3.1.1 Investment property under construction

Section 16 does not explicitly address investment property under construction. However, it states that an entity should determine the cost of a self-constructed investment property in accordance with paragraphs 10 to 14 of Section 17. [FRS 102.16.5]. This implies that investment property under construction is within the scope of Section 16 and that classification as an investment property is determined at initial recognition, instead of when construction is completed. In summary, these paragraphs require cost to comprise of purchase price, costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management, the initial estimate of costs of dismantling and removing the item and restoring the site and any capitalised borrowing costs in accordance with Section 25 – Borrowing Costs.

This reference to Section 17 implies that the FRC believes that an investment property under construction should normally be recognised and measured initially at cost under Section 17 on the grounds that the fair value cannot be reliably measurable until completion. However, if the fair value can be reliably measured during construction then FRS 102 would require that investment property under construction is held at fair value. See 3.2 below for measurement of investment property at initial recognition.

3.1.2 Investment property leased to other group entities

A property leased to other group entities is within the scope of Section 16 as it meets the definition of an investment property. [FRS 102.16.1, 16.4A-4B]. This classification in the lessor's individual financial statements will apply even if the rental is not at arm's length and the individual entity is not in a position to benefit from capital appreciation, provided the definition of an investment property is met.

In consolidated financial statements transactions between group entities, including income and expenses in respect of inter-group leased property should be eliminated in accordance with Section 9 – Consolidated and Separate Financial Statements (see Chapter 8 at 3.5.1). Property owned by one group company but leased to another will be classified as PP&E (being owner-occupied) from the perspective of the group as a whole.

During the drafting of the Triennial review 2017 amendments, a significant amount of feedback from stakeholders suggested that the cost of obtaining a fair value for an investment property that is rented to another group entity far outweighs the benefit, as the information is of little use when the investment property would be treated as PP&E in the consolidated financial statements. [FRS 102.BC.B16.2]. As a result, the Triennial review 2017 amendments introduced an accounting policy choice. [FRS 102.BC.B16.3]. The amended Section 16 states that an entity that rents investment property to another group entity should account for those properties either:

1. at fair value with changes in fair value recognised in profit or loss in accordance with Section 16; or
2. by transferring them to PP&E and applying the cost model in accordance with Section 17.

The Appendix to Section 2 provides guidance on determining fair value (see 3.3.1 below). An entity choosing to apply (b) above should provide all the disclosures required by Section 17, other than those related to fair value measurement. [FRS 102.16.4A].

When only part of a property is rented to another group entity and the remainder is used for other purposes (such as being rented to an external third party or owner-occupied), the accounting policy choice described above only applies to the component of that property that is rented to another group entity. [FRS 102.16.4B].

Section 16 is not explicit whether the accounting policy choice described above can be applied on a property-by-property basis. As currently written, it appears that an entity's accounting policy choice must be applied to all of its investment properties (or part of such property) rented to another group entities.

If an entity subsequently changes its previous choice of accounting policy, this represents a change in accounting policy and should be accounted for retrospectively (see Chapter 9 at 3.4). [FRS 102.10.10, 10.12].

As discussed at 1 above, the Triennial review 2017 amendments are applied retrospectively with limited transitional provision available. In particular, when an entity first applies the Triennial review 2017 amendments, as an exception to retrospective application, an entity may elect to measure an investment property rented to another group entity, that is measured on an ongoing basis at cost less accumulated depreciation and accumulated impairment losses, at its fair value and use that fair value as its deemed cost at the date of transition for the Triennial review 2017 amendments. [FRS 102.1.19(a)].

This transitional provision allows the use of fair value at the date of transition for applying the Triennial review 2017 amendments as ‘deemed cost’, instead of restating to historical cost, for investment property rented out to other group entities which is accounted for as PP&E. The transitional provision may be applied on a property-by-property basis. This option is similar to paragraph 35.10(c) of FRS 102 which permits first-time adopters to use a fair value at the transition date as the ‘deemed cost’ of an item of PP&E, an investment property or an intangible asset (which is available on an item-by-item basis – see Chapter 32 at 5.5.1). [FRS 102 Appendix III.40B].

