Inventory or investment property: classifying property

How is property classified under IFRS?

By the reason it is held, not by what it is. A developer's unsold flats are inventory; the same flats let to tenants by an investor are investment property; an office the company works from is property, plant and equipment. The classification is made for each property and drives how it is measured, how gains are reported and how a sale is presented.

Inventory or investment property: a land bank example

A property group buys a plot of land for CU 20 million. At the year end it is worth 26 million, and in year 2 the group sells it for 26 million. The table compares the land held as investment property under the fair value model with the same land held as inventory.

Total profit is the same, but as investment property it is recognised a year earlier, as a valuation gain, and the sale shows only a net gain on disposal. As inventory, nothing is recognised until the sale, which is then shown gross, as revenue and cost of sales. Classification therefore changes both the timing of profit and the size of reported revenue.

What about land with an undetermined use?

Land held for a currently undetermined future use is investment property: IAS 40 treats it as held for capital appreciation. Land bought with the intention of developing it for sale in the ordinary course of business is inventory from the start. Land banks therefore need a documented intention when they are acquired, and the classification should follow the board's plans, not the result the company would prefer.

What if part of a building is used by the owner?

If the owner-occupied part and the let part could be sold separately, or let separately under a finance lease, each is accounted for separately: one as property, plant and equipment, the other as investment property. If they could not, the whole building is investment property only if the owner-occupied part is insignificant. Where the parts cannot be sold separately, a company occupying one floor of a twenty-floor block may conclude that its use is insignificant; one occupying three floors of four cannot.

When do services make a property owner-occupied?

If the owner provides ancillary services that are insignificant to the arrangement as a whole, such as security and maintenance in an office block, the property remains investment property. If the services are significant, the owner is running a business from the property, and it is owner-occupied: a hotel that the owner manages is property, plant and equipment. Serviced offices and managed student accommodation fall in between, and the judgement and the criteria used must be disclosed.

What about property let to another group company?

A property let to a subsidiary or parent is investment property in the separate accounts of the company that owns it, if it is held to earn rent. In the consolidated accounts it is used by the group, so it is property, plant and equipment.

When can property move between categories?

Only when there is a change in use, evidenced by what the company does, not just what it intends. Examples are the start of owner occupation, from investment property to property, plant and equipment; the start of development with a view to sale, from investment property to inventory; the end of owner occupation; and the start of an operating lease to another party, from inventory to investment property. Investment property that the company decides to sell without redeveloping stays investment property until it is sold. Investment property being redeveloped for continued use as investment property also stays where it is. How each transfer is measured, and where the difference goes, is set out in property transfers.

How are sales presented differently?

Sales of inventory are revenue under IFRS 15, with the carrying amount in cost of sales. Disposals of investment property are not revenue: the gain or loss, the difference between the net proceeds and the carrying amount, is recognised in profit or loss, with the timing and amount of the consideration measured using IFRS 15 principles. Groups that sell both kinds of property should explain which sales are which. See IAS 2 inventories and IAS 16 property, plant and equipment.

How does US GAAP differ?

US GAAP has no separate investment property category outside investment companies. Real estate held for investment is carried at depreciated cost with impairment testing, and real estate developed for sale is held at cost under the real estate guidance. The classification questions still arise, but they change presentation more than measurement. See investment property: fair value or cost and real estate accounting.

This guide is general information. It is not tax or legal advice for your situation.