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MODULE 25 INVESTMENT PROPERTY

LEARNING OBJECTIVES:
1. Define an investment property.
2. State the initial and subsequent measurements of investment property.
3. Apply the fair value model of accounting for investment property.

OVERVIEW
PAS 40 Investment Property applies to the accounting for property (land and/or buildings) held
to earn rentals or for capital appreciation (or both). Investment properties are initially measured
at cost and, with some exceptions, may be subsequently measured using a cost model or fair
value model, with changes in the fair value under the fair value model being recognised in profit
or loss.

Acquiring new knowledge


Asynchronous - links to more information: www.farhatlectures.com; http://www.ifrsbox.com
A synchronous discussion for this lesson will be scheduled on October 6, 2020 (Tuesday 9:00
– 10:00 AM)

Investment property is 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.
[PAS 40.5] (INTENTION)

Examples of investment property:


o land held for long-term capital appreciation
o land held for a currently undetermined future use
o building leased out under an operating lease
o vacant building held to be leased out under an operating lease
o property that is being constructed or developed for future use as investment property

Other classification issues

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: [PAS
40.6]
o the rest of the definition of investment property is met
o the operating lease is accounted for as if it were a finance lease in accordance with PAS
17 Leases
o 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.

PROPERTY HELD UNDER OPERATING LEASE - UNDER FV


BUT IF MANY PROPERTIES (OTHER FOR RENT OTHER FOR SALE NA MAGKAKALAYO)
- OTHER
PERO IF APARTMENT/CONDO - MAGKAKADIKIT - AS PPE
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. [PAS 40.10]

Ancillary 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. 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. [PAS 40.13]

INSIGNIFICANT - PROVIDE SECURITY TO THE LESSEE - YOU PROVIDE ANCILLARY


SERVICES- CLASSIFIED AS INVESTMENT PROPERTY

SIGNIFICANT - CLASSIFIED AS PPE; WHEN YOU ARE THE ONE MANAGING THE HOTEL

Intracompany rentals. Property rented to a parent, subsidiary, or fellow subsidiary is not in-


vestment 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 state-
ments of the lessor, if the definition of investment property is otherwise met. [PAS 40.15]
FOR CONSOLIDATED(PINAGSASAMA B/IN CURRENT & SUBSIDIARY) PURPOSES - PPE
IF STAND ALONE, CAN QUALIFY AS INVESTMENT PROPERTY

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. [PAS 40.16]

Initial measurement
Investment property is initially measured at cost, ACQUISITION COSTS including transaction
costs. Such cost should not include start-up costs, abnormal waste, or initial operating losses
incurred before the investment property achieves the planned level of occupancy.

Subsequent measurement
PAS 40 permits entities to choose between:
o a fair value model, and
o a 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. PAS 40 notes that this is highly unlikely for a
change from a fair value model to a cost model.

DAPAT CONSISTENT SA PINILI, MAGKAKAROON LANG NG CHANGE IF APPROPRIATE

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. [PAS 40.5]

COMPARE FV FROM LAST YEAR TO CURRENT YEAR


IF < = UNREALIZED GAIN
> = UNREALIZED LOSS

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. [PAS 40.35]
Fair value should reflect the actual market state and circumstances as of the balance sheet
date. [PAS 40.38] 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. [PAS 40.45]

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 ad-
justments to reflect changes in economic conditions, and discounted cash flow projections
based on reliable estimates of future cash flows. [PAS 40.46]

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

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. [PAS 40.55]

Cost model
After initial recognition, investment property is accounted for in accordance with the cost model
as set out in PAS 16 Property, Plant and Equipment – cost less accumulated depreciation and
less accumulated impairment losses.

