NZ IFRS guidance
Under NZ IFRS, accounting for investment property is undertaken in accordance with the requirements of NZ IAS 40: Investment Property.
Paragraph 5 of NZ IAS 40 defines investment property as property (land or a building or part of a building) that is held to earn rentals or for capital appreciation or both, rather than for use in the production or supply of goods or services or for administrative purposes or sale in the ordinary course of business. If floors of a building are leased to other parties, those floors may be classified as investment property if they could be sold separately (or leased out separately under a finance lease).
Paragraph 7 states that "an investment property generates cash flows largely independently of the other assets held by an entity", which distinguishes it from owner-occupied property, which "generates cash flows that are attributable not only to property, but also to other assets used in the production or supply process". Thus, where an entity provides ancillary services to the occupants of a property it holds, the significance to the overall transaction of the services being provided will in part determine the appropriate accounting treatment.
Paragraph 8 lists examples of investment property:
- land held for long-term capital appreciation rather than for short-term sale in the ordinary course of business;
- land held for a currently undetermined future use (if an entity has not determined that it will use the land as owner-occupied property or for short-term sale in the ordinary course of business, the land is regarded as held for capital appreciation);
- a building owned by the entity (or held by the entity under a finance lease) and leased out under one or more operating leases;
- a building that is vacant but is held to be leased out under one or more operating leases.
Paragraph 9 lists examples of items that are not investment property - these include property held for future use as owner-occupied property and property held for future development and subsequent use as owner-occupied property, which should be accounted for in accordance with the requirements of NZ IAS 16: Property, Plant and Equipment.
Paragraph 14 notes that judgement is needed to determine whether a property qualifies as investment property and that an entity should develop criteria so that it can exercise that judgement consistently in accordance with the definition of investment property. The entity is required to disclose these criteria in the financial statements.
Policy
The classification of property is a matter of professional judgement that requires analysis of the substance of the circumstances surrounding its occupation.
The classification of property is done at the lowest possible level subject to materiality. Thus, where part of a building is occupied by other than the owners, consideration must be given as to whether that portion of the building could be classified as an investment property.
Where property is unoccupied consideration should be given to the intended future use of such property. If the owner intends to occupy the property in the future, classification as owner occupied property is indicated. Where the property is held for long-term capital appreciation, to be leased out, or for an unspecified use, investment property is indicated. In some limited circumstances consideration of the intended future use of a property may be required even if the property is occupied (for example if there is a clear future use for the property and it is being partially occupied for a short term prior to being used for its intended purpose).
Where property or a section of a property is occupied by other than its owner, the matters that require consideration in determining whether that item of property should be classified as investment property or as property, plant and equipment are:
- Whether the property or a section of a property is leased to the occupants under an operating lease. Such an arrangement would indicate that the property/section of the property was an investment property. Consideration should be given to whether the property or the section of a property could be separately sold or leased as a finance lease. If it could be, an investment property would be indicated. If the section of the property occupied by other than the owner, is unable to be sold or leased separately from the rest of the property, the property must be considered as a whole and will usually only be classified as investment property if the owner occupies an insignificant portion of the total property.
- In some limited circumstances, consideration of the intended future use of a property may be required even if the property is occupied. For example, if there is a clear future use for the property and it is being partially occupied for a short term prior to being used for its intended purpose.
- Whether the occupants of the property or a section of a property use additional services, including access to assets of the property's owner. If they do, owner occupied property is indicated if the services are integral to the reason that the occupier is using the property.
- Whether the occupants provide services that are integral to the operation of the owner's business and/or these services could not be provided effectively and efficiently by the lessee in another location.
If either of these circumstances applies, owner occupied property is indicated including the situations where the requirement for such services to be provided in that location is integral to the reason for the owner allowing the occupier to occupy the property.
- Whether property of a similar nature has been sold, or leased to another party under a finance lease. For example, continued classification of property as owner occupied on the basis that the occupants provide services that are essential to the operation of the owner's business may be questioned if the entity sells similar property previously classified as owner occupied on the same basis. This may indicate that the entity holds such property for investment purposes.
- Where the owner of the property is a public benefit entity, property held to meet service delivery objectives, rather than to earn rentals or for capital appreciation, is classified as 'owner occupied property'. Evidence of the existence of such objectives, for example in strategic plans, and of how a property meets such objectives will be required in such circumstances.
The matters outlined above should be examined in total, with a final opinion to be based on an examination of all relevant factors. The decision chart in Appendix 1 provides a structured approach that will assist the consideration of these factors.
This policy will need to be summarised for disclosure purposes in the financial statements as follows:
'The classification of property is a matter of professional judgement that requires analysis of the substance of the circumstances surrounding its occupation. The decision as to whether a property or part of a property is classified as 'Investment Property' is based on the criteria in NZ IAS 40, Investment Property and recognising the following:
Properties leased to third parties under operating leases will generally be classified as 'Investment Property' unless:
- The occupants provide services that are integral to the operation of the owner's business and/or these services could not be provided efficiently and effectively by the lessee in another location.
- The owner of the property is a public benefit entity, and the property is held to meet service delivery objectives, rather than to earn rentals or for capital appreciation.
- The property is being held for future delivery of services.
- If the lessor uses services of the owner and those services are integral to the reasons for their occupancy of the property.
Appendices [PDF 200KB]
Approved by Audit and Risk Management Subcommittee (delegated decision), 5 December 2005