If an entity elects to take this transitional exemption, this asset is measured under the alternative accounting rules rather than under the historical cost accounting rules. Therefore, any upwards revaluation compared to the historical cost amounts that would have been recorded at the date of transition must be recognised in a revaluation reserve as required by the Regulations. [1 Sch 35(1)]. The additional disclosures required by paragraph 34 of Schedule 1 to the Regulations must be given. [FRS 102 Appendix III.40C]. These disclosures are discussed in Chapter 6 at 10.2.4.

Subsequently, there may be transfers of reserves to the extent the entity is realising the revaluation reserve. The alternative accounting rules allow that an amount may be transferred from the revaluation reserve to the profit and loss account, if the amount was previously charged to the profit and loss account or represents a realised profit. [1 Sch 35(3)]. Therefore, where depreciation or an impairment has been charged based on the deemed cost which exceeds the historical cost, the excess depreciation or impairment (over that which would have been charged based on historical cost) may be transferred from the revaluation reserve to retained earnings (as a reserves transfer). Similarly, on sale of the asset, the amount in the revaluation reserve, where realised on sale, could be transferred to retained earnings (as a reserves transfer in equity). See Chapter 15 at 3.6.3.A and more generally on the use of the revaluation reserve, see also Chapter 6 at 10.2.3.

Associates and joint ventures are not part of a group. Therefore, a property owned by a group but leased to an associate or a joint venture would be accounted for as investment property in the consolidated financial statements of the group (provided, of course, it meets the definition of an investment property).

3.1.3 Property with the provision of ancillary services

Section 16 provides no guidance on the impact (if any) of ancillary services on the classification of a property as an investment property where such services are provided by the owner to the user of the investment property.

However, the definition of an investment property requires that the property should be held for capital appreciation and/or rentals rather than for use in the production or supply of goods and services. Therefore, if an owner provides ancillary services to the user of the investment property, exercise of judgement will be required to determine whether or not the property is being held for capital appreciation/rentals or for the income generated by the supply of those ancillary goods and services.

It would be reasonable to consider the related guidance in IFRS. IAS 40 states that if the owner supplies ancillary services to the user of the investment property, the property will not qualify as an investment property unless these services are an insignificant component of the arrangement as a whole. For example, security and maintenance services are described as being insignificant. [IAS 40.11].

The crucial issue is the extent to which the owner retains significant exposure to the risks of running a business. IAS 40 uses the example of a hotel. An owner-managed hotel, for example, would be precluded from being an investment property as the services provided to guests are a significant component of the commercial arrangements. [IAS 40.12-13].

However, the nature of the asset in question is not the key factor; rather it is the nature of the owner's interest in the asset. If the owner's position is, in substance, that of a passive investor, any property may be treated as investment property. If, in contrast, the owner has outsourced day-to-day functions while retaining significant exposure to variation in the cash flows generated by the operations that are being executed in the building, a property should rather be treated as owner-occupied property. [IAS 40.13].

IAS 40 refers to owner-managed hotels as being precluded from being investment property. Hotel properties that are leased on arm's length terms to hotel operators may, however, fall to be accounted for as investment property. This is more likely to be the case when:

• the payments under the lease are not significantly determined by the results of the hotel operator (see 3.1.10 below), rather they reflect the general market for such properties; and
• the nature of the owner's rights in the arrangements with the operator is not divergent from those usually expected under a property lease.

IAS 40 acknowledges that this question of significance can require judgements to be made. It specifies that an entity should develop consistent criteria for use in such instances that reflect the provisions described above. [IAS 40.14]. If significant, disclosure of this judgement would be required by Section 8 – Notes to the Financial Statements. [FRS 102.8.6].

3.1.4 Land

The definition of an investment property refers to land as well as buildings. Therefore, land is investment property if it is held to earn rentals or for capital appreciation or both. This is in contrast to land that is held for sale in the ordinary course of business (typically in the shorter term) or held for the production or supply of goods and services or for administrative purposes.

