS 16.7].


Examples of investment property included in the standard [IPSAS 16.12]

• land held for long-term capital appreciation

• land held for undetermined future use

• building leased out under an operating lease

• vacant building held to be leased out under an operating lease

• property that is being constructed or developed for future use as investment property


The following are not investment property and, therefore, are outside the scope of IPSAS 16:

• property held for use in the production or supply of goods or services or for administrative purposes [IPSAS 16.5]

• property held for sale in the ordinary course of operations or in the process of construction of development for such sale (IPSAS 12 Inventories) [IPSAS 16.5 and 16.13]

• property being constructed or developed on behalf of third parties (IPSAS 11 Construction Contracts) [IPSAS 16.13]

• owner-occupied property (IPSAS 17 Property, Plant and Equipment), including 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 and owner-occupied property awaiting disposal [IPSAS 16.13]

• property leased to another entity under a finance lease [IPSAS 16.13]

• property held to provide a social service and which also generates cash inflows (e.g. social housing facilities) [IPSAS 16.13]

• property held for strategic purposes which would be accounted for in accordance with IPSAS 17 Property, Plant and Equipment [IPSAS 16.13]


Property held under an operating lease


A property interest that is held by a lessee under an operating lease may be classified and accounted for as investment property if [IPSAS 13.8]:

• the property would otherwise meet the definition of investment property

• the lessee uses the fair value model for the asset recognized (cf infra in this Standard)



Classification issues


Partial own use: the entity may use part of the property to meet service delivery, and a potion to earn rentals or for capital appreciation. If the portions can be sold or leased out separately (finance lease), they are accounted for separately. If the portions cannot be sold or leased out separately, the property is investment property only if the owner-occupied portion is insignificant [IPSAS 16.14].

Ancillary services: If ancillary services are provide to the occupants of a property held, the classification as investment property is depending on the significance of the services provided to the contract as a whole. If these services are relatively insignificant (for instance, the government supplies security and maintenance services to the lessees) the classification as investment property is appropriate. If the services provided are more than insignificant (such as in the case of an owner-managed hotel), the property should be classified as an owner-occupied property [IPSAS 16.15].

Intra-entity leases: Property rented to the controlling entity or another controlled entity is not investment property in consolidated financial statements that include both the lessor and the lessee, because the property is owner-occupied from the perspective of the economic entity. In the separate financial statements of the lessor this property may qualify as investment property, if the definition of investment property is met [IPSAS 16.19].


Recognition

Investment property should be recognized as an asset if [IPSAS 16.20]:

• it is probable that the future economic benefits or service potential that are associated with the property will flow to the entity

• the cost or the fair value of the property can be reliably measured.


Initial measurement

Investment property is initially measured:

• at cost, including any transaction costs [IPSAS 16.26]

• at fair value, if the asset is acquired through on non-exchange transaction [IPSAS 16.27]


If the investment is measured at cost, the cost should included any directly attributable costs but should exclude start-up costs, abnormal waste, or initial operating losses incurred before the investment property achieves the planned level of occupancy [IPSAS 16.30].


Subsequent Measurement


IPSAS 16 permits the application of two models [IPSAS 16.39]:

• the fair value model

• the cost model.


One accounting policy shall be elected by the entity and applied to all of its investment property [IPSAS 16.39]. A voluntary change in accordance with IPSAS 3 is allowed only if this results in more reliable and relevant information. IPSAS 16 points out that it is highly unlikely that a change from a fair value model to a cost model will provide a more relevant presentation.


If a property held by the lessee under an operating lease is classified as an investment property (cfr supra), the application of fair value model is mandatory [IPSAS 16.43] and, as a consequence, all property classified as investment property shall be revalued according to the fair value model [IPSAS 16.8].


Fair value model


If the fair value model is applied, investment property is remeasured at fair value [IPSAS 16.42]. Gains or losses arising from changes in the fair value of investment property must be included in surplus or deficit for the period in which it arises [IPSAS 16.44].


There is a rebuttable presumption that the fair value of an investment property  can be reliably determined on a continuing basis. However in some cases it may be clear that the fair value cannot be reliably determined on a continuing basis [IPSAS 16.62]. IPSAS 16 identifies following cases:

investment property under construction: if the fair value cannot be reliably determined but it is expected that the fair value of the property can reliably determined upon completion of construction. The investment property under construction is measured at cost until either its fair value becomes reliably determinable or construction is completed.

investment property (other than an investment property under construction): if the fair value cannot be reliably determined on a continuing basis, the investment property shall be measured using the cost model in IPSAS 17. The residual value of the investment property is assumed to be zero. The entity shall apply IPSAS 17 until disposal of the investment property.


When an entity has elected to measure a property at fair value, the entity should continue to measure the investment property at fair value until disposal (or the use of the property has significantly changed indication a transfer to e.g. owner occupied property), even if comparable market transactions become less frequent or market prices become less readily available [IPSAS 16.64].


