Investment Property and IFRS for SME’s

19 Feb

Preview

Investment property plays a crucial role in financial reporting, especially for small and medium-sized enterprises (SMEs). Under the IFRS for SMEs standard, Section 16 outlines how businesses should account for investment property. Let’s break it down in simple terms, covering all key aspects and using practical examples.

What is Investment Property?

Investment property includes land or buildings that a business holds to earn rental income or for capital appreciation (increasing in value over time) rather than for use in operations or sale in the normal course of business.

Examples:

A company owns a building that it rents out to tenants. This is an investment property.
A business purchases land, expecting its value to rise before selling it. This is also investment property.
A retailer owns a warehouse used for storing its inventory. This is not an investment property because it is used in business operations.

How to Recognise Investment Property

Investment property is initially recorded at cost. This includes:

The purchase price
Directly related costs such as legal fees, brokerage fees, and property transfer taxes
If the property was self-constructed, costs are determined as per Section 17 (Property, Plant, and Equipment)

Example:

A business is buying a small commercial building for R5 000 000. It also pays R100 000 in legal fees and R50 000 in property transfer taxes. The total cost of the investment property is R5 150 000.

How to Measure Investment Property After Initial Recognition

There are two ways to measure investment property:

1. Fair Value Model (Preferred Approach)

If the fair value of the property can be measured reliably without excessive cost or effort, the business must record it at fair value at each reporting date. Any increase or decrease in fair value is recognised in profit or loss.

Example:

The company owns an office building valued at R1,000,000 last year. This year, due to high demand, its fair value increases to R1,100,000. The business records a R100,000 gain in its financial statements.

2. Cost Model (If Fair Value Cannot Be Measured Reliably)

If determining fair value is too costly or difficult, investment property is treated as property, plant, and equipment (PPE) under Section 17. This means:

The asset remains at cost
Depreciation is applied over its useful life
Impairment (loss in value) is assessed regularly

Example:

A small business owns a rural property where there is no active market for valuation. Since fair value cannot be measured reliably, the business follows the cost model, depreciating the property over its useful life.

Mixed-Use Property

If a property has both investment and operational use, it must be split into two parts:

The investment portion is classified as investment property.
The operational portion is classified as property, plant, and equipment.

If fair value for the investment portion cannot be determined separately, the entire property is accounted for under Section 17 (PPE).

Example:

A company owns a four-story building. The first two floors are rented out (investment property), while the top two floors are used as office space (PPE). The business separates the property into two parts for accounting purposes.

Accounting for Leased Investment Property

A business can classify a leased property as investment property if:

The lease is an operating lease
The business can reliably measure fair value

If these conditions are met, the property is treated as an investment property, and the lease is recorded at fair value.

Example:

A company rents a shopping mall on a long-term lease and sublets shops to smaller businesses. If fair value can be measured reliably, the leased property can be classified as investment property.

Transfers Between Categories

A property can only be reclassified when its purpose changes:

If a business starts using an investment property for its own operations, it is transferred to PPE.
If a property previously used for business operations is now rented out, it is reclassified as investment property.
If fair value can no longer be measured reliably, the property is moved to the cost model under Section 17.

Required Disclosures

Businesses must disclose key information about investment property, including:

Valuation Methods – How fair value was determined
Independent Valuation – Whether an independent expert assessed the value
Restrictions – Any legal or contractual restrictions on selling or using the property
Financial Obligations – Any outstanding obligations related to the property
Reconciliation of Values – Changes in fair value, new additions, or disposals

Conclusion

Understanding investment property under IFRS for SMEs helps businesses properly record and report property investments. The fair value model is preferred if a reliable valuation is available, while the cost model applies when valuation is difficult. Proper classification and disclosure ensure transparent financial reporting, helping stakeholders make informed decisions.

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