Key takeaways
- TAS 40 applies to property held to earn rentals or for capital appreciation, not property held for own use or for sale in the ordinary course of business.
- An entity must choose either the cost model or the fair value model and apply it to all of its investment property, with only the exceptions specified in the standard.
- The fair value model recognises changes in value in profit or loss immediately, and deferred tax usually arises.
- A transfer into or out of investment property requires evidence of a change in use, not merely management's intention.
Introduction
Different types of property are held for different purposes, which leads to different accounting. Thai Accounting Standard 40, Investment Property, is aligned with IAS 40. The key point is the choice of subsequent measurement under the cost model or the fair value model, which produces very different pictures in the financial statements.
1. Definition
Investment property is land or a building, or part of a building, held by an entity as owner or lessee to earn rentals, for capital appreciation, or both, rather than for use in production, services or administration, or for sale in the ordinary course of business.
Examples that meet the definition
- Land held for capital appreciation
- An office building let to tenants
- A condominium bought to let
- A community mall with leased space
- A vacant building intended to be let under an operating lease
- Land with no determined future use
Examples that do not meet the definition
- A developer's housing estate land intended for sale: inventory
- An office building used by the company itself: PP&E
- A condominium built by a developer for sale: inventory
- A hotel managed by the entity itself: PP&E
2. Differences from other standards
Property held for sale in the ordinary course of business falls under TAS 2, property used by the owner falls under TAS 16, and property held for rentals or capital appreciation falls under TAS 40. A lessee's right-of-use asset starts under TFRS 16 and may fall within TAS 40 if it meets the definition of investment property.
Mixed-use buildings
If the let portion can be sold separately or leased out separately under a finance lease, account for each portion separately according to its purpose. If the portions cannot be separated, the building is investment property only if the owner-occupied portion is insignificant.
Hotel
A hotel managed by the entity itself is PP&E because it provides significant services, such as reception, housekeeping, food and spa. If the owner leases the building to another operator on a long-term basis and earns a return in the nature of a lessor, the building may be investment property. You need to look at the substance of the contract and the level of risk the owner still bears.
Buildings under construction to become investment property
Property under construction or development for future use as investment property is within the scope of TAS 40.
3. Initial measurement
Investment property is recognised at cost, which includes the purchase price and directly attributable expenditure, such as transfer fees, non-refundable taxes, design and EIA costs, and borrowing costs under TAS 23. Advertising, training and initial operating losses are not included in cost.
4. Subsequent measurement
Cost Model
Carried at cost less accumulated depreciation and impairment losses. Buildings are depreciated over their useful lives, while land is not depreciated. Fair value must be disclosed in the notes.
Fair Value Model
Carried at fair value at the end of each reporting period, with no depreciation, and changes in value are recognised in profit or loss.
A change in policy is permitted only when it results in a more appropriate presentation in the financial statements. A change from the fair value model to the cost model is hard to justify.
5. Comparing the two models
The cost model gives more stable profit or loss and costs less to prepare. The fair value model better reflects current value, but profit or loss fluctuates with the market and valuations must be carried out regularly. Many ordinary companies choose the cost model, while real estate trusts and property funds tend to use fair value because investors need NAV information.
6. Example: an office building for rent
A building is bought at the start of Year 1 for THB 200 million, split into land at THB 80 million and building at THB 120 million. The building has a 30-year life and rental income is THB 12 million a year.
Cost Model
Annual depreciation is 120 ÷ 30 = THB 4 million. The net effect on profit before other expenses is +THB 8 million a year.
| Year | Cost | Accumulated depreciation | NBV | Depreciation/year | Rent | Effect on P&L |
|---|---|---|---|---|---|---|
| Y1 | 200 | 4 | 196 | 4 | 12 | 8 |
| Y2 | 200 | 8 | 192 | 4 | 12 | 8 |
| Y3 | 200 | 12 | 188 | 4 | 12 | 8 |
| Y5 | 200 | 20 | 180 | 4 | 12 | 8 |
If the market price at the end of Year 3 is THB 250 million, the statements still show NBV of THB 188 million, but a fair value of THB 250 million must be disclosed.
Fair Value Model
| Year | Fair Value | FV Change | Rent | Total effect on P&L |
|---|---|---|---|---|
| Y1 | 215 | 15 | 12 | 27 |
| Y2 | 230 | 15 | 12 | 27 |
| Y3 | 250 | 20 | 12 | 32 |
| Y4 market decline | 220 | (30) | 12 | (18) |
Even though rent is received as normal, the statements for the year in which the market falls may show a loss of THB 18 million. Management must therefore communicate operating profit separately from changes in value.
7. Case studies
Case 1: a REIT or property fund
A fund holds 5 buildings with a total value of THB 5,000 million. Using fair value, the statements show gains or losses from changes in value, and NAV better reflects current value.
Case 2: a land bank held for appreciation
A company buys 5 rai of land for THB 100 million, waits 5 to 10 years for prices to rise, and has no plan to develop it for sale in the ordinary course of business. The land is investment property and is not depreciated.
Case 3: an owner leasing a building to a hotel operator long term
A company leases a building to a hotel operator for 20 years. From the owner's perspective it may be investment property. The lessee recognises a right-of-use (ROU) asset under TFRS 16 in its own statements. You must check whether the structure is a genuine lease or a hotel management agreement.