Transfers to or from investment property classification


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: [PAS 40.57 (note that this list was changed from an
exhaustive list to an non-exhaustive list of examples by Transfers of Investment Property in
December 2016 effective 1 January 2018) ]
o commencement of owner-occupation (transfer from investment property to owner-occu-
pied property)
o commencement of development with a view to sale (transfer from investment property to
inventories)
o end of owner-occupation (transfer from owner-occupied property to investment property)
o commencement of an operating lease to another party (transfer from inventories to in-
vestment property)
o end of construction or development (transfer from property in the course of construc-
tion/development to investment property

The following rules apply for accounting for transfers between categories:
o 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, any difference between the fair value at the date of transfer
and it previous carrying amount should be recognised in profit or loss.
o for a transfer from owner-occupied property to investment property carried at fair
value, PAS 16 should be applied up to the date of reclassification. Any difference
arising between the carrying amount under PAS 16 at that date and the fair value is
dealt with as a revaluation under PAS 16 [PAS 40.61]
o 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
recognised in profit or loss [PAS 40.63]
o 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. [PAS 40.65]
o When an entity uses the cost model for investment property, transfers between cate-
gories 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.
o Disposal
o 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 dif-
ference between the net disposal proceeds and the carrying amount of the asset and
should be recognised as income or expense in the income statement. [PAS 40.66 and
40.69] Compensation from third parties is recognised when it becomes receivable. [PAS
40.72]
ORIGIN
ORIGIN PPE - REVAL SURPLUS
ORIGIN FROM INVENTORIES

Disclosure
Both Fair Value Model and Cost Model [PAS 40.75]
o whether the fair value or the cost model is used
o if the fair value model is used, whether property interests held under operating leases
are classified and accounted for as investment property
o if classification is difficult, the criteria to distinguish investment property from owner-oc-
cupied property and from property held for sale
o 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
o the amounts recognised in profit or loss for:
o rental income from investment property
o direct operating expenses (including repairs and maintenance) arising from in-
vestment property that generated rental income during the period
o direct operating expenses (including repairs and maintenance) arising from in-
vestment property that did not generate rental income during the period
o 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
o restrictions on the realizability of investment property or the remittance of income and
proceeds of disposal
o contractual obligations to purchase, construct, or develop investment property or for
repairs, maintenance or enhancements

Additional Disclosures for the Fair Value Model [PAS 40.76]


o 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 [PAS 40.76]
o significant adjustments to an outside valuation (if any) [PAS 40.77]
o 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 [PAS 40.78]
 
Additional Disclosures for the Cost Model [PAS 40.79]
o the depreciation methods used
o the useful lives or the depreciation rates used
o the gross carrying amount and the accumulated depreciation (aggregated with accumu-
lated impairment losses) at the beginning and end of the period
o 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-oc-
cupied property, and other changes
o 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
MODULE # 25 Post-test
TOA – INVESTMENT PROPERTY
Prof. U. C. Valladolid

Multiple Choice
Identify the choice that best completes the statement or answers the question.
All answers shall be submitted on or before October 9, 2020 (Friday)

1. It is defined as property (land or building or part of building or both) by an owner or finance lessee to earn
rentals or for capital appreciation or both.
a. Investment property
b. Owner-occupied property
c. Mining company
d. Rental company

2. An investment property shall be measured initially at


a. Cost
b. Cost less accumulated impairment losses
c. Depreciable cost less accumulated impairment losses
d. Fair value less accumulated impairment losses

3. Directly attributable expenditures related to investment property include


a. Professional fees for legal services, property transfer taxes and other transaction costs.
b. Start up costs.
c. Initial operating losses incurred before the investment property achieves the planned level
of occupancy.
d. Abnormal amounts of wasted material, labor and other resources incurred in constructing or
developing the property.

4. Subsequent to initial recognition, the investment property shall be measured at


a. Fair value
b. Cost less any accumulated depreciation and any accumulated impairment loss
c. Revalued amount
d. Either fair value or cost less any accumulated depreciation and any accumulated
impairment losses
AFTER INITIAL VALUATION

5. Investment property includes all of the following, except


a. Land held for long-term capital appreciation
b. Land held for currently undetermined use
c. Building owned by the reporting entity or held by a finance lessee leased out under one or
more operating leases.
d. Property held for sale in the ordinary course of business or in the process of construction for
such sale. - INVENTORY

6. Which of the following is an investment property?


a. Property being constructed or developed on behalf of third parties.
b. Property that is being constructed and developed as investment property.
c. Property held for future development and subsequent use as owner-occupied property.
d. Owner-occupied property awaiting disposal.

