PROPERTY INVESTMENTS

Definition
Investment property is defined as property (land and building of part of a building or both) held
by an owner or by the lessee under a finance lease to earn rentals or for capital appreciation or
both, rather that for:
a. Use in the production or supply of goods or services or administrative purposes; and
b. Sale in the ordinary course of business.

In other words, only land and building can qualify as investment property. An equipment or any
movable property cannot qualify as investment property.

Examples of Investment Property

a. Land held for long-term appreciation value, rather than for short-term sale in the ordinary
course of business.
b. Land whose future use has not yet been terminated. If the future use has not yet been
determined, land is assumed to be held for capital appreciation.
c. A building owned or held under a finance lease and leased out under an operating lease.
d. A building that is vacant, but held to be leased out under an operating lease.
e. Investment property being redeveloped for continued use as investment property.
f. As part of the “ Improvements to International Financial Reporting Standard 2008” property
that is under construction or development for future use as investment property will be within
IAS/PAS 40’s scope. Previously such property was within the scope of IAS/PAS 16. The
amendment of IAS/PAS 40’s investment property, and consequential amendments to IAS/PAS
16 Property, plant, and equipment, that deals with property under construction or property that is
under construction or development for future use as investment property, should be applied
prospectively for annual periods beginning January 1, 2009.

Investment Property does not include:

1. Property intended for sale in the course of business or for development and resale .
2. Property under construction for third parties.
3. Owner-occupied property, including property held for such use or development prior to
such use.
4. Property occupied by employees.
5. Owner-occupied property awaiting disposal.

Conditions for the recognition of Investment Property

Investment property shall be recognized as an asset when and only when:

a. It is probable that the future economic benefits that are associated with the investment
property will flow to the entity.
b. The cost of the investment property can be measured reliably.

Initial Measurement of Investment Property

The investment property shall be measured initially at cost. Transaction costs shall be included
in the initial measurement.

1. The cost of a purchased investment property comprises the purchase price and any
directly attributable expenditure.
 Directly attributable expenditure includes professional fees for legal services, property
transfer taxes and other transaction costs.

If payment for an investment property is deferred, the cost is the cash price equivalent.

The difference between the cash price and the total payments is recognized as interest
expense over the credit period.
2. The cost of a self-constructed investment property is its cost at the date when the
construction or development is completed.

3. If payment for an investment property is deferred, its cost is the cash price equivalent.
The difference between this amount and the total payment is recognized as interest
expense over the period of credit.

4. One or more property may be required in exchange for a non-monetary asset or assets,
or a combination of monetary and non-monetary assets. The cost of such an investment
property is measured at fair value unless (a) the exchange transaction lacks commercial
substance or (b) the fair value of neither the asset received nor the asset given up is
reliably measurable. The acquired asset is measured in this way even if an entity cannot
immediately derecognize the asset given up. If the required asset is not measured at fair
value, its cost is measured at the carrying amount of the asset given up.

Subsequent Measurement of Investment Property

An entity shall choose either of the following models as accounting policy and shall apply that
the policy to all of its investment property:

a. Fair value Model

Fair value is defined as the amount for which the property could be exchanged between
knowledgeable, willing parties in an arm’s length transaction. Fair value will normally be
obtainable by reference to current prices on an active market for similar properties in the
same location and condition as the property under review. In the absence of such an
active market, information from variety of sources may have to b consistent, including;
(a) current prices on an active market for properties of aa different nature, condition or
location, adjusted to reflect those differences, and (b) discounted cash flow projections
based on reliable estimates of future cash flows. If it becomes impossible to measure
fair value reliably, the cost-based -policy should be adopted and retained until the
property is disposed of.

The fair value policy requires the enterprise to revalue its investment properties
each year, any gain or loss being included in the net profit or loss for the period.

