MODULE 5 – Investment Property

3.1 Definition, nature, classification

3.1.1 Definition & Nature

PAS 40 defines investment property as a 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.
Capital appreciation is in the form of increase in value due to increase in property market prices.
Emphasis must be made that only land or building may qualify as investment property and movable
properties cannot qualify as investment property.
Investment property, share a characteristic from other investments in general, that is, it is an asset
acquired with the goal of generating income or appreciation. Owners acquire a property expecting it to
gain in value such as land acquired in a developing area where market prices of land is increasing; or
expecting to generate income with little effort by renting it out.

3.1.2 Classification
Land and building are commonly used in business operations. However, there are a few other purposes
for holding these properties, these are the common classifications of these properties based on
business intention:

Land or Building

For immediate resale or

Held to earn rentals or
capital appreciation or
both.
Held for use in business.
developed and resold
(Office building, production
under normal course of
plant, warehouse etc.)
business.

Investment
Owner-occupied property Merchandise inventory
property

PAS 40 Investment PAS 16 Property, Plant &

PAS 2 Inventories
Property Equipment

Examples of investment property:

 Land held for long-term capital appreciation.
 Land held for a currently undetermined future use.
 Building leased out under an operating lease.
 Vacant building held to be leased out under an operating lease.
 Property that is being constructed or developed for future use as investment property
The following are not investment properties and, therefore, are outside the scope of IAS 40:
 Property held for use in the production or supply of goods or services or for administrative
purposes
 Property held for sale in the ordinary course of business or in the process of construction of
development for such sale (IAS 2 Inventories) For example, a business operating as a real estate

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 developer, the purpose for acquisition of properties is so that it can be immediately resold or
developed further and subsequently sold or disposed.
 Property being constructed or developed on behalf of third parties (IAS 11 Construction
Contracts)
 Owner-occupied property (IAS 16 Property, Plant and Equipment), including property held for
future use as owner-occupied property, property held for future development and subsequent
use as owner-occupied property, property occupied by employees and owner-occupied
property awaiting disposal
 Property leased to another entity under a finance lease.

Property held under an operating lease. A property interest that is held by a lessee under an operating
lease may be classified and accounted for as investment property provided that: [IAS 40.6]
 the rest of the definition of investment property is met
 the operating lease is accounted for as if it were a finance lease in accordance with IFRS 16
Leases
 the lessee uses the fair value model set out in this Standard for the asset recognised
An entity may make the foregoing classification on a property-by-property basis.
About operating and finance lease - IFRS 16 Leases will be covered in the course PRELEC1 of the
accountancy program.

Non-current asset held-for-sale.

Also, land and building may be accounted for as “non-current asset held-for-sale” if it qualifies the
definition under IFRS 5 for held-for-sale classification. Vaguely described non-current assets held for
sale are those assets which were originally acquired to be used as property, plant and equipment
(owner-occupied) and later management decision deemed to discontinue the use of the asset and
immediately dispose it within twelve months.
Per clarification, inventory is different from non-current asset held-for-sale in that, inventory is
acquired primary for the reason of resale, non-current asset held-for-sale is acquired to be used as PPE
then discontinued operating the asset and later reclassified as held-for-sale.
You will study non-current asset held-for-sale in the course PRELEC1 of the accountancy program.

Partial own use.

If the owner uses part of the property for its own use, and part to earn rentals or for capital
appreciation, and the portions can be sold or leased out separately, they are accounted for separately.
Therefore the part that is rented out is investment property. If the portions cannot be sold or leased
out separately, the property is investment property only if the owner-occupied portion is insignificant.
For example, a company owns an apartment complex for rent, and the apartment units consist of row-
houses wherein one of the units is being used by the company as office building. The building is part
owner occupied and part investment property
Ancillary services
In relation to renting a property, ancillary services are additional necessary services offered to tenants
to enhance or improve the core service activity (renting). Ancillary services although necessary are still
only considered as support services. i.e. (providing janitorial services, security services)
If the entity provides ancillary services to the occupants of a property held by the entity, the
appropriateness of classification as investment property is determined by the significance of the
services provided.
If those services are a relatively insignificant component of the arrangement as a whole (for instance,
the building owner supplies security and maintenance services to the lessees), then the entity may
treat the property as investment property.