A situation may arise where an entity has land but has not yet decided what this land will be used for. Section 16 is silent on this matter but IAS 40 provides guidance that if, on initial recognition, land is held for a currently undetermined future use, i.e. if an entity has not determined whether it will use the land as owner-occupied property or for sale in the ordinary course of business, it is deemed to be held for capital appreciation and must be classified as investment property. [IAS 40.8].

3.1.5 Property interests held under operating leases

Section 16 applies to property interests held by a lessee under an operating lease that are classified as investment property. [FRS 102.16.1]. A lessee in an operating lease is permitted to classify and account for its interest in the property as an investment property using Section 16 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 on an on-going basis (or prior to the Triennial review 2017 amendments, the lessee can measure the fair value of the property interest without undue cost or effort on an on-going basis – see 3.3.2 below). [FRS 102.16.3].

The Appendix to Section 2 provides guidance on determining fair value (see 3.3.1 below). This classification alternative is available on a property-by-property basis so that a lessee may decide to classify some property interests held under an operating lease as investment property and leave the others off the balance sheet. [FRS 102.16.3].

The accounting for investment properties held on operating leases is discussed at 3.2.4 below.

3.1.6 Social benefit entities

Section 16 specifically excludes properties whose main purpose is to provide social benefits, from being accounted for as investment properties. For example, social housing held by a public benefit entity (i.e. an entity whose primary objective is to provide goods or services for the general public, community or social benefit and where any equity is provided with a view to supporting the entity's primary objectives rather than with a view to providing a financial return to equity providers, shareholders or members). Such properties held primarily for the provision of social benefits are properties held to supply services, which do not meet the definition of an investment property, and therefore, are accounted for as PP&E in accordance with Section 17. [FRS 102.16.3A].

3.1.7 Properties with mixed use

A property may have mixed use and could be partly owner-occupied and partly held for rental. For example, an entity may own a building and occupy some floors for its own use but also sub-lease other floors to tenants.

As a result of the Triennial review 2017 amendments, the guidance on separating components of a mixed use property has been expanded and the use of ‘undue cost or effort’ exemption when determining fair value has been removed (see 3.3.2 below).

Section 16 now requires that mixed use property should be separated between investment property and PP&E if the resulting portions could be sold separately or leased out separately under a finance lease. [FRS 102.16.4]. In cases where the components of a mixed use property can be physically and legally separated but the fair value of the investment property component cannot be measured reliably, the entire property should be accounted for as PP&E in accordance with Section 17. The Appendix to Section 2 provides guidance on determining fair value (see 3.3.1 below). [FRS 102.16.4].

Section 16 does not provide further guidance if the components of a mixed use property cannot be physically and legally separated but the fair value of the entire property can be measured reliably. It would be reasonable to consider the related guidance in IFRS. Under IAS 40, in the event that no separation is possible, the property is an investment property only if an insignificant proportion is used for non-investment property purposes. [IAS 40.10]. The setting of a threshold to evaluate whether or not something is significant or insignificant depends on judgement and circumstances.

Criteria used in the assessments described above should be applied consistently and if significant, disclosure of these judgements would be required by Section 8. [FRS 102.8.6].

Prior to the Triennial review 2017 amendments, Section 16 required mixed use property to be separated and accounted for as investment property or PP&E, as applicable for the relevant components. However, if the entity could not reliably measure the fair value of the investment property components without undue cost or effort, then the entity would have accounted for the entire property as PP&E in accordance with Section 17. Accordingly, Section 16 required consideration only of whether the separate investment property element could be fair valued. It did not require that the property could actually be physically and legally separated between investment property and PP&E.

3.1.8 Property leased to others

Properties leased to third parties under one or more operating lease are generally investment properties, whether they are owned freehold by the reporting entity or held under a leasehold interest. Under IFRS, this will also apply if the property is currently vacant while tenants are being sought. [IAS 40.8].

However, in our view, an exception should be made in those cases where, despite being leased out, properties have been held for sale in the ordinary course of business since their initial recognition (either by acquisition or transfer – see 3.4.2 below). Leasing of property prior to sale is a common practice in the real estate industry in order to minimise cash outflows whilst the entity seeks a buyer and because prospective buyers may view the existence of such lease contracts positively, especially those that wish to acquire property for investment purposes.