Cost model

If the cost model is elected by the entity, the investment property is subsequently accounted for in accordance with the cost model as set out in IPSAS 17 Property, Plant and Equipment – cost less accumulated depreciation and less accumulated impairment losses [IPSAS 16.65]


Transfers to or from investment property classification

Transfers to, or from, investment property should only be made when there is a change in use. Following items may provide evidence for the changed use [IPSAS 16.66]:

• commencement of owner-occupation (transfer from investment property to owner-occupied property)

• commencement of development with a view to sale (transfer from investment property to inventories)

• end of owner-occupation (transfer from owner-occupied property to investment property)

• commencement of an operating lease to another party (transfer from inventories to investment property)


When an entity decides to dispose an investment property without development, the property is not reclassified as inventory but is dealt with as investment property until it is disposed of [IPSAS 16.68].


Following principles are applicable for transfers between categories:

a) transfer from investment property carried at fair value to owner-occupied property or inventories: the fair value at the date of change is the cost for subsequent accounting in the new category [IPSAS 16.71]

b) transfer from owner-occupied property to investment property carried at fair value: IPSAS 17 should be applied until the date of change. If a difference arises between the carrying amount under IPSAS 17 and the fair value at the date of change, this difference is dealt treated as a revaluation under IPSAS 17 [IPSAS 16.72]

c) transfer from inventories to investment property at fair value: any difference between the fair value at the date of change and it previous carrying amount should be recognized in surplus or deficit [IPSAS 16.74]

d) Upon completion of the construction/development of an investment property that will be carried at fair value: any difference between the fair value at the date of change and the previous carrying amount should be recognized in surplus or deficit [IPSAS 16.76]


When an entity has elected the cost model for its investment property, transfers between categories will occur at the carrying amount of the property transferred. The cost the property will not be affected for measurement or disclosure purposes.


Disposal

An investment property should be derecognized [IPSAS 16.77]:

• on disposal or

• when the investment property is permanently withdrawn from use and no future economic benefits or service potential are expected from its disposal (i.e. retirement)


The gain or loss on disposal or retirement should be determined as the difference between the net disposal proceeds and the carrying amount of the asset, and should be recognized in surplus or deficit [IPSAS 16.80]. Compensation from third parties should be recognized in surplus or deficit when it becomes receivable [IPSAS 16.83].


Disclosures


Required disclosures for both Fair Value Model and Cost Model[IPSAS 16.86]

• whether the entity uses the fair value or the cost model

• only when the fair value model is used: whether and in what circumstances property interests held under operating leases are classified and accounted for as investment property

• if classification is difficult, the criteria used to make the classification between investment property, owner-occupied property and property held for sale

• methods and significant assumptions applied in determining the fair value of investment property

• the extent to which the fair value of investment property is based on a valuation by a independent valuer with professional qualifications; if there has been no such valuation, that fact has to be disclosed

• the amounts recognised in surplus or deficit for:

o rental revenue from investment property

o direct operating expenses (including repairs and maintenance) arising from investment property that generated rental revenue during the period

o direct operating expenses (including repairs and maintenance) arising from investment property that did not generate rental income during the period

• restrictions on the realizability of investment property or the remittance of revenue and proceeds of disposal, if these exist that fact should be disclosed together with the related amounts.

• contractual obligations to purchase, construct, or develop investment property or for repairs, maintenance or enhancements


Disclosures additional to the Fair Value Model [IPSAS 16.87]

• a reconciliation between the carrying amounts of investment property at the beginning and end of the period showing:

o additions (separately disclosure of additions from acquisitions and subsequent expenditure)

o additions related to acquisitions from entity combinations

o disposals

o fair value adjustments

o foreign exchange differences

o transfers to and from inventories and owner-occupied property

o other changes

• significant adjustments to an valuation (if any) [IPSAS 16.88] (e.g. to avoid double counting)

• if an entity measures an item of investment property using the cost model (see exception above under the fair value model), following additional disclosures are required [IPSAS 16.89]:

o description of the investment property;

o explanation of why fair value cannot be determined reliably;

o If possible, the range of estimates within which fair value is highly likely to lie

o upon disposal of investment property not carried at fair value: (i) the fact of the disposal, (ii) the carrying amount and (iii) gain or loss recognized.


Disclosures addition to the Cost Model [IPSAS 16.90]


• the depreciation methods used

• the useful lives or the depreciation rates used

• the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period

• a reconciliation of the carrying amount of investment property at the beginning and end of the period showing:

o additions (separately disclosure of additions from acquisitions and subsequent expenditure)

o additions related to acquisitions from entity combinations

o disposals

o depreciation

o impairment recognised or reversed

o exchange differences

o transfers to and from inventories and owner-occupied property

o other changes

• the fair value of investment property. When the fair value of an item of investment property cannot be measured reliably, following additional disclosures are required

o a description of the investment property

o explanation why the entity cannot determine the fair value reliably

o if possible: the range of estimates within which fair value is highly likely to lie


December 2001

IPSAS 16: Investment Property issued

December 2006

revision of IPSAS 16

1 January 2008

Effective date of IPSAS 16

1 January 2011

Effective date of Improvements to IPSASs (issued in January 2010)

IPSAS 16 Investment Property