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Chapter 31/ In vestment Property
(lAS
40)
347
5.2 Measurement Afte r Recogni tion
An entity shall select either the cost model or the fair value model for
all its investment property.
There are , however, two exceptions. If an ent ity elects to cl assify pr operty held under an operating
lea se as investment property, then it
mu st se lect the fair value model fo r all its investment property.
The second exception is if the entity has investment property backing liabilities that pay a return
linked to the fair va lue of the assets ; if so, regardless of which mode l is se lected for measuring such
investment property, the entity continues to have a choice of models for its other investment prop–
erty.
5.3 Fair Value Model
5.3.1
If the fair model value is selected, after initial recognition, investment propert y shall be
measured at fair value. Fair va lue is the amount for which an asset co uld be exch anged between
knowledgeable, will ing parti es in an arm's-length transaction.
5.3.2
An y ga ins or losses aris ing from changes in fair value shall be reco gni zed in the income
statement. Thi s is qu ite a radi cal diver gen ce from previous practice s but is con sistent with oth er
Standards wherein assets are held in part for capital appreciation . Th e issue is that any ga in on such
remeasurement is unrealized, and , in many jurisdictions, the retained earnings of an entity are co n–
sidered distributable (although some j urisdictions have legal definitions of distributab le reserves) .
Consequently, many entities then tran sfer an amount from retained earnings to a capi tal reserve that
may be treated as dis tributab le on ly upo n disposal of the related asset.
5.3.3
When app lying the fair value model, the fair values shou ld reflect the market conditions
at
the balance sheet date.
Valuations, therefore, carried out at date s too far removed from the balance
sheet date co uld reflect market co nditions that are markedly different from those at the bal ance
sheet date and would be unacceptable. In addition, care needs to be taken as equipment, suc h as
lifts, air cond ition ing, and the like, may be recogni zed as sepa rate assets. Valu ati ons usually in–
clude such assets, which sho uld not be double counted.
5.3.4
If, on acquisition, it is not po ssible to determi ne fair value rel iabl y on a co ntinuing basis,
then the asset sha ll be measured using the cost model under lAS 16 until disposal. Residual value
shall be ass umed to be zero . Therefore , it is possib le for an entity to hold investment property,
some of whi ch is mea sured at fair value and some under the cost model.
5.3.5
If an en tity measures investment property at fair value, it shall co nti nue to do so until dis–
posal, even if readily availabl e market data become less freq uent or les s readily availab le.
5.4 Cost Model
An entity that selects the cost model shall mea sure all of its investment property in accordance with
lAS 16' s requirements for that mode l except those cl assified as held for sale in accordance with
IFRS 5.
Case Study 2
Facts
Investors Galore Inc., a listed company in Germany, ventured into construction of a mega shopping mall
in south Asia, which is rated as the largest shopping mall of Asia. The company' s board of directors af–
termarket research decided that instead of selling the shopping mall to a local investor, who had ap–
proached them several times during the construction period with excellent offers which he progressively
increased during the year of construction, the company would hold this property for the purposes of
earning rentals by letting out space in the shopping mall to tenants. For this purpose it used the services
of a real estate company to find an anchor tenant (a major international retail chain) that then attracted
other important retailers locally to rent space in the mega shopping mall, and within months of the com–
pletion of the construction the shopping mall was fully let out.
The construction of the shopping mall was completed and the property was placed in service at the end
of 20X!. According to the company' s engineering department the computed total cost of the construc–
tion of the shopping mall was $100 million. An independent valuation expert was used by the company
to fair value the shopping mall on an annual basis. According to the fair valuation expert the fair values
of the shopping mall at the end of 20XI and at each subsequent year-end thereafter were