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Where the services provided are more significant (such as in the case of an owner-managed hotel), the
property should be classified as owner-occupied.
Intracompany rentals
Property rented to a parent, subsidiary, or fellow subsidiary is not investment property in consolidated
financial statements that include both the lessor and the lessee, because the property is owner-
occupied from the perspective of the group. However, such property could qualify as investment
property in the separate financial statements of the lessor, if the definition of investment property is
otherwise met.
Consolidated financial statements will be discussed further in the course ABUSCOM of the accountancy
program.

3.2 Recognition criteria and Measurement

3.2.1 Recognition
Investment property should be recognised as an asset when:
 it is probable that the future economic benefits that are associated with the property will flow
to the entity; and
 the cost of the property can be reliably measured.

3.2.2 Initial Measurement

Investment property is initially measured at cost, including transaction costs.
Such cost should not include:
 Start-up costs
 Abnormal waste
 Initial operating losses incurred before the investment property achieves the planned level of
occupancy.

Illustration: Initial measurement of Investment Property

The following events took place on January 1, 2020,
 Noid Corp. acquired a building by paying the owner P10,000,000 cash.
 Brokers fee to make the sale possible was also incurred for P500,000.
 Noid also incurred P1,000,000 in clean-up and minor repairs.
The building was entirely designated to be rented out to tenants as an apartment complex. The
building had a fair value of P12,000,000 after refurbishing the minor damages to the property.
Requirements:
1. How should Noid present the building in the statement of financial position?
2. Why is the building not classified as Property, plant and equipment?
3. What amount should be capitalized as investment property?
4. Prepare the journal entries to record the above transactions.

Requirement 1:
Answer: Investment Property. It is held for rentals, this qualifies the definition under PAS 40.

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 Requirement 2:
Answer: In order for the building to qualify as PPE, it must be used in business. i.e. production of
goods and services (factory plant), used in general business processes (office building,
warehouse etc.).

Requirement 3:
Purchase price P 10,000,000
Broker’s fee 500,000
Investment property P 10,500,000

Investment property is initially measured at cost plus transaction costs. The broker’s fee is a
directly attributable transaction cost since the sale would not have happened had it not been
paid.

Requirement 4:
Investment property P 10,500,000
Repairs expense 1,000,000
Cash P 11,500,000
To record investment property & repairs.

The clean-up and minor repairs costs are part of start-up costs which are expensed.

3.2.3 Subsequent Measurement

IAS 40 permits entities to choose between: [IAS 40.30]
 Fair value model
 Cost model.
One method must be adopted for all of an entity's investment property. Change is permitted only if
this results in a more appropriate presentation. IAS 40 notes that this is highly unlikely for a change
from a fair value model to a cost model.

Fair value model

Investment property is remeasured at fair value, which is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date.
Gains or losses arising from changes in the fair value of investment property must be included in net
profit or loss for the period in which it arises. Fair value should reflect the actual market state and
circumstances as of the balance sheet date.
The best evidence of fair value is normally given by current prices on an active market for similar
property in the same location and condition and subject to similar lease and other contracts.
In the absence of such information, the entity may consider current prices for properties of a different
nature or subject to different conditions, recent prices on less active markets with adjustments to
reflect changes in economic conditions, and discounted cash flow projections based on reliable
estimates of future cash flows.

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Illustration: Subsequent measurement of Investment Property - Fair value model
On January 1, 2020, Noid Corp. acquired a parcel of land for P20,000,000. Noid also incurred
transaction costs amounting to P800,000. The land is to be held for capital appreciation and will be
accounted for at fair value model.
The land had the following fair values provided on an independent valuation:
December 31, 2020 P 22,000,000
December 31, 2021 23,000,000
December 31, 2022 25,000,000

Requirement: The journal entries in 2020 are:

Answers:
Investment property P 20,800,000
Cash P 20,800,000
To record investment property & repairs.

Purchase price 20,000,000

Transaction cost 800,000
Investment property 20,800,000

Investment property P 1,200,000

Gain on change in fair value P 1,200,000
To record fair value change.

