Owner-occupied property are such assets that are held by the entity for use in production or provision of services in the ordinary course of business. This is exactly those assets that are discussed under IAS 16 Property Plant and Equipment. For example, building that holds production machinery and machinery itself are both owner-occupied property. However, if it is given out under an operating lease to third party then it is not an owner-occupied property rather an investment property.
Not every asset held by the entity is owner-occupied i.e. that is meant to be used by the entity itself. Assets may fall under different categories including:
- Inventory – though it is an asset but it is meant to be sold in the ordinary course of business. IAS 2 Inventories deal with such assets.
- Investment property – though it may or may not be owned by the entity but they are not used by the entity rather kept vacant mostly to get benefit of increasing price in the future or to earn rentals e.g. by giving out under operating lease to third party.
- Asset held for sale are such asset from which entity intends to recover cash flows by selling but not in ordinary course of business. IFRS 5 deals with such assets.
To learn more about classification of assets read: Assets: Types and Classifications
Under International Financial Reporting standards management of the entity is required to correctly classify the asset at the time of recognition as only correct classification will result in correct reporting in terms of measurement and presentation of the asset.
IAS 40 Investment Property owner-occupied property to be classified and measured separately from investment property. Owner-occupied property includes:
- property vacant but intended to be used in the future
- property under development that will be used subsequent to its development
- property given to/occupied by employees
- property awaiting disposal. This is different from asset held for sale on account of intentions regarding recovery of cash flows as it is/was in use and not acquired or constructed with an intention to be sold.
In some cases property is partially used by the entity and other part is held for capital appreciation or to earn rentals. If such assets can be sold or leased out separately then they should be accounted for separately. If it is not possible then property is considered investment property if insignificant portion of asset is held for business use.
Similarly if the entity offers services to lessee then significance of services will determine if it is investment property. For example entity leased out a building on which lessee runs a hotel and ask for the entity (lessor) to provide hotel management services e.g. arrange events, check-in and check-outs etc that are of significant importance to run a hotel. In such situation it is an owner-occupied property and not an investment property. However, if the services are insignificant like providing security services to hotel then it will be considered an investment property.