Key takeaways
- This article focuses on how to decide the classification; in-depth measurement is covered in the TAS 40 article.
- The first question is what the asset is held for, not whether it is a building or land.
- If it is sold in the ordinary course of business, it is inventory; if the owner uses it, it is PP&E; if it is held for rental income or capital appreciation, it is investment property.
- Leasehold must be analysed contract by contract under TFRS 16; do not draw conclusions from the name used to sell it.
Introduction
Accountants and executives often ask whether a building or land that the company holds should be PP&E under TAS 16 or investment property under TAS 40. The answer lies in the purpose for which it is held.
1. The core difference
| Issue | TAS 16 PP&E | TAS 40 Investment Property |
|---|---|---|
| Objective | Used in the entity's operations | Leased out or held for capital appreciation |
| Who uses the asset | Used by the owner | Used by tenants |
| Source of income | Used together with production or service activities | Rental income or increase in value |
2. The same building can be accounted for differently
Case 1: used as head office
A beverage manufacturer uses a 10-storey building as its head office. Its income comes from selling beverages, and the building merely supports the business, so it is PP&E under TAS 16.
Case 2: built and leased to other companies
The same company builds another building and leases it to a bank, a consulting firm and a technology company. Its income is rent, so the building is investment property under TAS 40.
Case 3: buying land to wait for the price to rise
The company buys vacant land near a special economic zone, has no development plan within five years and holds it for capital appreciation. This land is investment property.
3. Differences to watch
3.1 Measurement
Both standards allow the cost model, but the second option differs. Under the TAS 16 revaluation model, the revaluation surplus is recognised in OCI, whereas under the TAS 40 fair value model, changes in value are recognised in profit or loss immediately. Many companies therefore choose the cost model because they want to avoid volatility.
3.2 Depreciation
- TAS 16 requires depreciation, except generally on land.
- The TAS 40 cost model charges depreciation in the same way as the TAS 16 principles.
- The TAS 40 fair value model does not charge depreciation.
3.3 Disclosure
Even when using the cost model, the entity must disclose the fair value of its investment property, together with rental income, direct expenses and related obligations.
4. Decision tree
- Is it held for sale in the ordinary course of business? If yes, it is inventory under TAS 2.
- If not, is it used in the entity's own operations? If yes, it is PP&E under TAS 16.
- If it is not owner-occupied, is it held for rental or capital appreciation? If yes, it is investment property under TAS 40.
5. Classification in the sample project
A developer builds a 100-unit condominium project: 50 units sold outright and 50 units leased long-term for 30 years. It also has a sales gallery and office equipment.
| Item | Preliminary classification | Points to check |
|---|---|---|
| Freehold units under construction for sale | Inventory under TAS 2 | Recognise COGS on transfer |
| Units leased for 30 years | May be investment property, or fall under lessor classification under TFRS 16 | Read the contract and analyse whether it is a finance lease or an operating lease |
| Land for a project developed for lease | May be investment property | Must be separated from the land to be sold |
| Sales gallery that is completed and leased commercially | May be investment property | If used for the entity's own sales activities, analyse it according to the nature of the expenditure |
| Office equipment and computers used by the entity itself | PP&E under TAS 16 | Depreciate over the useful life |
Do not judge leasehold by its name: If the contract is a 30-year lease, revenue recognition depends on the classification under TFRS 16. Tax must be considered separately, and the Revenue Department has previously answered a ruling request on a 30-year land lease by saying that advance rent should be spread over the lease term. You should therefore confirm with the auditor and tax adviser before setting the policy.
Conclusion
Classification does not depend on physical characteristics but on the purpose for which the asset is held. The accounting team should consider this from the project planning stage, because the choice of standard affects depreciation, measurement, profit and disclosure.