Land fair value at Dec. 31, 2020 22,000,000

Land cost at Jan. 1, 2020 (20,800,000)
Gain on change in fair value 2020 1,200,000

The journal entries on December 31, 2021

Investment property P 1,000,000
Gain on change in fair value P 1,000,000
To record fair value change.

Land fair value at Dec. 31, 2021 23,000,000

Land fair value at Dec. 31, 2020 (22,000,000)
Gain on change in fair value 2021 1,000,000

The gain on change in fair value will be presented in the income statement as other income.

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 Illustration: Subsequent measurement of Investment Property - Fair value model
On January 1, 2020, Norman Corp. constructed a commercial complex building for P15,000,000. The
building is expected to have a useful life of 10 years. Its primary purpose is for renting out to store
owner-tenants. Norman opted for the fair value model since the commercial complex is positioned
in a competitive area where fair value of properties are easily determined.
The building had the following fair values provided by an expert:
December 31, 2020 P 14,000,000
December 31, 2021 11,500,000
December 31, 2022 11,500,000

The journal entries in 2020 are:

Answers:
Investment property P 15,000,000
Cash P 15,000,000
To record investment property & repairs.

Loss on change in fair value P 1,000,000

Investment property P 1,000,000
To record fair value change.

Building fair value at Dec. 31, 2020 14,000,000

Building cost at Jan. 1, 2020 (15,000,000)
Loss on change in fair value (1,000,000)

The journal entries on December 31, 2021

Loss on change in fair value P 2,500,000
Investment property P 2,500,000
To record fair value change.

Loss on change in fair value will be presented as other expenses.

Investment property accounted for under the fair value model is not depreciated but still tested for
impairment.

There is a rebuttable presumption that the entity will be able to determine the fair value of an
investment property reliably on a continuing basis. However: [IAS 40.53]
 If an entity determines that the fair value of an investment property under construction is not
reliably determinable but expects the fair value of the property to be reliably determinable
when construction is complete, it measures that investment property under construction at
cost until either its fair value becomes reliably determinable or construction is completed.
 If an entity determines that the fair value of an investment property (other than an investment
property under construction) is not reliably determinable on a continuing basis, the entity shall
measure that investment property using the cost model in IAS 16. The residual value of the
investment property shall be assumed to be zero. The entity shall apply IAS 16 until disposal of
the investment property.

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Where a property has previously been measured at fair value, it should continue to be measured at fair
value until disposal, even if comparable market transactions become less frequent or market prices
become less readily available. [IAS 40.55]

Cost model
After initial recognition, investment property is accounted for in accordance with the cost model as set
out in IAS 16 Property, Plant and Equipment – cost less accumulated depreciation and less
accumulated impairment losses. [IAS 40.56]
Illustration 2: Subsequent measurement of Investment Property - Cost model
On January 1, 2020, Nomad Corp. acquired a shopping mall for P21,500,000 cash. The building is
expected to have a useful life of 10 years and a P1,500,000 residual value. Its primary purpose is for
earning rentals from store owners. Nomad opted to account for the property using the cost model.
The building had the following fair values provided by a valuation expert:
December 31, 2020 P 18,000,000
December 31, 2021 15,500,000
December 31, 2022 14,500,000

Required: The journal entries in 2020 are:

Answers:
Journal entries in 2020
Investment property P 21,500,000
Cash P 21,500,000
To record investment property & repairs.

Depreciation expense P 2,000,000

Accumulated depreciation P 2,000,000
To record depreciation.

Building cost at Jan. 1, 2020 21,500,000

Residual value ( 1,500,000)
Depreciable amount 20,000,000
Annual depreciation (20,000,000 / 10 years) ( 2,000,000)

The journal entries on December 31, 2021

Depreciation expense P 2,000,000
Accumulated depreciation P 2,000,000
To record depreciation.

The fair value of the investment property is completely ignored.