In those circumstances – and notwithstanding that they are leased to tenants under operating leases – they should be accounted for as inventory under Section 13 – Inventories – as long as it remains the intention to hold such properties for short-term sale in the ordinary course of business. The rent received would be recorded in profit or loss and would not be treated as a reduction in the cost of inventory.

Property that is leased to a third party under a finance lease is not an investment property but is accounted for under Section 20 (see Chapter 18).

3.1.9 Property held or under construction for sale in the ordinary course of business

Property held, or being constructed, with the intention of sale in the ordinary course of business is not an investment property. This includes property acquired exclusively for sale in the near future or for development and resale (such property is accounted for as inventory under Section 13 (see Chapter 11)) and property being built or developed under construction contract for third parties (covered by Section 23 – Revenue (see Chapter 20).

In practice, the classification between investment property and property intended for sale in the ordinary course of business is often a difficult judgement. There is only a fine line between:

• a property held for capital appreciation, and therefore classified as investment property; and
• a property intended for sale in the ordinary course of business, which would be classified as inventory. This might be the case where, for example, the owner will undertake activities to increase the property's value prior to sale or where there is uncertainty in obtaining permits required from relevant authorities prior to commencing construction activities. In the latter case, the property, e.g. land, may continue to appreciate in value during the period where there are no development activities – see 3.2.5 below.

As set out at 3.1.8 above, the receipt of rental income from a property would not necessarily be the deciding factor. Certainly, other than for land (see 3.1.4 above), there is no deemed ‘default’ classification when the future use of a property has not yet been determined.

However, this judgement is important because whilst Section 16 allows property held as inventory to be reclassified as investment property when the property first meets the definition of investment property, it is more difficult to reclassify investment property as inventory (see 3.4.1 below). Accordingly, an entity should develop criteria so that it can exercise that judgement consistently in accordance with the definition of investment property and with the related guidance in Section 16. If significant, disclosure of this judgement would be required by Section 8. [FRS 102.8.6].

3.1.10 Property where rentals are determined by reference to the operations in the property

It may also be inappropriate to consider a property as investment property if the owner is significantly exposed to the operation of the business in the property through a linkage between the rentals charged and the performance of the business.

A common example is the incidence of turnover or profit-related rents in retail leases. If the turnover or profit-related element is a very significant proportion of total rental then consideration should be given to whether the landlord is so exposed to the performance of the underlying retail business as to make classification of the property as investment property inappropriate. This will be a matter of judgement, including the consideration of any other facts and circumstances (for example, the length of the lease to the tenant). If significant, disclosure of this judgement would be required by Section 8. [FRS 102.8.6].

3.2.1 Deferred payments

In considering the purchase price, if payment for the property is deferred beyond normal credit terms, the present value of all future payments is calculated in order to arrive at the cost. [FRS 102.16.5].

3.2.2 Exchange for monetary and/or non-monetary assets

Section 16 is silent on how to measure the cost of an investment property acquired in part or in whole in exchange for a non-monetary asset.

However, guidance is contained in Section 17 in respect of how to measure the cost of an item of PP&E in exchange for a non-monetary asset or combination of monetary and non-monetary assets. This states that the cost of acquired asset is measured at fair value unless:

• the exchange transaction lacks commercial substance; or
• the fair value of neither the asset received nor the asset given up is reliably measurable. In that case, the asset's cost is measured at the carrying amount of the asset given up. [FRS 102.17.14].

This is further discussed in Chapter 15 at 3.4.4.

3.2.3 Self-constructed property

To determine the cost of a self-constructed investment property, Section 16 refers to the guidance in paragraphs 10 to 14 of Section 17 (see Chapter 15). [FRS 102.16.5]. This means that only those costs that are allowed by Section 17 can be capitalised and that capitalisation ceases when the asset has reached the condition necessary for it to be capable of operating in the manner intended by management. Therefore, start-up costs and operating losses incurred before the investment property achieves the planned occupancy level are not to be capitalised because at the date of physical completion, the asset would be capable of operating in the manner intended by management.

