Investment property is such asset that is acquired or constructed by the entity to earn profits instead of using the asset in the ordinary course of business.
Intentions behind such assets are different from usual asset in a way that are not used to produce goods or provide services that are actual business of the entity rather they open up an independent stream of income that mostly does not have any connection with the other activities of the business.
Investment properties are held:
- either to earn income by renting out the asset
- or selling the asset for price higher than the acquisition cost either without any value addition or after value addition i.e. renovating the asset or moving the asset to better market
- or simply to enjoy appreciation in the value of asset over a period of time which will help e.g. land bought with an intention that its value will increase in the future and thus helps strengthening capital of the entity
According to IAS 40 following are the examples of investment property:
- piece of land bought for capital appreciation i.e. with an intention that its value will increase over time rather then selling it in the ordinary course of business
- land acquired but the application of such asset is not determined and it is unclear that it will be used in the ordinary course of the business then such asset is automatically treated as investment property.
- any asset (e.g. building or machinery) that is either owned by the entity or taken under a finance lease and sub-leased under operating lease agreement
- any asset that is currently vacant or not used in ordinary course of the business and intention is to give it out under operating lease agreement
- asset constructed by the entity in-house to be used as investment property in the future
However, the following assets, though they appear to be so, are not considered investment property:
- the asset acquired, produced or constructed to be sold in short term in the ordinary course of the business. As selling such asset is the actual business of the entity therefore, it will be treated as inventory rather than an investment property e.g. vehicle acquired by the workshop to be sold after overhaul.
- asset constructed for the client e.g. building or housing scheme under construction contract
- asset leased out under finance lease agreement