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3.3 Transfers to or from investment property

3.3.1 Classification of Transfers

Transfers to, or from, investment property should only be made when there is a change in use,
evidenced by one or more of the following:

Commencement of owner- transfer Owner-occupied

Investment property to
occupation from property

Commencement of
transfer
development with a view Investment property to Inventories
from
to sale

transfer Owner-occupied Investment

End of owner-occupation to
from property property

Commencement of an
transfer Investment
operating lease to another Inventories to
from property
party

Property under
End of construction or transfer investment
development or to
development from property
construction.
When an entity decides to sell an investment property without development, the property is not
reclassified as inventory but is dealt with as investment property until it is derecognised. [IAS 40.58]

3.3.2 Accounting for Transfers

The following rules apply for accounting for transfers between categories:
 For a transfer from investment property carried at fair value to owner-occupied property or
inventories, the fair value at the change of use is the 'cost' of the property under its new
classification [IAS 40.60]

Illustration: Transfer from investment property at fair value to PPE

On December 31, 2020, Nonchala Corp. owns a commercial complex building held for rentals
and being carried at its current fair value of P16,500,000. The commercial complex was
originally acquired on January 1, 2016 at a cost of P20,000,000 with an original useful life of 20
years with no residual value.
During the year the board of directors decided on the commencement of owner-occupation
on the commercial complex after it was vacated by the tenants.
Required:The journal entry to record the transfer is:

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 Answer:
Building P 16,500,000
Investment property P 16,500,000
To record property reclassification.

The building will be depreciated over its remaining useful life of 15 years.
(20 years original – 5 years expired)
The journal entry on December 31, 2021 to record the depreciation of the building:
Depreciation expense P 1,100,000
Accumulated depreciation P 1,100,000
To record depreciation expense.

Depreciation expense = (16,500,000 / 15 years)

Illustration: Transfer from investment property at fair value to inventory

On December 31, 2020, Nonchala Corp. owns a commercial complex building held for rentals
and being carried at its current fair value of P16,500,000. The commercial complex was
originally acquired on January 1, 2016 at a cost of P20,000,000 with an original useful life of 20
years with no residual value.
During the year the board of directors commenced development of the commercial complex
with a view to immediate sale.
Required: The journal entry to record the transfer is:

Answer:
Inventory P 16,500,000
Investment property P 16,500,000
To record property reclassification.

 for a transfer from owner-occupied property to investment property carried at fair value, IAS 16
should be applied up to the date of reclassification. Any difference arising between the carrying
amount under IAS 16 at that date and the fair value is dealt with as a revaluation under IAS 16 [IAS
40.61]

Illustration: Transfer from PPE to investment property at fair value

On December 31, 2020, Nonchala Corp. owns a commercial complex building with a carrying
amount of P15,000,000. The commercial complex was originally acquired on January 1, 2016 at
a cost of P20,000,000 with an original useful life of 20 years.
The commercial complex had a fair value of P16,500,000 at that time.
During the year the board of directors ended owner occupation of the commercial complex
and prepared it to be rented out to tenants.
Required: The journal entries to record the transfer is:

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 Answer:
Building P 2,000,000
Accumulated depreciation P 500,000
Revaluation surplus 1,500,000
To record revaluation of building.

Revaluation:
Carrying amount Fair value Revaluation
Building 20,000,000 22,000,000 2,000,000
Accum. Dep. (5,000,000) (5,500,000) ( 500,000)
CA/SV/RS 15,000,000 16,500,000 1,500,000

Investment property P 16,500,000

Accumulated depreciation 5,500,000
Building P 22,000,000
To record reclassification of building.

 for a transfer from inventories to investment property at fair value, any difference between the
fair value at the date of transfer and it previous carrying amount should be recognized in profit or
loss [IAS 40.63]
Illustration: Transfer from inventory to investment property at fair value.
On December 31, 2020, Exos Realtors Corp. owns a commercial complex building developed
with a view to sale. The commercial complex has a cost of P15,000,000 and has been carried in
the books properly as inventory.
During the year the board of directors commenced an operating lease to another party for the
whole commercial complex.
The commercial building has a fair value of P16,500,000 at that time.
The journal entry to record the transfer is:

Answer:
Investment property P 16,500,000
Inventory P 15,000,000
Gain on change in fair value 1,500,000
To record inventory reclassification.

 when an entity completes construction/development of an investment property that will be

carried at fair value, any difference between the fair value at the date of transfer and the previous
carrying amount should be recognised in profit or loss. [IAS 40.65]

Illustration: Completion of construction of investment property at fair value.

