Tangible assets are typically a significant part of the balance sheet, so reclassifying them is often delicate work—made all the more so by the huge financial statement errors that doing it wrongly can cause.

On 14 March 2018, the European Commission endorsed amendments, bundled in a document called the Transfers of Investment Property, to IAS 40 Investment Property. The amendments, published by the International Accounting Standards Board (IASB), aim to clarify whether paragraph 57 of IAS 40 allows a property under construction to be reclassified as investment property (instead of an inventory property) when there is an evident plan to change its use.

The mention of intention

At the heart of the issue is the question of whether it can be considered a "change in use" if a company merely intends to develop land that it has bought, before actually doing anything with it. Because indeed what if the company, despite its intention, never develops it? Paragraph 57—as the amendments now clarify—says that it cannot be considered so: a change in the management's intentions does not constitute a change in use.

Elaborating, it says that a property can be reclassified as investment property when, and only when, the property fully meets the definition of investment property and there is supporting evidence for that. Conversely, a property can be reclassified as inventory property by the same principle.

Inventory is just one example—the same principle applies to property plants and equipment.


Thus, intention alone does not constitute a change in use; a change in use must be properly evidenced.

If a change in use is noted but the evidence supporting it is lacking, then any gains or losses emanating therefrom would be considered errors in the financial statements.

IAS 40 provides some examples for acceptable types of evidence. These examples are valuable as guidance but, independently of them, you should also feel confident that your evidence is sufficient if challenged by an auditor or regulator. In addition, take care that the change in use is actually supported by the way you assess the asset's valuation.

An opportunity to revisit your portfolio

These amendments are effective for annual periods beginning on or after 1 January 2018. Earlier application is permitted, but must be disclosed.

The IASB provides two options for transition:

  • the prospective approach: apply the amendments to transfers that occur after the date of initial application and also reassess the classification of property assets held at that date
  • the retrospective approach: apply the amendments retrospectively, but only if it does not involve the use of hindsight

When applying the prospective approach, IAS 40 requires a specific disclosure on the amounts reclassified.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.