CAF-1 · Chapter 4

IAS 40 Investment Property MCQs with Answers

15 multiple-choice questions on IAS 40 Investment Property for CAF-1 Financial Accounting and Reporting. Try each one before revealing the answer and explanation.

1. Question 1

   Which of the following properties owned by a company would be classified as an investment property under IAS 40?

   • A) A property occupied by an employee paying market rent.
   • B) A building held for long-term capital appreciation rather than short-term sale.
   • C) A factory used for the production of the company's main product line.
   • D) Land held for future development as an owner-occupied administrative headquarters.
   Show answer & explanation

   Answer: B) A building held for long-term capital appreciation rather than short-term sale.

   Investment property is held to earn rentals, for capital appreciation, or both. Owner-occupied properties (including employee-occupied and future headquarters) are classified as PPE under IAS 16.

2. Question 2

   Sigma Real Estate uses the fair value model for its investment properties. At year-end, the fair value of its commercial plaza increased by Rs. 8 million. How should this increase be treated in the financial statements?

   • A) Recognized in Other Comprehensive Income (OCI) and accumulated in equity.
   • B) Ignored, as unrealized gains are not recognized until the property is sold.
   • C) Recognized as a gain in the statement of profit or loss for the period.
   • D) Deducted from the carrying amount of the property.
   Show answer & explanation

   Answer: C) Recognized as a gain in the statement of profit or loss for the period.

   Unlike IAS 16 where revaluation gains go to OCI, under the IAS 40 Fair Value Model, any gain or loss arising from a change in the fair value of an investment property is recognized directly in profit or loss for the period in which it arises.

3. Question 3

   An entity owns a multi-story building. It occupies 5% of the space for its own administrative offices and leases out the remaining 95% to independent tenants. The portions cannot be sold separately. How should the building be classified?

   • A) The entire building must be classified as Property, Plant and Equipment (IAS 16).
   • B) The entire building must be classified as Investment Property (IAS 40).
   • C) 5% as Property, Plant and Equipment and 95% as Investment Property.
   • D) It must be classified as Inventory (IAS 2).
   Show answer & explanation

   Answer: B) The entire building must be classified as Investment Property (IAS 40).

   If portions cannot be sold separately, the property is investment property only if an insignificant portion is held for use in the production/supply of goods or administrative purposes. Since 5% is insignificant, the whole building falls under IAS 40.

4. Question 4

   Which of the following properties is classified as an investment property under IAS 40?

   • A) A property being constructed on behalf of a third party.
   • B) Land held for undetermined future use.
   • C) A building occupied by the entity's administrative staff.
   • D) Property held for sale in the ordinary course of business.
   Show answer & explanation

   Answer: B) Land held for undetermined future use.

   Land held for an undetermined future use is classified as investment property because it is regarded as held for capital appreciation.

5. Question 5

   If a company owns a building and leases it out to an independent third party under an operating lease, how is it classified?

   • A) As inventory.
   • B) As property, plant, and equipment.
   • C) As investment property.
   • D) As an intangible asset.
   Show answer & explanation

   Answer: C) As investment property.

   A building owned by the entity and leased out under one or more operating leases is a classic example of investment property.

6. Question 6

   How should an entity account for a property that has both an investment property portion and an owner-occupied portion, if the portions can be sold separately?

   • A) Classify the entire property as investment property.
   • B) Classify the entire property as PPE.
   • C) Account for the portions separately.
   • D) Classify it based on whichever portion generates more revenue.
   Show answer & explanation

   Answer: C) Account for the portions separately.

   If portions of a property can be sold separately, an entity accounts for the investment and owner-occupied portions separately.

7. Question 7

   Under IAS 40, which of the following of the following costs should NOT be included in the initial cost of an investment property?

   • A) Professional fees for legal services.
   • B) Property transfer taxes.
   • C) Start-up costs, unless necessary to bring the property to a working condition.
   • D) The purchase price of the property.
   Show answer & explanation

   Answer: C) Start-up costs, unless necessary to bring the property to a working condition.

