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Section 16 – Investment property
Section 16 deals with any property that meets the definition of investment property. It details the required accounting for investment property initially, subsequently and what happens when the investment property cannot be reliably measured. Property held primarily for the provision of social benefits even where they meet the definition (e.g. social housing held by a public benefit entity) are scoped out of Section 16 and instead accounted for under Section 17 PPE.
Definition of investment property
Extract from FRS 102 Section 16.2
16.2 Investment property is 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:
(a) use in the production or supply of goods or services or for administrative purposes; or
(b) sale in the ordinary course of business.
OmniPro comment
Once an entity meets the definition included in Section 16.2 above, the entity is required to measure the property in line with Section 16. Note property includes land. The entity does not have a choice, unless it could argue that preparing a valuation results in undue cost and effort. However, where an entity has valued the property under old GAAP it will be difficult to argue that it would result in undue cost or effort.
The key point to consider when determining whether a property should be classified as investment property is the entity’s intention with regard to the use of the property. Where an entity has not determined what they will use the property for, it would indicate that it should be accounted for as an investment property as they are willing to hold on to it in the meantime which in itself suggests they are holding it for capital appreciation. The only exception to this would be where the company itself is engaged in the business of developing property for onward sale. In that situation it would be classified as inventory.
The standard does not deal specifically with how the provision of ancillary services would affect whether a property is classified as investment property. IAS 40 (IFRS) deals with such services. Where ancillary services provided to a property are significant then the property cannot be classified as investment property. For example if an entity that owns an office building that it rents out and as part of this provides maintenance and security services to the tenants, this would be seen as an insignificant services. However, if the entity also provides broadband, housekeeping and other services then this may suggest that the entity is actually engaged in a trade of providing these services and are therefore not insignificant so as a result it should be classified as property, plant and equipment.
The costs to be included in investment property and included in the fair value calculation, are the other assets such as lifts, air conditioning, built in furniture, they should not be accounted separately as property, plant and equipment.
Operating lease classified as investment property
Extract from FRS 102 Section 16.3
16.3 A property interest that is held by a lessee under an operating lease may be classified and accounted for as investment property using this section if, and only if, the property would otherwise meet the definition of an investment property and the lessee can measure the fair value of the property interest without undue cost or effort on an on-going basis. This classification alternative is available on a property-by-property basis.
OmniPro comment
Where an entity leases a property on an operating lease who then sublease this to another tenant and thereby meets the definition of an investment property, it then has to be accounted for as an investment property unless it incurs undue cost and effort in fair valuing the property. The classification can be carried out on property by property basis for each operating lease.
Mixed use property or property lease to other group companies classified as investment property
Extract from FRS 102 Section 16.4
16.4 Mixed use property shall be separated between investment property and property, plant and equipment. However, if the fair value of the investment property component cannot be measured reliably without undue cost or effort, the entire property shall be accounted for as property, plant and equipment in accordance with Section 17.
OmniPro comment
Where an entity uses a property for its own use and has excess space which it rents out (e.g. the first floor of a property is used for business purposes and the second floor is rented to a third party or a group company), it is possible to allocate the portion of the space rented to investment property if that portion can be valued reliably. Where it can be valued reliably and there is no argument to support the undue cost or effort principal it must be accounted for as an investment property.
Where the portion of the property used for own use as compared to the total size of the property is insignificant then it may be possible to value the whole property as investment property. This will require judgement on a case by case basis.
Section 16, does not exclude property rented to other group companies for coming within the scope of Section 16. Therefore where it is held for capital appreciation or earns rental income, it comes within the definition of investment property and therefore will need to be accounted for as such assuming it can be measured without undue cost or effort. It may be possible to classify this as investment property even where no rent is charged as it is held for capital appreciation.
Self-constructed investment property is not dealt with specifically in Section 16 however it does stated that the initial cost should be dealt with in line with Section 17-PPE. However, this does not preclude self-constructed assets from being classed as investment property where they meet the definition of investment property and it can be reliably measured without undue cost or effort.
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