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IAS 40 — Can a property under construction be transferred from inventory to investment property, when there is an evident change in use?

Date recorded:

This session was devoted to discussion on a submission received by the IFRS Interpretations Committee regarding the application of paragraph 57 of IAS 40, which provides guidance on transfers to, or from, investment properties.  The Technical Manager introduced the agenda paper and asked the Committee members whether they agreed with the recommendation set out in the agenda paper to propose an amendment to IAS 40 as part of the annual improvements process.

One Committee member noted that he agreed with the substance of the proposed amendment, noting that paragraph 57 currently reads very much like a rule or set of exhaustive circumstances, and that it would be an improvement if the principle was emphasised, and accordingly, supported the staff recommendation.

One of the IASB members present noted that, although she agreed that the proposed amendment was a good idea; she had one reservation.  She noted that, as it was currently drafted, she read paragraph 57 as a closed set, and cautioned the Interpretations Committee to be careful not to imply that it was fine for the paragraph to be read more broadly if one felt it would lead to a better answer.  She noted that, as in other circumstances where the IASB had carefully drafted things to be a closed set, she didn’t want a precedent to be set that it was okay to do something general if it was thought this would result in a better outcome.  She acknowledged that the proposed amendment didn’t do this, but cautioned that anything published around the edges with respect to why the amendment was made should be carefully worded.

The Director of Implementation Activities noted that the staff had understood that there was an element of anti-abuse that had been written into these rules, which was why the staff was trying to retain the notion that there should be evidence to support the change that has occurred.

There was discussion around whether the phrase “when and only when” should be retained.  The Chairman noted that the phrase had a long history in IFRSs and was an anti-abuse phrase that meant when and only when and not any other time, and wasn’t included in IFRSs frivolously.  Accordingly, he noted that if this phrase was to be taken out, it would result in the amendment being more than an annual improvement, and noted that his preference was for it to be retained.  An IASB member present also noted her preference for the phrase to be retained.

Another Committee member questioned whether the examples were needed if the paragraph was being amended to set out the principle.  He noted that a number of questions had arisen in practice with respect to the examples, and further questioned which examples were really helpful.

The Director of Implementation Activities noted that this would be driven by how tightly the Interpretations Committee wanted this to be applied.

The Chairman noted that the question the Interpretations Committee needed to answer was whether “when and only when” applied only to a change in the use of the property, or whether it also applied to the four remaining examples.  He noted that if the phrase was all encompassing, and included the four examples, then the examples could not be taken out or diminished.  However, if the phrase applied only to the principle [there being a change in use of the property] then there was scope to play around with the examples.

The Director of Implementation Activities highlighted the fact that the staff recommendation focused on the change in use.

An IASB member present suggested that this could be articulated as when and only when there is a change in use of property that is supported by evidence that a change has occurred, and there are different ways of showing it.

A Committee member noted that the diversity in practice today resulted from a disagreement over whether “when and only when” referred to a change in use, or a change in use evidenced by [x], and accordingly, he stressed that if “when and only when” was used, the Interpretations Committee needed to be very clear whether it applied to just a change in use, or also to the types of evidence that were needed.

The Chairman proposed that the Interpretations Committee move forward on the basis that “when and only when” referred to a change in use evidenced by facts and circumstances.

All Committee members agreed with this proposal.

With respect to the staff recommendation that the Interpretations Committee should recommend that the IASB make the amendment through annual improvements, the Chairman asked the Committee members whether they believed significant diversity existed in practice on this issue, and added that, if it did, this would need to be more than an annual improvement.

A Committee member noted that in some jurisdictions, particularly in Asia, there was significant diversity in practice and in others, little diversity in practice.  He noted that diversity arose on the issue of whether “when and only when” applied to just a change in use and other evidence could be used, or whether it also referred to the four types of evidence listed in the paragraph.  Several other Committee members noted that they had also seen significant diversity in practice on this issue.

The Chairman concluded that the proposed amendment did not meet the criteria for an annual improvement, and proposed that the Interpretations Committee recommend the issue to the IASB as an amendment.

All Committee members agreed with this proposal.

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