In addition to the purchase price and directly attributable costs, the cost of a self-constructed investment property also comprises the initial estimate of costs (if any) of dismantling and removing the property and restoring the site on which it is located and any borrowing costs capitalised in accordance with Section 25 (see Chapter 22). [FRS 102.17.10]. Paragraphs 11 to 14 of Section 17 referred to above also provide guidance in determining which costs are not capitalisable, treatment of income and expenses of incidental operations during construction of a property, accounting for deferred payments and accounting for exchanges of assets when acquiring a property.

These are further discussed in Chapter 15 at 3.4.1 to 3.4.4.

3.2.4 Property interests held under a finance or operating lease

The initial cost of a property interest held under a lease and classified as an investment property should be as prescribed for a finance lease by paragraphs 9 and 10 of Section 20. This applies even if the property interest would otherwise be classified as an operating lease if it was within the scope of Section 20 (see 3.1.5 above).

This means that initial cost of the asset is the lower of the fair value of the property and the present value of the minimum lease payments. An equivalent amount is recognised as a liability. Any premium paid for a lease would be included in the minimum lease payments for this purpose thus forming part of the cost of the asset but are clearly excluded from the liability as it has already been paid. [FRS 102.16.6].

3.2.5 Expenditure prior to planning permissions/zoning consents

In UK, as well as in many jurisdictions, permissions from relevant authorities are required prior to development of new or existing property, and the ability to start physical construction of the development depends on these permissions.

Application for such permissions supports the entity's intention as to the use of the property and may be considered as a factor in classifying the asset. However, unless an entity is considering a number of possible uses of the asset at its initial recognition, the uncertainty in obtaining relevant permission would usually not affect the classification of the property which, as described at 3.1 above, is mainly based on the entity's intention when the property is first acquired. Subsequent to initial recognition, assets might be reclassified into and from investment property (see 3.4.2 below).

The likelihood of obtaining such permissions, however, is relevant in recognition and measurement of any additional costs to the property. Developers typically incur significant costs prior to such permissions being granted and such permissions are rarely guaranteed. Therefore, in assessing whether such pre-permission expenditure can be capitalised – assuming it otherwise meets the criteria – a judgement must be made, at the date the expenditure is incurred, of whether there is sufficient probability that the relevant permissions will be granted. Conversely, if during the application and approval process it is no longer expected that necessary permits will be granted, capitalisation of pre-permission expenditure should cease and any related amounts that were previously capitalised should be written off. Under the fair value model, it would not affect the measurement of the investment property in the statement of financial position; it would only affect presentation of write-off of expenses and fair value gains and losses in the income statement. If, however, the cost model is used due to the fact that the fair value of investment property can no longer be measured reliably (see 3.3.4 below), the carrying amount of any related property subject to development or redevelopment (or, if appropriate, the cash generating unit where such an asset belongs) should be tested for impairment, where applicable, in accordance with Section 27– Impairment of Assets (see Chapter 24).

3.2.6 Income from tenanted property during development

An issue that can arise is whether rental and similar income generated by existing tenants in a property development may be capitalised and offset against the cost of developing that property.

Section 17 requires that the income and related expenses of incidental operations are recognised in profit or loss and included in their respective classifications of income and expense (see Chapter 15 at 3.4.2). [FRS 102.17.12]. In our view there should not be a measurement difference between the cost of a property development dealt with under Section 16 and the cost of development dealt with under Section 17. We consider that rental and similar income from existing tenants are incidental operations to the development and therefore should not be capitalised against the costs of the development. Rather such rental and similar income should be recognised in profit or loss in accordance with the requirements of Section 20 (see Chapter 18), together with related expenses. For these purposes it is irrelevant whether the investment property is held at fair value, or in certain cases, at cost (see 3.3 below).

3.2.7 Payments by the vendors to the purchaser

In some instances, a transaction for the purchase of an investment property may include an additional element where the vendor repays an amount to the purchaser – perhaps described as representing a rental equivalent for a period of time.

The question then arises whether, in the accounts of the purchaser, this payment should be recorded as income (albeit perhaps recognised over a period of time) or as a deduction from the acquisition cost of the investment property on initial recognition.