On December 31, 2020, Exos Realtors Corp. completed construction of a commercial complex
building. The commercial complex has a construction cost of P15,000,000.
During the year the board of directors intends to lease out the commercial complex to tenants.
The commercial building has a fair value of P16,500,000 at completion of construction.
Required: The journal entry to record investment property at completion:

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 Answer:
Investment property P 16,500,000
Construction in progress P 15,000,000
Gain on change in fair value 1,500,000
To record completion of construction.

When an entity uses the cost model for investment property, transfers between categories do not
change the carrying amount of the property transferred, and they do not change the cost of the
property for measurement or disclosure purposes.

Illustration: Transfer of investment property at cost

Investment property building carrying amount of P15,000,000.
Scenario 1: Journal entry if transferred to inventory:
Inventory P 15,000,000
Investment property P 15,000,000
To record transfer to inventory

Scenario 2: Journal entry if transferred to Property, plant and equipment:

Building P 15,000,000
Investment property P 15,000,000
To record transfer to PPE.

No gain or loss is recorded in transfers from cost model investment property. This is also known
as carrying value approach.

Disposal
An investment property should be derecognised on disposal or when the investment property is
permanently withdrawn from use and no future economic benefits are expected from its disposal. The
gain or loss on disposal should be calculated as the difference between the net disposal proceeds and
the carrying amount of the asset and should be recognised as income or expense in the income
statement. [IAS 40.66 and 40.69]

Illustration: Disposal of Investment property at fair value.

Dunce owns a building being rented out to tenants. The building is carried at its current fair value of
P10,000,000. On December 31, 2020 Dunce sold the building for 11,000,000 to Bogart Inc. and paid
P200,000 in broker’s fees.
Requirement: Journal entry to record disposal of:
Cash P 10,800,000
Investment property P 10,000,000
Gain on disposal of Investment property 800,000
To record disposal of Investment property.

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3.4 Disclosures

3.4.1 Both Fair Value Model and Cost Model

 whether the fair value or the cost model is used
 if the fair value model is used, whether property interests held under operating leases are
classified and accounted for as investment property
 if classification is difficult, the criteria to distinguish investment property from owner-occupied
property and from property held for sale
 the extent to which the fair value of investment property is based on a valuation by a qualified
independent valuer; if there has been no such valuation, that fact must be disclosed
 the amounts recognised in profit or loss for:
i. rental income from investment property
ii. direct operating expenses (including repairs and maintenance) arising from investment
property that generated rental income during the period
iii. direct operating expenses (including repairs and maintenance) arising from investment
property that did not generate rental income during the period
iv. the cumulative change in fair value recognised in profit or loss on a sale from a pool of
assets in which the cost model is used into a pool in which the fair value model is used
 restrictions on the realizability of investment property or the remittance of income and
proceeds of disposal
 contractual obligations to purchase, construct, or develop investment property or for repairs,
maintenance or enhancements

3.4.2 Additional Disclosures for the Fair Value Model

 a reconciliation between the carrying amounts of investment property at the beginning and end
of the period, showing additions, disposals, fair value adjustments, net foreign exchange
differences, transfers to and from inventories and owner-occupied property, and other changes
[IAS 40.76]
 significant adjustments to an outside valuation (if any) [IAS 40.77]
 if an entity that otherwise uses the fair value model measures an item of investment property
using the cost model, certain additional disclosures are required [IAS 40.78]
3.4.3 Additional Disclosures for the Cost Model
 the depreciation methods used
 the useful lives or the depreciation rates used
 the gross carrying amount and the accumulated depreciation (aggregated with accumulated
impairment losses) at the beginning and end of the period
 a reconciliation of the carrying amount of investment property at the beginning and end of the
period, showing additions, disposals, depreciation, impairment recognised or reversed, foreign
exchange differences, transfers to and from inventories and owner-occupied property, and
other changes
 the fair value of investment property. If the fair value of an item of investment property cannot
be measured reliably, additional disclosures are required, including, if possible, the range of
estimates within which fair value is highly likely to lie.

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