Audit work common to all types of land and building will be required to establish ownership, existence and value.

IAS 40 requires that companies may adopt the cost based approach or the fair value policy for the treatment of investment properties.

If the cost based approach is used, the accounting treatment is as for the benchmark treatment under IAS 16 (Cost less accumulated depreciation and impairment losses) and you should be familiar with the audit procedures normally carried out.

If the fair value policy is adopted, the company is required to revalue the property each year taking gains and losses to the income statement. Fair value will normally be verifiable by reference to current prices on an active market. In the absence of an active market, the auditor may need to consider evidence of valuations from similar markets (suitably adjusted) or discounted cash flow projections. Points peculiar to investment properties for the auditor to review therefore include:

  1. Confirming that the fair value policy is appropriate (for example it is rented to a non group company)
  2. Assessing the reliability of the evidence on which fair value is based especially when no active market exists
  3. Correctness of accounting for transfers between classification to for from investment properties where (and only where) a change of use has occurred. (You should re-familiarize yourself with the accounting treatment where transfers between components are made).
  4. Completeness of disclosure requirements.

 Typical audit evidence might include:Physical inspection of the location and condition of the investment property and confirmation that it is not owner occupied.

    • Valuer’s report (whether external or internal) including the date(s) of valuation; base used (i.e. open market), assumptions made (e.g. full occupancy), etc
    • The qualifications, experience and objectivity of the valuer(s)
    • The calculations of individual gains/losses on properties disposed of.
    • Representations from/enquiries of management in respect of the treatment of investment properties
    • Review of previous information for consistency (e.g. financial statements from previous years)
    • Management’s impairment review, if any
    • The proposed note disclosure reflecting the true and fair override.

    Accounting requirements

    IAS 40 prescribes the accounting treatment for investment property and related disclosure requirements.

    Investment property is initially recognized at cost. Subsequent to initial recognition,

    investment property is carried either at:

    • Cost, less accumulated depreciation and any accumulated impairment losses, as prescribed by IAS 16 Property, Plant and Equipment, or
    • Fair value. Fair value is the price at which the property could be exchanged between knowledgeable, willing parties in an arm’s length transaction.

    Movements in fair value are recognized immediately in profit or loss.

    The measurement model is applied consistently to all investment property. However, an entity may choose either the fair value model or the cost model for investment property backing liabilities that pay a return linked directly to the fair value of specified assets including that investment property, regardless of the model chosen for all other investment property.

    Transfers to, or from, the investment property classification are made only when there is evidence of a change in use.

    The gain or loss on derecognition of an item of investment property is the difference between the net disposal proceeds, if any, and the carrying amount of the item. The gain or loss is included in profit or loss.