ACCTG 161 SPECIAL TOPICS ANG ACCOUNTING UPDATES 1 161-16

PAS 40 Investment Property

1. Definition – property1 (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.
2. Purpose – An investment property is not held for (1) use in the production/supply of goods or services or for administrative purposes
[owner-occupied], or (2) for sale in the ordinary course of business [inventory] 2
3. Property held under an operating lease – A property interest that is held by the lessee under an operating lease 3 may be classified and
accounted for as investment property, provided that:
- if it meets the definition of investment property, and
- the lessee recognizes it under fair value model 4

4
If the lessee uses the fair value model to its investment property, the fair
value model is also used to measure the right-of-use assets that meet the
definition of investment property
1
Excludes any movable property. Examples of investment property include:
(a) land held for long-term capital appreciation, (d) vacant building held to be leased out under an operating lease,
(b) land held for a currently undetermined future use, (e) property that is being constructed or developed for future use as investment property
(c) building leased out under an operating lease, (previously classified as PPE)
2
Items not considered as investment property:
(a) property held for use in the production or supply of goods or services or for administrative purposes;
(b) property held for sale in the ordinary course of business or in the process of construction of development for such sale (IAS 2 Inventories);
(c) property being constructed or developed on behalf of third parties (IAS 11 Construction Contracts);
(d) owner-occupied property (IAS 16 Property, Plant and Equipment), including property held for future use as owner-occupied property;
(e) property held for future development and subsequent use as owner-occupied property,
(f) property occupied by employees,
(g) owner-occupied property awaiting disposal,
(h) property leased to another entity under a finance lease
3
Under
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ACCTG 161 SPECIAL TOPICS ANG ACCOUNTING UPDATES 1 161-16

IFRS 16 Leases requires a lessee to recognize a right-of-use asset and a lease liability. The right-of-use asset is initially recognized at
cost which includes:
- PV of lease payments
- lease payments made to the lessor at or before the commencement date less any lease incentive
- initial direct cost incurred by the lessee
- estimate of cost of dismantling and restoring the underlying asset for which the lessee has a present obligation
4. Partial own use (partly investment, partly owner-occupied) – If the owner uses part of the property for its own use, and part to earn
rentals or for capital appreciation:
- the portions can be sold or leased out separately, they are accounted for separately
- the portions cannot be sold or leased out separately, the property is investment property only if the owner-occupied portion is
insignificant.
5. Ancillary services – If the entity provides ancillary services to the occupants of a property held by the entity
- If those services are a relatively insignificant component of the arrangement as a whole, then the property as investment property.
- Where the services provided are more significant5, the property should be classified as owner-occupied.
6. Intracompany rentals – Property rented to a parent, subsidiary, or fellow subsidiary is not investment property in consolidated financial
statements (owner-occupied from the perspective of the group)
- Such property is investment property in the separate financial statements of the lessor, if the definition of investment property is
otherwise met.
7. Recognition – investment property shall be recognized 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
8. Measurement – the investment property shall be measured initially at cost6, including transaction costs. Subsequently, the entity may
choose either:
- Fair Value Model7: the investment property is carried at fair value8. This shall not be depreciated. Changes in fair value are
recognized in profit or loss.
 When there is difficulty in determining the FV (e.g. investment property under construction), 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 9.
- Cost Model: the investment property is carried at cost less any accumulated depreciation and any accumulated impairment
losses
9. Transfers to or from investment property10 – when there is a change in use, evidenced by one or more of the following:
- commencement of owner-occupation (transfer from investment property to owner-occupied property)
- commencement of development with a view to sale (transfer from investment property to inventories)
- end of owner-occupation (transfer from owner-occupied property to investment property)
- commencement of an operating lease to another party (transfer from inventories to investment property)
- end of construction or development (transfer from property in the course of construction/development to investment property)
10. Accounting for transfers between categories – the following rules shall be followed:
- 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
- for a transfer from owner-occupied property to investment property carried at fair value, the 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
- 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
- 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 recognized in profit or loss
- when the entity uses cost model, transfers between investment property, owner-occupied property and inventory shall be made at
the carrying amount
11. The investment property shall be derecognized:
- on disposal 11
- when the investment property is permanently withdrawn from use
- when no future economic benefits are expected from the investment property
12. Disclosure requirements
5
Example is owner-managed hotel.
6
The initial cost shall exclude start-up costs, abnormal waste, or initial operating losses incurred before the investment property achieves the planned level of
occupancy.
7
If the building is leased at a furnished basis, the FV of the building generally includes the FV of the furniture and other integral equipment. The FV secludes prepaid
or accrued operating lease income.
8
If the entity uses the fair value model, it shall continue to measure other investment property at FV, notwithstanding the fact that one investment property is carried
using the cost model due to exceptional cases mentioned above.
9
The residual value of the investment property shall be assumed to be zero.
10
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 derecognized
11
The gain or loss on disposal is equal to the difference between the net disposal proceeds and the carrying amount of the investment property to be recognized as
income or expense in the income statement.
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ACCTG 161 SPECIAL TOPICS ANG ACCOUNTING UPDATES 1 161-16

- General Disclosure
 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 recognized in profit or loss for:
 rental income from investment property
 direct operating expenses (including repairs and maintenance) arising from investment property that generated rental
income during the period
 direct operating expenses (including repairs and maintenance) arising from investment property that did not generate
rental income during the period
 the cumulative change in fair value recognized 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
- Additional disclosures when Fair Value Model is used:
 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
 significant adjustments to an outside valuation (if any)
 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
- Additional disclosures when Cost Model is used:
 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 recognized or reversed, foreign exchange differences, transfers to and from inventories
and owner-occupied property, and other changes
 the fair value of investment property12

Cash Surrender Value

1. Accounting – depends on who is the beneficiary 13
- If the beneficiary is the officer insured (or any other person other than the entity), the payment of the premium is charged to
insurance expense
2. Definition – the amount which the insurance firm will pay upon the surrender and cancelation of the life insurance policy. It arises when:
- The policy is a life policy.
- Premiums for three full years must have been paid
- The policy is surrendered at the end of the third year or anytime thereafter
3. Rationale – the cash surrender value is from the excess of the annual fixed premium and the annual risk during the earlier years of the
policy
4. Classification – noncurrent investment
5. Recognition – the following is the proforma entry for the initial recognition of the cash surrender value
Cash surrender value* xx
Life insurance expense** xx
Retained earnings*** xx
*Applicable to the three years of the life policy
**Portion of the cash surrender value applicable to the current year
***Portion of the cash surrender value applicable to the prior years

Recognition of cash surrender value, subsequent to the third year:

Cash surrender value xx
Life insurance expense xx

Receipt of the proceeds of the life policy

Cash xx
Cash surrender value xx
12
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
13
The entity may insure the life of its officers and name itself as the beneficiary.
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ACCTG 161 SPECIAL TOPICS ANG ACCOUNTING UPDATES 1 161-16

Life insurance expense* xx

Gain on life insurance settlement** xx
*Credited for the unexpired premium at the time of death
** Face of policy xx
Less: Cash surrender value xx
Unexpired premium xx xx
Gain on life insurance settlement xx
6. Loan Value14 – amount which the insured can borrow from the insurance firm with the cash surrender value as collateral security

14
Should not be deducted from the cash surrender value and accounted for as an ordinary obligation
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