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IAS 40 - Accounting for telecommunication tower

Date recorded:

The Committee received a request to clarify whether a telecommunication tower should be accounted for as property, plant and equipment under IAS 16 or as an investment property under IAS 40. Paragraph 5 of IAS 40 defines investment property as follows (emphasis added):

Investment property is property (land or a building-or part of a building-or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both…

The submitter is seeking a clarification on whether the telecommunication tower should be viewed as a ‘building’ and thus ‘property’, as described in paragraph 5 of IAS 40 and how the service element in the leasing agreement and business model of the entity should be taken into consideration when analysing this issue.

The staff, in analysing the issue, considered whether the telecommunication tower is considered property, whether ancillary services are significant and whether equipment is an integral part of other investment property. As a result of their assessment, the staff believed that the telecommunication tower described in the submission should be accounted for as investment property under IAS 40. However, the staff acknowledged that there could be other instances where it is difficult to decide what types of assets and transactions should be accounted for in accordance with IAS 40. The staff believed this was the primary result of a lack of clarity in the definition of ‘investment property’ under IAS 40, which includes the terms ‘building’ and ‘property’. In order to assess whether there was significant divergent accounting practices caused by the ambiguity of the terms, the staff had commenced outreach on other types of transactions and assets which suggested that many telecommunications towers, in particular, are being treated as property, plant and equipment under IAS 16.

In analysing this issue, the Committee generally agreed that the lack of a clear definition of the term ‘property’ and ‘building’ under IFRSs could cause divergent interpretations on whether an item of property, plant and equipment qualifies as ‘property’ as used in paragraph 5 of IAS 40. The Committee Chair, referencing the definition of building in the dictionary, noted that it only says a building is something built with a roof and walls, such as a house or factory, and therefore, the telecommunications tower would not appear to fit this definition.

Given the lack of clarity regarding the definition of property and building in paragraph 5 of IAS 40, Committee members suggested a few alternatives:

  • A larger project should be undertaken to consider the definition of property and buildings.
  • Amend IFRSs to include portions of US GAAP guidance in the area of real estate accounting which may prove useful in distinguishing property and buildings from other assets.
  • Apply the literal definition of a building, which would suggest a physical structure is not a building unless it has a roof and walls. However, some Committee members expressed concerns with the implication of such a decision on practice.
  • Amend IAS 40 to say that the purpose of the physical structure (i.e., held to earn rent or to earn capital appreciation or both), rather than the nature of the asset (i.e., building) should take precedence in defining the asset as investment property. However, many Committee members were concerned that amending IAS 40 in such a way would result in far more physical structures qualifying as investment properties, and in doing so, may result in more investments being exempted from consolidation given the proposed criteria in the IASB’s active project on investment entities.

After hearing the arguments, the Committee Chair noted two paths forward: apply the literal definition of property and building or ask the staff to perform further work on IAS 40 in considering a path forward (such as considering the incorporation of some of the real estate accounting guidance in US GAAP). Mixed views were expressed by Committee members. As a result, the Committee Chair asked that the staff perform further analysis, including working with the IASB investment entities’ project team to consider the implications of amending IAS 40 on the Board’s proposed investment entities’ criteria. The Committee will consider the results of the staff’s analysis at a future meeting.

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