In our view such amounts are an integral part of the acquisition transaction and should invariably be treated as a deduction from the acquisition cost of the investment property because the payment is an element of a transaction between a vendor and purchaser of the property, rather than a landlord and tenant. In the event that the repayments by the vendor are spread over time, the present value of those payments should be deducted from the cost of the investment property and an equivalent receivable recognised against which those payments are amortised.

3.2.8 Acquisition of investment property or business combination

The judgement required to determine whether the acquisition of investment property is an acquisition of an asset or a group of assets – or a business combination within the scope of Section 19 – Business Combinations and Goodwill – should be made with reference to Section 19 (see Chapter 17 at 3.2). This judgement will rest upon the facts and circumstances of each acquisition. If significant, disclosure of this judgement would be required by Section 8. [FRS 102.8.6].

The definition of a business is applied regardless of whether the entity purchases a property directly or, in the case of consolidated financial statements, via the shares in another entity.

3.3.1 Determining fair value

Fair value is ‘the amount for which an asset could be exchanged… between knowledgeable, willing parties in an arm's length transaction’. [FRS 102 Appendix I].

Section 16 emphasises that if a property interest held under a lease is classified as investment property, the fair value to be determined is the leasehold interest and not the underlying property. [FRS 102.16.7].

Section 16 refers to the guidance on determining fair value in the Appendix to Section 2. [FRS 102.16.7]. This provides a methodology in approaching fair value measurement whenever fair value measurement is permitted or required. See Chapter 4 at 3.13 for the detailed discussion of such guidance.

In practice, the fair value estimate arrived at under FRS 102 may be similar to that estimated for ‘market value’ as defined by the Royal Institution of Chartered Surveyors (‘RICS’) and the International Valuation Standards Council (‘IVSC’). Their definition of ‘market value’ being ‘the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm's length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.’¹

Many entities use an external valuer to estimate fair value based on the RICS and/or IVSC Valuation Standards. In practice, the use of an independent valuer with a recognised and relevant professional qualification and with recent experience in the location and category of the investment property being valued is generally preferred by many entities over valuations prepared in-house, albeit there is no requirement for an entity to use an independent valuer in determining the fair value of investment property. However, if there has been no such independent valuation, this must be disclosed (see 3.6.1 below). [FRS 102.16.10(b)].

3.3.2 Undue cost or effort

Prior to the Triennial review 2017 amendments, Section 16 required only investment property that could be measured at fair value without undue cost or effort to be measured at fair value; any that could not were accounted for as PP&E using the cost model in Section 17. [FRS 102.BC.B16.1]. However, FRS 102 did not define ‘undue cost or effort’.

The FRC observed implementation issues when applying the concept of ‘undue cost or effort’. It was noted that entities needed to apply judgement in determining whether an exemption was available in their circumstances, which led to the exemptions being applied inconsistently in similar circumstances and therefore different costs being incurred in the preparation of financial statements. It was noted that not all entities were applying sufficient rigour in assessing the availability of the undue cost or effort exemptions; it is not an accounting policy choice. In response to these issues, the undue cost or effort exemptions that existed in FRS 102 were removed. [FRS 102.BC.A47-48].

The FRC particularly noted that in the UK, entities should generally be able to obtain a fair value for an investment property, without undue cost or effort, which would provide useful, decision-relevant information to users of the financial statements. Therefore as part of the Triennial review 2017, and in line with the response to implementation issues described above, the undue cost or effort exemption in relation to investment property was removed. [FRS 102.BC.B16.1].

3.3.3 Double-counting of assets and liabilities

Section 16 does not address the potential for double-counting assets and liabilities that are recorded separately in the balance sheet, but also included within a valuation of an investment property. Common examples include air-conditioning, lifts and fixtures and fittings, all of which may be recorded separately on the balance sheet as tangible fixed assets and also included within a valuation obtained for a furnished investment property.

An entity would need to consider the specific inputs included in the investment property valuation to assess whether it includes assets and liabilities which are also recognised separately on the balance sheet. If so, an adjustment is required to avoid double-counting these assets or liabilities.

