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Wiley lFRS: Practicallmplementation Guide and Workbook
3.4 Sometimes a property owner provides ancillary services, such as cleaning, maintenance, and
security. Provided that such services are insignificant to the arrangement as whole, then the prop–
erty is an investment property.
3.5 In other cases- for instance, a hotel-services can be significant, such as services provided to
guests. Some hotel management arrangements render the owner merely a passive investor. Judg–
ment must be used in determining whether the property satisfies the definition of an investment
property.
3.6 An issue arises with groups of companies wherein one group company leases a property to
another. At group, or consolidation level, the property is owner-occupied . However, at individual
company level, the owning entity treats the building as investment property. Appropriate consoli–
dation adjustments would need to be made in the group accounts.
Facts
XYZ Inc. and its subsidiaries have provided you, their International Financial Reporting Standards
(IFRS) specialist, with a list of the properties they own:
(a) Land held by XYZ Inc. for undetermined future use
(b) A vacant building owned by XYZ Inc. and to be leased out under an operating lease
(c) Property held by a subsidiary of XYZ Inc., a real estate firm, in the ordinary course of its busi–
ness
(d) Property held by XYZ Inc. for the use in production
(e) A hotel owned by ABC Inc., a subsidiary of XYZ Inc., and for which ABC Inc. provides secu-
rity services for its guests' belongings
Required
Advise XYZ Inc. and its subsidiaries as to which of the above-mentioned properties would qualify under
lAS 40 as investment properties. If they do not qualify thus, how should they be treated under IFRS?
Solution
Properties described under items (a), (b), and (e) would qualify as investment properties under lAS 40.
With respect to item (e), it is to be noted that lAS 40 requires that when the ancillary services are pro–
vided by the entity and they are considered relatively insignificant component of the arrangement, then
the property is considered an investment property.
These properties qualify as investment properties because they are being held for rental or for capital ap–
preciation as opposed to actively managed properties that are used in the production of goods.
Property described in item (c) is to be treated as "inventory" under lAS 2.
Property described in item (d) is treated as a long-lived asset under lAS 16.
4. RECOGNITION
4.1 Investment property shall be recognized as an asset
when and only when
• It
is probable that future economic benefits will flow to the entity;
and
• The cost of the investment property can be measured reliably.
4.2 Recognition principles are similar to those contained in lAS
16.
5. MEASUREMENT
5.1 Measurement at Recognition
5.1.1 An investment property shall be measured initially at cost, including transaction charges.
Again, the principles for determining cost are similar to those contained in lAS
16,
in particular for
replacement and subsequent expenditure.
5.1.2 However, property held under an operating lease shall be measured initially using the prin–
ciples contained in lAS
17,
Leases-at
the lower of the fair value and the present value of the
minimum lease payments. A key matter here is that the item accounted for at fair value is
not the
property itself
but the
lease interest.