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IAS 40 — Accounting for a structure that appears to lack the physical characteristics of a building

Date recorded:

At its September 2012 meeting, the Committee considered a request to clarify whether telecommunication towers in a jurisdiction should be accounted for as property, plant and equipment or as investment property. The request included a specific fact pattern where an entity owns telecommunication towers and receives rent revenue in exchange for leasing spaces in the towers to telecommunication operators to which they attach their own devices. The entity provides certain basic services to the telecommunication operators such as maintenance services.

At that meeting, the Committee considered whether the telecommunication tower should be viewed as a ‘building’, and thus, ‘property’, as described in paragraph 5 of IAS 40 Investment Property, and whether ancillary services provided by the entity are significant to the arrangement as a whole.

The Committee observed that the tower in the submission has some of the characteristics of investment property given that spaces in the tower are let to tenants to earn rentals. However, the Committee questioned whether the tower qualified as a ‘building’ given its lack of features typically associated with a building such as walls, floors and a roof.

On the basis of the discussions above, and acknowledging that similar questions could arise across other structures including gas storage tanks and advertising billboards, the Committee requested the staff to analyse this issue further and to consider whether amendments to the scope of IAS 40 could or should be made.

At this meeting, the staff presented a summary of its outreach of national standard-setters and regulators, which revealed a lack of diversity in practice (where all respondents who had similar transactions in their jurisdiction had accounted for the telecommunications tower as property, plant and equipment in accordance with IAS 16 Property, Plant and Equipment). The staff also outlined the interrelationship of this issue with some of the IASB’s other projects including investment entities and leasing. In particular, the staff noted that the IASB will be discussing the definition of property in the context of the leasing proposals at the January 2013 IASB meeting. Following this feedback, the staff recommended that the Committee should propose to the IASB an amendment to IAS 40 in order to accommodate the emerging business models that employ investment property activities with assets that have not been traditionally viewed as property. The staff highlighted two proposed alternatives for amending IAS 40:

  • Approach A — Amend the definition of 'property' to include any property improvements and equipment if they form part of an integrated group of assets that include land or a building, or both (i.e., amend the definition of ‘investment property’ in paragraph 5 of IAS 40 using the notion of an ‘integrated group of assets’ as currently partly used in paragraph 50 of IAS 40).
  • Approach B — Amend the definition of ‘investment property’ by clarifying the term ‘building’ using the ‘land element’ notion whereby any physical structure or equipment would be classified as investment property if any expected cash flows from rentals or capital appreciation incorporate a land element.

Multiple Committee members believed that the Committee should defer discussing this issue until either the IASB completes its deliberations on the definition of property in the context of the leasing proposals or it is determined that significant diversity exists in practice. However, some preferred that the Committee proactively address this issue given that it is a developing business model which may grow in prevalence in the future.

Those Committee members who preferred to proactively address the issue had difficulties reaching a preferred solution in which to do so. In particular, one Committee member expressed concern that the staff’s proposals may significantly increase the population of assets considered to be investment property. Another Committee member expressed concern with relying on the proposals from the leasing project when he saw inconsistencies between those proposals and IAS 40 in defining property. Specifically, he noted that the focus of IAS 40 is the asset’s characteristic that it generates cash flow largely independently of the other assets. Conversely, the current proposal in the leasing project for classifying leases (which has a rebuttable presumption based on asset type, e.g., property versus non-property) is based on a principle of consumption (although acknowledging the interplay between a lessor’s generation of income and lessee’s consumption of the right-of-use asset in the leasing proposals).

The Committee Chair, in summarising the discussion, saw no appetite for advancing the issue at this meeting. Instead, he recommended that the Committee defer further discussion pending the IASB’s discussion of ‘what is property’ as part of the leasing project. He also asked that the staff raise with the IASB the Committee’s concerns over differing principles between IAS 40 and the leasing project in defining property.

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