   Start-up costs are excluded from the initial cost unless they are necessary to bring the property to the condition intended by management.

8. Question 8

   Under the fair value model for investment property, how are changes in fair value treated?

   • A) Recognized in other comprehensive income.
   • B) Recognized in profit or loss for the period in which they arise.
   • C) Credited directly to retained earnings.
   • D) Ignored until the property is sold.
   Show answer & explanation

   Answer: B) Recognized in profit or loss for the period in which they arise.

   Any gain or loss arising from a change in the fair value of an investment property is recognized directly in profit or loss for the period.

9. Question 9

   If an entity chooses the cost model for its investment properties, what must it still disclose?

   • A) The fair value of the investment properties.
   • B) The replacement cost of the properties.
   • C) The net realizable value of the properties.
   • D) Nothing extra is required.
   Show answer & explanation

   Answer: A) The fair value of the investment properties.

   IAS 40 requires all entities using the cost model to still measure and disclose the fair value of their investment properties in the notes.

10. Question 10

    When an entity transfers an investment property carried at fair value to owner-occupied property (PPE), what is the deemed cost for subsequent accounting?

    • A) The original historical cost.
    • B) The net book value before transfer.
    • C) The fair value at the date of change in use.
    • D) The estimated future sale price.
    Show answer & explanation

    Answer: C) The fair value at the date of change in use.

    For transfers from investment property at fair value to owner-occupied property, the fair value at the date of change in use becomes the deemed cost.

11. Question 11

    An entity transfers an owner-occupied property to investment property to be carried at fair value. At the transfer date, the fair value exceeds the carrying amount. How is this difference treated?

    • A) Recognized as a gain in profit or loss.
    • B) Treated as a revaluation surplus under IAS 16 in other comprehensive income.
    • C) Ignored.
    • D) Deducted from the new carrying amount.
    Show answer & explanation

    Answer: B) Treated as a revaluation surplus under IAS 16 in other comprehensive income.

    The entity applies the IAS 16 revaluation model up to the transfer date, so the difference is treated as a revaluation surplus in OCI.

12. Question 12

    When an investment property is disposed of, the gain or loss is calculated as the difference between:

    • A) Gross proceeds and fair value.
    • B) Net disposal proceeds and the carrying amount.
    • C) Gross proceeds and historical cost.
    • D) Net disposal proceeds and the original purchase price.
    Show answer & explanation

    Answer: B) Net disposal proceeds and the carrying amount.

    Gains or losses from disposal are determined as the difference between the net disposal proceeds and the carrying amount of the asset.

13. Question 13

    A property is leased to a subsidiary within the same group. In the consolidated financial statements, how is this property classified?

    • A) As investment property.
    • B) As owner-occupied property.
    • C) As inventory.
    • D) As an intangible asset.
    Show answer & explanation

    Answer: B) As owner-occupied property.

    From the perspective of the group as a whole, the property is owner-occupied and classified as PPE in the consolidated financial statements.

14. Question 14

    If an entity uses the fair value model but cannot reliably determine the fair value of an under-construction investment property, what should it do?

    • A) Measure the property at cost until its fair value can be reliably measured or construction is complete.
    • B) Expense the entire cost immediately.
    • C) Estimate a fair value regardless of reliability.
    • D) Transfer it to inventory.
    Show answer & explanation

    Answer: A) Measure the property at cost until its fair value can be reliably measured or construction is complete.

    If fair value cannot be reliably measured for an under-construction property, it must be measured at cost under IAS 16 until the fair value becomes reliable or construction completes.

15. Question 15

    Which of the following is a general disclosure requirement for all investment properties under IAS 40?

    • A) The names of all current tenants.
    • B) Whether the entity applies the fair value model or the cost model.
    • C) The exact future maintenance schedule.
    • D) The original construction blueprints.
    Show answer & explanation

    Answer: B) Whether the entity applies the fair value model or the cost model.

    An entity must disclose whether it applies the fair value model or the cost model as its accounting policy for investment properties.