When an entity separately recognises prepaid or accrued operating lease income and lease incentives in the balance sheet, the investment property valuation may also include such items. If so, an adjustment is required to avoid double-counting the asset or liability.

If a property valuation of investment property held under a lease is obtained net of the valuer's estimate of the present value of the future lease obligations, (which is usually the case), an amount should be added back by adjusting for the finance lease obligation recognised in the financial statements, to arrive at the fair value of the investment property for the purposes of the financial statements, since the lease obligation is already recognised in the balance sheet.

In our view, an adjustment will always be required to avoid double-counting assets or liabilities.

3.3.4 Inability to determine fair value of investment property

Prior to the Triennial review 2017, paragraph 8 of Section 16 stated that if a reliable measure of fair value was no longer available without undue cost or effort for an item of investment property measured using the fair value model, the entity should have thereafter accounted for that item as PP&E in accordance with Section 17 until a reliable measure of fair value became available. The carrying amount of the investment property on that date became its cost under Section 17. The related amount of this change was required to be disclosed as part of the reconciliation between the carrying amounts of investment property at the beginning and end of the period. It was considered a change of circumstances and not a change in accounting policy.

Paragraph 9 of Section 16 also stated that other than the requirement described above, an entity would transfer a property to, or from, investment property only when the property first meets, or ceases to meet, the definition of investment property.

The Triennial review 2017 amendments resulted in deletion of paragraph 8 of Section 16 as described above and paragraph 9 of Section 16 was clarified that unless otherwise required by FRS 102, an entity would transfer a property to, or from, investment property only when the property first meets, or ceases to meet, the definition of investment property (see 3.4 below).

Consequently, an investment property whose fair value can no longer be measured reliably should still be classified as investment property, instead of transferring and accounting for it as PP&E. However, following the guidance on determining fair value in the Appendix to Section 2, if a reliable measure of fair value is no longer available for an investment property measured at fair value, its carrying amount at the last date the investment property was reliably measurable becomes its new ‘cost’. The entity should measure the investment property at this ‘cost’ less impairment (if any), until a reliable measure of fair value becomes available (see Chapter 4 at 3.13.5). [FRS 102.2A.6, BC.B16.4].

The FRC particularly noted that in the UK, entities should generally be able to obtain a fair value for an investment property, which would provide useful, decision-relevant information to users of the financial statements. [FRS 102.BC.B16.1]. Further, the FRC noted that prior to the introduction of FRS 102, investment properties were required to be measured at open market value. [FRS 102.BC.B16.4]. Therefore, it appears reasonable to expect that in practice, the inability to determine fair value of investment property would occur only in exceptional cases.

The accounting consequences when the fair value cannot be measured reliably for investment property under construction and mixed use property are discussed at 3.1.1 and 3.1.7 above, respectively.

3.4.1 Transfers from investment property to inventory

Transfers to inventory are more difficult to deal with by way of the application of a general principle since it is a common practice in the real estate industry to hold investment properties as assets ‘available’ for sale. This is especially the case when an entity believes it is economical to sell the assets before they reach their peak of capital growth, or when recycling of equity (selling owned property to buy new property) presents more opportunities for capital appreciation, or in situations where an entity urgently needing cash for operations wants to release money tied up in real estate properties. FRS 102 does not provide further guidance on this therefore, it would be reasonable to consider the related guidance in IFRS.

Under IFRS, unless there is development with a view to sale, it may not be possible to reclassify investment property as inventory even if the entity holding that property changes its intentions and is no longer holding that property for rental or capital appreciation. Accordingly, when an entity decides to dispose of an investment property without development, it should continue to classify the property as an investment property until it is derecognised (see 3.5 below) and should not reclassify it as inventory. Similarly, if an entity begins to redevelop an existing investment property for continued future use as investment property, the property remains an investment property and is not reclassified as owner-occupied property during the redevelopment. [IAS 40.58].

3.4.2 Accounting treatment of transfers

The Triennial review 2017 amendments added further guidance in accounting for transfers of investment property.

