Level 1 CFA® Exam:
Investment Property
A building possessed by a company can be classified as:
- property, plant, and equipment,
- inventory, or
- investment property.
We talked about PP&E and inventories and their recognition and measurement in the previous lessons.
As far as investment property is concerned, the term is not defined under U.S. GAAP but it’s defined under IFRS.
According to IAS 40 devoted to investment properties, investment property is defined as property held by the owner or by the lessee under a finance lease to earn rentals or for capital appreciation, or both.
So, investment property is not any property possessed by a company. For example, a property used by employees to produce goods or services won’t be classified as an investment property.
As we said, to classify a property in the investment property category, the company should hold the property to earn rentals or for capital appreciation, or both.
Now we will talk about the valuation of investment property according to IFRS and U.S. GAAP.
According to U.S. GAAP, we use the cost model to value investment properties, whereas under IFRS either the cost model or the fair value model can be used.
Investment Property Valuation
(...)
Disclosures
Disclosures related to investment property depend on the type of the model used, namely the cost model or the fair value model.
If the fair model is used, disclosures related to model specification, such as the way of establishing fair value, are required. What is more, if the fair model is applied, the reconciliation between the beginning of the period and the end of the period carrying values of investment property should be disclosed.
If, on the other hand, the cost model is used, the depreciation method, useful life, and fair value of the property should be disclosed.
In the table, you can see an excerpt from the financial statements of Big Crushers, Inc. Decide whether a company uses the fair value model or the cost model and compute gross rental income for 2022.
| Property operating expenses | (USD 90,000) |
| Loss on disposal of investment property | (USD 5,000) |
| Valuation gains | USD 24,000 |
| Administrative expenses | (USD 29,000) |
| Net operating profit | USD 100,000 |
(...)
- According to IAS 40 devoted to investment properties, investment property is defined as property held by the owner or by the lessee under a finance lease to earn rentals or for capital appreciation, or both.
- According to U.S. GAAP, we use the cost model to value investment properties, whereas under IFRS either the cost model or the fair value model can be used.
- If a company chooses one of the models, namely either the cost model or fair value model, it should apply it to all investment properties.
- If the fair model is used, disclosures related to model specification are required.
- If the cost model is used, the depreciation method, useful life, and fair value of the property should be disclosed.