Case 4: buying condominium units to let
A company buys 5 condominium units at THB 5 million each, THB 25 million in total. These units are investment property. When they are to be sold, they are classified as held for sale only if they meet the conditions of TFRS 5.
Case 5: mixed-use
Floors 1 to 3, retail space let to tenants, fall under TAS 40. Floors 4 to 10, offices used by the owner, fall under TAS 16. Floors 11 to 25, condominiums for sale, fall under TAS 2. Costs must be allocated on a reasonable basis and supported by documents.
8. Reclassification
| Transfer | Examples of evidence | Measurement |
|---|---|---|
| Investment property to inventory | Start of development for sale | Under the fair value model, use fair value at the transfer day as the new cost. Under the cost model, use the carrying amount. |
| Investment property to PP&E | Start of owner occupation | Same principle as above |
| Inventory to investment property | Start of an operating lease to another party | Under the fair value model, the difference between fair value and the carrying amount goes to P&L. Under the cost model, use the carrying amount. |
| PP&E to investment property | End of owner occupation | Under the fair value model, follow the revaluation principles of TAS 16 up to the transfer day. |
If a developer completes a condominium, cannot sell it and decides to lease it long term, the decision alone is not enough. There must be an evidenced change in use, such as the start of an operating lease with another party.
9. Disposal
The gain or loss is the net proceeds received less the carrying amount. For example, with a carrying amount of THB 180 million, a sale price of THB 250 million and selling costs of THB 5 million, the net proceeds are THB 245 million and the gain is THB 65 million.
10. Tax issues in Thailand
Depreciation
Buildings have a maximum tax depreciation rate of 5% a year, while the accounts use the useful life or, under the fair value model, no depreciation. Deferred tax must therefore be considered.
Fair value gains
A gain recognised in the financial statements but not yet realised through a sale usually creates no tax liability in that year. For example, with a fair value gain of THB 30 million, a deferred tax liability (DTL) is recognised at 30 × 20% = THB 6 million. The tax base and the actual tax treatment of the item must be checked.
Tax on sale
A juristic person pays corporate income tax (CIT) at 20% on net profit under tax law. Specific Business Tax (SBT) of 3.3% is calculated on the selling price or the appraised value, whichever is higher. Companies in general pay SBT regardless of the holding period. The transfer fee is 2% at the normal rate, and temporary reduction measures have their own specific conditions.
11. A complete example: a sample REIT
| Year | Year-end fair value | FV Gain/(Loss) | Rent | Expenses | Gain/(loss) |
|---|---|---|---|---|---|
| Y1 | 1,080 | 80 | 80 | (20) | 140 |
| Y2 | 1,200 | 120 | 80 | (20) | 180 |
| Y3 | 950 | (250) | 80 | (20) | (190) |
A fluctuating NAV does not necessarily mean that cash distributions will fall by the same amount. Investors should separate accounting gains from the cash flow the fund actually receives.
12. Disclosure
An entity must disclose its measurement policy, the valuation methods and assumptions, rental income, direct operating expenses, restrictions on the assets and related obligations. Under the cost model, it must disclose fair value and a reconciliation of cost and depreciation. Under the fair value model, it must disclose a reconciliation of fair value and the information required by TFRS 13.
13. Fair value under TFRS 13
Level 1 is quoted prices in an active market for identical assets. Level 2 is other observable inputs. Level 3 is unobservable inputs, such as the assumptions in a DCF. Many properties fall into Level 3, so the cap rate, discount rate, rental growth and occupancy rate should be disclosed.
14. Who suits the fair value model
Real estate investment companies and funds whose investors want a market-based NAV may benefit from the fair value model. Companies that hold only a small amount of investment property, or that do not want volatile profits, usually choose the cost model. The choice is a trade-off between how up to date the financial statements are and how stable the figures are.
15. KPI
- Yield = annual rental income ÷ fair value
- Cap rate = NOI ÷ property value
- Occupancy Rate
- NOI Margin
- WALE (Weighted Average Lease Expiry)
The cap rate should be based on current market reports and valuations, not on a fixed figure.
16. Common mistakes
- Classifying investment property as PP&E out of habit
- Classifying a self-managed hotel as investment property
- Failing to separate classifications in mixed-use projects
- Failing to measure fair value properly under the fair value model
- Charging depreciation while using the fair value model
- Failing to disclose fair value under the cost model
- Failing to recognise deferred tax, or measuring it incorrectly, when property is transferred between classifications
17. Checklist for CFOs
- Have a classification policy covering PP&E, investment property and inventory
- Keep documents showing how costs are allocated in mixed-use projects
- Apply the measurement model consistently
- Set the valuation frequency and use suitable valuers
- Keep evidence of changes in use
- Disclose fair value even when using the cost model
- Consider deferred tax
- Monitor insurance and lease expiry dates
18. Comparing the four standards
| Standard | Applies to | Measurement |
|---|---|---|
| TAS 2 | Held for sale in the ordinary course of business | Lower of Cost or NRV |
| TAS 16 | Owner-occupied | Cost or revaluation model |
| TAS 40 | Held for rental or capital appreciation | Cost or fair value model |
| TFRS 5 | Non-current assets that meet the conditions to be classified as held for sale | Lower of carrying amount or fair value less costs to sell, with some exceptions |
Conclusion
TAS 40 depends on the purpose for which the property is held and the evidence of how it is used. The choice between the cost model and the fair value model shapes the nature of reported profit for many years. Management should decide by considering the users of the financial statements, valuation costs, deferred tax and the company's financial conditions.