The Exposure Draft ED/2024/1 Investment Property, released by the IASB (International Accounting Standards Board), proposes targeted amendments to IAS 40, Investment Property. It aims to clarify specific aspects of the standard that have proven challenging in practice, particularly regarding classification and measurement after completion of construction or development.

A key issue addressed is the application of IAS 40 when an entity develops or constructs a property for dual use – partly for its own use and partly to earn rental income or for capital appreciation (investment property). The existing guidance in IAS 40 can be ambiguous when determining whether the entire property should be classified as investment property or if it should be split between investment property and owner-occupied property. The Exposure Draft proposes clarifying principles to guide this determination.

Specifically, the proposed amendments introduce the concept of “predominant use.” If one portion of the dual-use property is considered predominant, the entire property should be classified based on that predominant use. Determining predominant use requires careful judgement, considering factors such as the relative sizes of the portions, the nature of the entity’s activities in each portion, and the intended future use of the property. This approach intends to simplify the accounting treatment in situations where a clear predominance exists.

Furthermore, the Exposure Draft clarifies the circumstances under which a property that is initially classified as inventory can be transferred to investment property after construction or development is complete. It addresses situations where an entity intends to sell a property constructed for that purpose but later decides to retain it for rental income or capital appreciation. The proposed amendments stipulate that such a transfer is appropriate only when there is a demonstrable change in intention. This change must be supported by evidence, such as a formal decision by management to change the intended use of the property and actions consistent with holding the property for investment purposes.

Another area of focus is subsequent measurement. Once a property is classified as investment property, IAS 40 allows entities to choose between the cost model and the fair value model. The Exposure Draft does not propose changes to this fundamental principle. However, it emphasizes the importance of consistently applying the chosen model and discloses sufficient information to enable users to understand the entity’s accounting policies and the impact of investment property on its financial performance and position.

The overall objective of the Exposure Draft is to reduce diversity in practice and enhance the comparability of financial statements. By providing clearer guidance on classification and measurement of investment property, the IASB aims to improve the consistency and transparency of accounting for these assets. Stakeholders are encouraged to review the Exposure Draft and provide feedback to the IASB to ensure that the final amendments effectively address the identified issues and result in a more robust and reliable accounting standard.

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