International Accounting Standard 40 (IAS 40) defines investment property as the “property (land or a building — or part of a building — or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for:
a) use in the production or supply of goods or services or for administrative purposes; or
b) sale in the ordinary course of business”.
Investment property is held to earn rentals or to gain from capital appreciation from the changes in the value of the property or for both of these purposes. Investment property, as opposed to owner occupied property, is not for use or sale in the ordinary course of business.
An important distinguishing characteristic of investment property is that it generates cash flows which are significantly independent from other assets held by an entity. This factor distinguishes investment property from owner occupied property. Because the usage of property in the production or supply of goods generates cash flows which are attributable to the property as well as other assets used in the process of production or supply of goods.
Property held by a lessee under an operating lease can also be classified as investment property (it is optional). It can be classified investment property if it meets the above definition of investment property.
The following are some of the examples of investment property:
· land held for long-term capital appreciation
· a building leased out under one or more operating leases
· a building that is currently vacant but is held to be leased out under one or more operating leases
Another important of example of investment property is land held for a currently undetermined future use. If an entity has not decided whether 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 investment property.
It should be noted that the property that is being constructed or developed for future use as investment property will not be treated as investment property. Such a property will be classified as investment property only when the construction or development completes.