3.6.1 Disclosures required by Section 16

The following disclosures are required:

• the methods and significant assumptions applied in determining the fair value;
• the extent to which the fair value (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 should be disclosed (e.g. a statement that the fair value of investment property is based on internal appraisals rather than on a valuation by an independent valuer as described above);
• the existence and amounts of any restrictions on the realisability of investment property or the remittance of income and proceeds of disposal;
• contractual obligations to purchase, construct or develop investment property or for repairs, maintenance or enhancements; and
• a reconciliation between the carrying amounts of investment property at the beginning and end of the period; showing separately:
  • additions, disclosing separately additions resulting from acquisitions through business combinations;
  • net gains and losses arising from fair value adjustments;
  • transfers to and from PP&E – see 3.4 above (or prior to the Triennial review 2017 amendments, transfers to PP&E when fair value can no longer be measured reliably without undue cost or effort – see 3.3.2 above);
  • transfers to and from inventories – see 3.4 above (or prior to the Triennial review 2017 amendments, transfers to and from inventories and owner-occupied property); and
  • other changes (e.g. disposals).

  The reconciliation need not be presented for prior periods. [FRS 102.16.10].

All relevant disclosures required for leases which a reporting entity has entered into must be disclosed in accordance with Section 20 (see Chapter 18). [FRS 102.16.11].

Prior to the Triennial review 2017 amendments, all of the above disclosures were required explicitly only for all investment property accounted for at fair value through profit or loss.

As a consequence of the Triennial review 2017, such explicit reference to ‘all investment property accounted for at fair value through profit or loss’ was deleted. This may mean that the above disclosures are also applicable to investment properties whose fair value can no longer be measured reliably. Such properties are still classified as investment property but are measured at cost amount less impairment, if any, until a reliable measure of fair value becomes available (see 3.3.4 above). [FRS 102.2A.6]. However, it is reasonable to expect that only those disclosures that are considered relevant to such properties would be provided. For example, the first two bullet points above might not be relevant.

Entities might also need to consider providing further information about such properties whose fair value can no longer be measured reliably and may consider the disclosures required by IAS 40 such as:

• the reconciliation described above could disclose the amounts for such investment property held at cost separately from amounts relating to other investment property held at fair value;
• a description of such investment property;
• an explanation of why fair value cannot be measured reliably;
• if possible, the range of estimates within which fair value is highly likely to lie; and
• on disposal of investment property not carried at fair value:
  • the fact that the entity has disposed of investment property not carried at fair value;
  • the carrying amount of that investment property at the time of sale; and
  • the amount of gain or loss recognised. [IAS 40.78].

The reconciliation described above may also need to show impairment losses and reversals of impairment losses, together with corresponding accumulated opening and ending balances.

Section 27 requires disclosure of impairment losses and reversals of impairment losses including the line item(s) in the statement of comprehensive income (or the income statement, if presented) in which those impairment losses are included or reversed. It also requires an entity to disclose a description of the events and circumstances that led to the recognition or reversal of the impairment loss (see Chapter 24 at 8).

The disclosure requirements for investment properties carried at cost (e.g. investment property rented to another group entity measured under the cost model and mixed use property but the fair value of the investment property component cannot be measured reliably – see 3.1.2 and 3.1.7 above, respectively) are set out in Section 17 (see Chapter 15 at 3.9).

3.6.2 Additional disclosures required by the Regulations

The following disclosures are required by the Regulations for investment properties measured at fair value through profit or loss in addition to those required by Section 16:

• the fair value and the changes in value included in the profit and loss account; [1 Sch 55, 2 Sch 66, 3 Sch 73]
• the balance sheet items affected and the basis of valuation adopted in determining the amounts of the assets; [1 Sch 58, 2 Sch 69, 3 Sch 76]
• the comparable amounts determined under the historical accounting rules (aggregate cost and cumulative depreciation) or the differences between the fair value and historical cost, had the asset always been recorded at historical cost; [1 Sch 58, 2 Sch 69, 3 Sch 76] and
• an analysis of land and buildings between freehold tenure and leasehold tenure splitting the land held on leasehold tenure between land held on long lease (50 years or more) and short lease. [1 Sch 53, 2 Sch 64, 3 Sch 71, 10 Sch 7].