7. An owner-occupied property is held by an owner or finance lessee


I. For use in the production of goods or services.
II. For administrative purposes.
a. I only
b. II only
c. Both I and II
d. Neither I and II

PPE - FOR USE


8. Which statement is correct if the property is partly investment and partly owner-occupied? - PPE
I. If the investment and owner-occupied portions could be sold or leased out separately, the portions shall
be accounted for separately as investment property and owner-occupied property.
II. If the investment and owner-occupied portions could not be sold or leased out separately, the property
is investment property if only an insignificant portion is held for manufacturing or administrative
purposes.
a. I only
b. II only
c. Both I and II
d. Neither I nor II

IF SEPARATE, ISPLIT PPE & INVEST PROPERTY

9. Which statement is correct concerning property leased to an affiliate?


I. From the perspective of the individual entity that owns it, the property leased to an affiliate is
considered an investment property.
II. From the perspective of the affiliates as a group and for purposes of consolidated financial statements,
the property is treated as owner-occupied property.
a. Both I and II
b. Neither I nor II
c. I only
d. II only
STAND ALONE - INVEST PROP
CONSOLIDATED - PPE

10. A gain arising from a change in the fair value of an investment property for which entity has opted to use
the fair value model is recognized in
a. Profit or loss
b. General reserve in the shareholders’ equity
c. Valuation reserve in the shareholders’ equity
d. Retained profits

11. When the entity uses the cost model, transfer between investment property, owner-occupied property and
inventory shall be accounted for at
a. Fair value
b. Carrying amount
c. Cost
d. Assessed value
COST MODEL IS CA WHETHER IT IS RECLASSIFIED

12. A transfer from investment property carried at fair value to owner- occupied property shall be accounted for
at
a. Fair value, which becomes the deemed cost for subsequent accounting
b. Carrying amount
c. Historical cost
d. Fair value less cost to sell

13. If owner-occupied property is transferred to investment property that is to be carried at fair value, the
difference between the carrying amount of the property and its fair value shall be
a. Included in profit or loss
b. Included in retained earnings
c. Included in equity
d. Accounted for as revaluation of property, plant and equipment.
CLASSIFY ORIGIN OF PPE = REVAL SURPLUS - OCI
IF ORIGIN IS NOT PPE = G/L FROM RECLASSIFICATION

14. If an inventory is transferred to investment property that is to be carried at fair value, the remeasurement to
fair value is
a. Included in profit or loss
b. Included in equity
c. Included in retained earnings
d. Accounted for as revaluation of inventory

15. When an investment property under construction is completed and to be carried at fair value, the difference
between the carrying amount and fair value shall be
a. Included in profit or loss
b. Included in retained earnings
c. Included in other comprehensive income
d. Accounted for as revaluation of property, plant and equipment

16. In case of property held under an operating lease and classified as investment property
a. The entity has to account for the investment property under the cost model only.
b. The entity has to use the fair value model only.
c. The entity has the choice between the cost model and the fair value model.
d. The entity needs only to disclose the fair value and can use the cost model.

17. Transfer from investment property to property, plant and equipment is appropriate
a. When there is change of use
b. Based on the entity’s direction
c. Only when the entity adopts the fair value model
d. The entity can never transfer property into another classification once it is classified as
investment.

18. An investment property is derecognized when


a. It is disposed to a third party.
b. It is permanently withdrawn from use.
c. No future economic benefits are expected from its disposal.
d. In all of the above cases.

19. When the entity uses the cost model, transfer between investment property, owner-occupied property and
inventory shall be accounted for at
a. Cost
b. Fair Value
c. Assessed Value
d. Carrying amount

*BEFORE & AFTER RECLASSIFICATION

20. An investment property is recognized when


I. The cost of the investment property can be measured reliably
II. It is probable that the future economic benefits that are associated with the investment
property will flow to the entity
a. I only
b. II only
c. Neither I nor II
d. Both I and II
*SUBJECT TO CHANGE - NEW STANDARD

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