If an entity previously measured an investment property at fair value , it shall continue to

measure the property at fair value until disposal (or until the property becomes owner-
occupied property or the entity begins to develop the property or subsequent sale in the
ordinary course of business) even if comparable market transactions become less
frequent or market prices become less readily available.
After initial recognition, an entity that chooses the cost model shall measure all its
investment property in accordance with PAS16’s requirements for that model, other than
those that meet the criteria to be classified as held for sale (or are included in a
disposal group that is classified as held for sale) in accordance with PFRS 5 non-current
assets held for sale and discontinued operations. Investment properties that meet the
criteria to be classified as held for sale (or are included in a disposal group that is
classified as held for sale) shall be measured in accordance with PFRS 5.

Illustration:

Assume Pau Company acquired a tract of land for capital appreciation at a cost of
Php8,000,000 early in 2020. At December 31, 2020, on the basis of an independent
appraisal made, the asset is determined to have a fair value of 9,200,000.

At December 31, 2020, Pau Company using the fair value model shall prepare the
following entry:

Investment property-Land for capital appreciation 1,200,000

Fair value gain on investment property 1,200,000

In determining the fair value of investment property, transaction costs that may be
incurred on sale or disposal costs are not deducted. In addition, the fair value of
investment property, at the enterprise’s reporting date , shall reflect market conditions at
that date.

The best evidence of fair value of investment property, transaction costs that may be
incurred on sale or other disposal costs are not deducted. In the absence of current
prices in an active market, an entity considers information from a variety of sources,
including (IAS 40, paragraph 46):
a. current prices in an active market for properties of different nature, condition
or location, adjusted to reflect those differences;
b. recent prices of similar properties on less active markets, with adjustments to
reflect any changes in economic conditions since the date of the transactions
that occurred at those prices, and]
c. discounted cash flow projections based on reliable estimates of future cash
flows, supported by the terms of any existing lease and other contracts and
by external evidence such as current market rents for similar properties in
the same location and condition, and using discount rates that reflect current
market assessments of the uncertainty in the amount and timing of the cash
flows.
In rare cases when an entity uses the fair value model and the fair value of a specific
investment property cannot be reliably determined on a continuing basis, the entity shall
measure that investment property using the cost model. The residual value of that
property is presumed to be zero. The entity shall continue to measure the remaining
investment property using the fair value model.

If an entity has previously measured an investment property at fair value, it shall

continue to measure the property a fair value until disposal or until the property is
transferred to another classification because of change in use or intention.
 When an entity chooses to classify a property interest held by a lessee under an
operating lease as an investment property, all investment property held by the entity
shall be measured using the fair value model.

b. Cost Model

After the recognition , an entity that chooses the cost model shall measure all of its
investment property at cost less accumulated depreciation less any impairment losses.
Where the cost model is followed, the fair value of the property should be disclosed.

Transfer to or from Investment Property Classification- it should only be made when

there is a change in use, evidenced by:
a. Commencement of owner-occupation (transfer from Investment Property to
Property, Plant and Equipment, PPE)
b. Commencement of development with a view to sale (transfer from Investment
property to Inventories).
c. End of owner-occupation (transfer from PPE to Investment property)
d. Commencement of an operating lease to another party (transfer from inventories to
Investment property).
e. End of construction or development (transfer from PPE to Investment property).

Transfers using the Cost Model

When the entity uses the cost model to measure its investment property, transfers between
investment property, owner-occupied property ( under property, plant and equipment) and
inventories do not change the carrying amount of the property transferred and they do not
change the cost of that property for measurement or disclosure purposes.

Thus, under the cost model, when a building previously classified as an investment property is
transferred to property, plant and equipment classification because the building will be used in
the production or supply of goods or services or for administrative purposes, the entry is

Building xxx
Accumulated depreciation – Building Held
as Investment Property xxx
Building Held as Investment Property xxx
Accumulated depreciation – Building xxx

When land held as investment property is reclassified as inventory, because the enterprise
commences development with a view to sale in the ordinary course of business, the entry is

Inventory xxx
Land held as investment property xxx

When the enterprise commences operating leases to other parties for a property that is
previously held in inventories, the entry is

Building held as property investment xxx

Inventories xxx
Transfer using the Fair Value Model

When reclassification is made for investment property that is carried at fair value, the transfer in
the new classification is also made at fair value. Thus, when investment property carried at fair
value is reclassified as inventory , the entry is

Inventory xxx
Investment property xxx

It is to be understood, that the property is to be adjusted first to its fair value at the date of
reclassification, with change in fair value taken to profit or loss.

