What is Investment Property provides a quick introduction in a important industry that affects almost each living person and businesses.
Investment property is real estate property that has been purchased with the intention of earning a return on the investment, either through rental income, the future resale of the property or both. An investment property can be a long-term endeavor or an intended short-term investment such as in the case of flipping, where real estate is bought, remodeled or renovated, and sold at a profit.
The way in which an investment property is used has a significant impact on its value. Investors sometimes conduct studies to determine the best, and most profitable, use of a property. This is often referred to as the property’s highest and best use. For example, if an investment property is zoned for both commercial and residential use, the investor weighs the pros and cons of both until he has ascertained which has the potential for the highest rate of return, and then utilizes the property in that manner.
Under international financial reporting standards, investment property is property that an entity holds to earn rental income and/or capital appreciation. It generates cash flows mostly independently of other assets held by an entity. It is not property that an entity uses to supply goods or services, nor is it used for administrative purposes (these would then be Property, plant and equipment).
Examples of investment property are land held for appreciation and a building held for current or future leases to third parties. Examples of assets that are not investment property are property intended for sale in the near term, property being constructed for a third party, owner-occupied property, and property leased to a third party under a lease.
If an entity provides services to the occupants of a property, it can account for the property as an investment property only if the services it provides are insignificant.
Investment property is accounted for at fair value only if the property can be measured reliably without undue cost or effort. If that is not possible, the property should be accounted for as ‘property, plant and equipment’, and not as investment property. If the investment property fair value can be measured reliably, it shall be measured at fair value at each reporting date with changes in fair value recognised in profit or loss.
Disclosure is required of the extent to which the fair value of investment property is based on a valuation by an independent valuer who holds a recognised and relevant professional qualification and has recent experience in the location and class of the investment property being valued. If there has been no such valuation, that fact shall be disclosed. IAS 40 What is Investment Property? Wha
Investment property is initially recognised at the purchase price plus other directly attributable costs as well as an initial estimate of dismantling, removal and restoration costs where applicable.
Payments for investment property which are deferred beyond normal terms are measured at present value. The difference is accounted for as prescribed in Basic financial instruments.
Deferred tax is brought into account in respect of fair value gains and losses compared to costs at initial recognition. IAS 40 What is Investment Property? Wha
Where an entity holds property for sale in the ordinary course of business this, too, will not meet the definition of investment property. Such properties are accounted for under Property, Plant and Equipment.
Where there are uncertainties as to whether a property should be classified as investment property, and hence accounted for as Investment Property or as Property, plant and equipment, then the question to ask is ‘what is the property being used for?’. The answer to this question will usually lead you to the correct accounting treatment. IAS 40 What is Investment Property? Wha
Complications can arise when property is ‘mixed-use’ property. In other words, where part of a property is investment property and the other part is used in the ordinary course of business.
Such mixed-use property must be separated between its investment property portion and its property, plant and equipment portion. IAS 40 What is Investment Property? What is Investment Property?
The investment property portion is accounted for under Investment property (unless the fair value of the investment property portion cannot be measured reliably without undue cost or effort, in which case the entire property is accounted for under Property, plant and equipment). The remaining portion is accounted for under Property, plant and equipment.
See also: The IFRS Foundation