FINANCIAL STATEMENTS 3Consolidated financial statements as of December 31, 2017 5.4 Investment properties Accounting policies Investment properties (IAS 40 & IFRS 13) Property that is held for long-term rental yields or for capital appreciation or both, and that is not occupied by the companies in the consolidated Group, is classified as investment property. Investment property also includes property that is being constructed or developed for future use as investment property. For all investment properties, their current use equates to the highest and best use. Land held under operating leases is classified and accounted for by the Group as investment property when the definition of investment property is met. The operating lease is accounted for as if it were a finance lease. Investment property is measured initially at its cost, including related transaction costs and where applicable eviction and borrowing costs (see below). After initial recognition, investment property is carried at fair value. Investment property under construction is measured at fair value if the fair value is considered to be reliably determinable. Investment properties under construction for which the fair value cannot be determined reliably, but for which the Company expects that the fair value of the property will be reliably determinable when construction is completed, are measured at cost less impairment until the fair value becomes reliably determinable or construction is completed – whichever is earlier. In order to evaluate whether the fair value of an investment property under construction can be determined reliably, management considers the following factors, among others: > the stage of completion; > the level of reliability of cash inflows after completion; > the development risk specific to the property. Additions to investment properties consist of capital expenditures, evictions costs, capitalized financial interests, letting fees and other internal costs related to development. Certain internal staff and associated costs directly attributable to the management of major schemes during the construction phase are also capitalized. The difference between the fair value of an investment property at the reporting date and its carrying amount prior to re-measurement is included in the income statement as a valuation surplus or deficit. The profit on disposal is determined as the difference between the sales proceeds and the carrying amount of the asset at the commencement of the accounting period plus capital expenditure in the period. When the Group begins to redevelop an existing investment property for continued future use as an investment property, the property continues to be held as an investment property. In addition, the investment properties recorded at cost are tested for impairment at June 30 and December 31, whenever there is evidence of a loss of value. Where such evidence exists, the new recoverable asset value is compared against its net book value, and an impairment is recognized. Borrowing costs Under IAS 23, borrowing costs directly attributable to the acquisition or construction of eligible assets are included in the cost of the respective assets. When a loan is not directly attributable to an asset, Klépierre uses the capitalization rate applied to the expenses related to the asset in order to measure the attributable cost; if several non-specific borrowing lines exist, the capitalization rate is the weighted average rate of those loans observed during fiscal year. Fair value of investment property The fair value of Klépierre’s investment properties is appraised by the independent professionally qualified appraisers who hold a recognized relevant professional qualification and have recent sectorial experience in the locations and segments of the investment properties valued. They are responsible for valuing the Group’s assets on June 30 and December 31 of each year. The fair value excludes transfer duties and fees (fees are measured on the basis of a direct sale of the asset, even though these costs can, in some cases, be reduced by selling the Company that owns the asset). The fair values are determined in compliance with evaluation rules described in IFRS 13. In addition, given the complexity of real estate asset valuations and the nature of certain non-public data (such as rental growth projection, capitalization and actualization rates), the fair values of the investment properties have been classified as level 3 according to IFRS 13 criteria. Accordingly, there are no transfers of properties between the fair value hierarchies. 86 KLÉPIERRE 2017 REGISTRATION DOCUMENT