When reclassification is made from owner occupied property to investment property that will be
carried at fair value, the excess of fair value over the carrying value shall be taken to
Revaluation Surplus.

When fair value exceeds previous value, the appropriate entry is

Land Held as Investment Property xxx

Land xxx
Revaluation Surplus xxx

When fair value is less than previous carrying value, the appropriately entry is

Land Held as Investment Property xxx

Revaluation Surplus (Equity)/Revaluation Loss (P&L) xxx
Land xxx

Any excess of the previous carrying amount over the fair value at the date of transfer is charged
to Revaluation Surplus balance pertaining to that asset. Any further excess is charged to a loss
taken to profit or loss.

When an inventory item of land or building is reclassified as investment property, the entry is

Land/Building Held as Investment Property xxx

Inventory xxx
Fair value gain on transfer of inventory to
Investment property (to profit or loss) xxx
EXERCISES:

1. Pau Company is a supplier of industrial products, in 2019, the company purchased a plot of
land on the outskirts of a major city. The land was originally acquired at a cost of
Php15,000,000. The area has mainly low-cost public housing and very limited public
transport facilities. The national government has plans to develop the area as an industrial
park in five years time and land’s expected to greatly appreciate in value if the government
proceeds with the plan. Pau Company’s management has not decided what to do with the
property. On December 31, 2020, the property has a current fair value of Php15,400,000.
How should the company classify the property in its December 31, 2020 statement of
financial position?
a. as land at its historical cost of Php15,000,000.
b. as land at its current fair value of Php15,400,000.
c. as investment property at its current fair value of Php15,400,000.
d. as inventory at the lower of cost of Php15,000,000 or current fair value of
Php15,400,000.

c- Pau Company should classify the property as investment property. Although the
management has not determined a use for the property after the park’s development takes
place, in the medium term the land is held for capital appreciation. IFRS/PFRS considers
land as held for capital appreciation, if an entity has not determine that it will use the land
either as owner-occupied property or for short-term sale in the ordinary course of business.

2. Cam Company acquired an investment property with an instalment price Php2,400,000. The
acquisition of the property requires a down payment of 20% and a non-interest bearing note
payable at the end of each year for five years. The prevailing market rate of interest for
similar instrument is 12%. The present value of factor of annuity of 12% for four periods is
3.605. Cam Company incurred transaction costs amounting to Php50,000 for the property.

Down payment (Php2,400,000 x 20%) Php 480,000

PV of Future payments [(Php2,400,000 x 80% )/5] x 3.605 1,384,320
----------------------
Fair value of the investment property 1,864,320
Add: Transaction costs 50,000
----------------------
Historical cost of the investment property Php 1,914,320
==============
3. On January 1, 2020, Pau Company acquired an investment property at a total cost of
Php10,000,000. At December 31, 2020, the carrying value of the property in the company’s
books is Php12,000,000.

On December 31, 2021, Pau Company decided to use the property and immediately
reclassified as plant asset (owner occupied property).

What would be the initial cost of plant asset if it has a fair value of Php13,000,000 at
conversion date?
Php13,000,000 - Transfer from investment property carried at fair value to owner-
occupied property (PPE) or to inventories- the fair value at the time of transfer is
the measure of its new classification.

4. Cam Company, medium-sized entity, has an investment property with a historical cost of
Php4,800,000. On December 31, 2019, the fair value of this investment property is
Php5,600,000. What amount gain or loss should be recognized?

Fair value Php 5,600,000

Carrying value 4,800,000
------------------------
Unrealized gain-to profit or loss Php 800,000
==============
A gain or loss arising from a change in the fair value of investment property shall be recognized
in profit and loss for the period in which it arises.

