Accounting for investment property Q&As- FRS 102

Welcome to the Institute’s Financial Reporting Q&A pages. We have prepared these pages to address some of the commonly asked questions relating to financial reporting matters.

Whilst we hope that the below questions are beneficial to you, they are not a substitute for reading the relevant accounting standards in full and are not intended to replace the accounting standards. Users of these pages should be aware that different facts and circumstances may exist in relation to similar accounting matters which may significantly change the financial reporting implications, and as a result, these Q&As do not represent a "one size fits all" solution to financial reporting issues.

In these Q&As, we look at Investment Property under FRS 102 and some of the commonly asked questions.

1. What is an “Investment Property”?
2. How are Investment Properties measured under FRS 102?
3. How should mixed use property be accounted for under FRS 102?
4. Can I avoid fair valuing an investment property because I believe that the fair value of the property cannot be measured without undue cost or effort?
5. Are there any specific assets that can avail of an exemption from applying the rules of Section 16- Investment Property?
6. How do I account for an investment property that no longer meets the definition of an investment property ?
7. An asset has previously been accounted for as property, plant and equipment but now meets the definition of an investment property. How should this be accounted for on the date of change in use?
8. What are the disclosure requirements for investment property under FRS 102?

1. What is an “Investment Property”?

   FRS 102 defines Investment Property as follows:

   “Property (land or a building, or part of a building, or both) held by the owner or by the lessee under a finance lease to earn rentals or for capital appreciation or both, rather than for:

   1. use in the production or supply of goods or services or for administrative purposes, or
   2. sale in the ordinary course of business.”

   Example

   TW Limited is a manufacturing company and makes garden furniture in its production facility. Following a successful few years, it had generated surplus cash and decided to spend this on a commercial premises which it then rented out to a third party. The premises was not used as part of its trade. In this instance, the commercial premises that it purchased would be classed as investment property under FRS 102.

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2. How are Investment Properties measured under FRS 102?

   On initial recognition, an investment property should be measured at cost (which includes its purchase price and any directly attributable expenditure such as legal & brokerage fees, property transfer taxes and other transaction costs).

   Subsequently an investment property should be measured at fair value at each reporting date with changes recognised in profit or loss.

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3. How should mixed use property be accounted for under FRS 102?

   Mixed use property refers to property that typically serves 2 functions- for example a shop that has an apartment overhead that is rented out could have a portion of the asset classified as property, plant and equipment (the shop) and an investment property (the apartment held for rental purposes).

   FRS 102 requires that the Investment Property & Property, Plant & Equipment portions of a mixed use property should be separated as such if these portions can be sold separately or leased separately under a finance lease. However, if the fair value of the investment property portion of a mixed use asset cannot be measured reliably then the entire property should be accounted for as property plant and equipment.

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4. Can I avoid fair valuing an investment property because I believe that the fair value of the property cannot be measured without undue cost or effort?

   No - with effect from accounting periods beginning on or after 1 January 2019, the exemption allowing an entity to treat investment properties whose fair value cannot be “measured reliably without undue cost or effort” is no longer available.

   As a result, all investment properties that are not specifically allowed an exemption from applying the provisions of Section 16 (Investment Property) must measure investment property at fair value.

   Example

   Company A is a trading company who also owns an investment property. It rents this property to another entity for €50,000 per annum. The directors feel that as the rental income is not a major part of the company’s affairs and as the cost of obtaining a valuation creates unnecessary expense on the entity they can avail of an exemption from obtaining a valuation on the grounds that it creates undue cost and effort on the company. Can the directors avail of this?

   No - the directors cannot be exempted from applying fair value on the grounds of undue cost or effort. With effect from years commencing on or after 1st January 2019, the company must carry this asset at fair value. If it has not done so then the company may have a prior year error to correct in accordance with section 10 of FRS 102.

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5. Are there any specific assets that can avail of an exemption from applying the rules of Section 16 - Investment Property?

   The following assets may be exempted from some of the rules of Section 16 of FRS 102:

   • An entity that rents an investment property to a fellow group entity has a choice to:
     • Account for the asset at fair value through profit or loss in accordance with section 16, or
     • Transfer the asset to property, plant and equipment and apply the cost model in accordance with section 17.
   • Property held primarily for the provision of social benefits (eg. Social housing) held by a public benefit entity should not be classified as investment property and should be accounted for as property, plant and equipment under section 17 of FRS 102.
   • In the case of a mixed use property (discussed above), if the fair value of the investment property component cannot be measured reliably, the entire property shall be accounted for as property, plant and equipment in accordance with Section 17.

    

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6. How do I account for an investment property that no longer meets the definition of an investment property (for example, an asset previously meeting the definition of an investment property now meets the definition of property, plant & equipment)?

   Unless required otherwise by another FRS, the entity should transfer the asset from investment property when that property first ceases to meet the definition of an investment property.

   The deemed cost of the asset transferred is the fair value at the date of change in use.

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7. An asset has previously been accounted for as property, plant and equipment but now meets the definition of an investment property. How should this be accounted for on the date of change in use?

   In accordance with Section 16.9B of FRS 102, the entity should continue to apply the requirements of Section 17 of FRS 102 up to the date of change in use (following the rules of the cost model or revaluation model). The entity should treat any difference in the carrying amount and the fair value on date of change in use as follows:

   If the change results in an increase in the carrying value of the asset the increase should be recognised in other comprehensive income and accumulated in equity. However, if the revaluation reverses a previously recognised decrease in asset value then the increase should be recognised in the profit and loss account only to the extent that it reverses the previously recognised decrease.

   If the change results in a decrease in the carrying value of the asset then the decrease should be recognised in other comprehensive income to the extent of any previously recognised revaluation increase accumulated in equity, in respect of that asset. If a revaluation decrease exceeds the accumulated revaluation gains accumulated in equity in respect of that asset, the excess should be recognised in profit or loss.

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8. What are the disclosure requirements for investment property under FRS 102?

   A company should disclose the following in accordance with section 16.10 of FRS 102:

   
   
   1. "the methods and significant assumptions applied in determining the fair value of investment property;
   2. the extent to which the fair value of investment property (as measured or disclosed in the financial statements) 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;
   3. the existence and amounts of restrictions on the realisability of investment property or the remittance of income and proceeds of disposal;
   4. contractual obligations to purchase, construct or develop investment property or for repairs, maintenance or enhancements; and
   5. a reconciliation between the carrying amounts of investment property at the beginning and end of the period, showing separately:
      • additions, disclosing separately those additions resulting from acquisitions through business combinations;
      • net gains or losses from fair value adjustments;
      • transfers to and from property, plant and equipment (see paragraphs 16.9 to 16.9B);
      • transfers to and from inventories (see paragraphs 16.9, 16.9A and 16.9C); and
      • other changes."
   This reconciliation need not be presented for prior periods.

    

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