5. On December 31, 2019, Pau Company’s investment in real property has carrying value of
Php7,200,000 accounted for under the fair value model, before considering market value
adjustment. If the fair value at December 31, 2019 is Php6,000,000, how much should be the
gain or loss on transfer if Pau Company would shift to cost model?
Zero-If an entity has previously measured an investment property at fair value, it
shall continue to measure the property at fair value until disposal (or until the
property becomes owner-occupied property or the entity begins to develop the
property for subsequent sale in the ordinary course of business) even if
comparable market transactions become less frequent or market prices become
less readily available (PAS 40, paragraph 55).

The above standard clearly prohibits an enterprise to transfer from fair value to
the cost model. Therefore, the entity should continue to measure its investment
property at fair market value of Php6,000,000 and recognize an unrealized loss of
Php1,200,000 as a decline in value of the investment not as a loss on transfer from
fair value to cost model.

6. On January 1, 2020, Pau Company acquired an investment property at a total cost of

Php10,000,000. At December 31, 2020, the carrying value of the property in the company’s
books is Php12,000,000.
 On December 31, 2021, Pau Company decided to use the property and immediately
reclassified as plant asset (owner occupied property).

What amount of revaluation surplus Pau Company would recognize a the time of
conversion?

None- The accounting standard requires an entity to use PAS 40 from initial recognition up
to the time the asset is disclosed of. Therefore, the difference between the carrying value and
the fair value of the investment property at the time of transfer/conversion is recognized as an
unrealized gain related to the investment property and be reported in the current year profit
and loss. Application of PAS16 (PPE Revaluation) will come to into play only after the
transfer.

7. On January 2, 2020, Cam Company acquired an investment property and the initial cost of
investment property was Php10,000,000. On the date of acquisition, the company chooses the
cost model to account for its investment. As of December 31, 2021, it has a carrying value of
Php9,800,000 and a fair value of Php10,200,000.

On December 31, 2022, the company decided to transfer the investment property to owner
occupied property that is also under the cost model. On the date of transfer, the fair value of
property is Php10,000,000, while its carrying value was Php9,600,000.

What amount of gain or loss on transfer should the company recognize on December 31,
2022?
No gain or loss- When the company 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.

8. On January 2, 2019, Mari Company converted its occupied property to investment property
that is to be carried at fair value. The carrying value of the property in the company’s books
is Php8,000,000.

Assuming the fair value of the property on the date of transfer or conversion is Php7,600,000,
Mari Company should recognize ____________.
a. A loss of Php400,000 in the profit and loss
b. A Php400,000 deferred los as an asset
c. A Ph400,000 unrealized loss in the shareholder’s equity
d. A Php8,000,000 cost of the investment property.

A- Market value , date of transfer Php 7,600,000

Carrying value, date of transfer 8,000,000
------------------------
 Loss or impairment loss to profit or loss Php 400,000
===============

9. On January 2, 2019, Mari Company converted its occupied property to investment property
that is to be carried at fair value. The carrying value of the property in the company’s books
is Php8,000,000.

Assuming the fair value of the property on the date of transfer or conversion is Php8,800,000,
Mari Company should recognize
a. A Php800,000 unrealized gain in the profit or loss
b. A Php800,000 revaluation surplus in the shareholders’ equity
c. A Php800,000 unrealized gain in the liability section.
d. A Php800,000 direct credit to accumulated profits and losses.

B – Market value, date of transfer Php 8,800,000

Carrying value, date of transfer 8,000,000
-------------------------
Revaluation Surplus-to Shareholder’s
Equity Php 800,000
===============

10. On June 15, 2019, Pau Company sold its investment property for Php6,250,000 net of
disposal cost and other transaction costs of Php150,000. This property was acquired at a
historical cost of Php5,120,000 including total transaction costs of Php190,000 and has a fair
value of Php6,200,000 as of December 31, 2018.

If the company uses the cost model, what amount of realized gain on sale of the investment
property should Pau Company recognize?

Selling price Php 6,250,000

Carrying value 5,120,000
-------------------------
Gain on sale Php 1,130,000
===============

11. On June 15, 2019, Pau Company sold its investment property for Php6,250,000 net of
disposal cost and other transaction costs of Php150,000. This property was acquired at a
historical cost of Php5,120,000 including total transaction costs of Php190,000 and has a fair
value of Php6,200,000 as of December 31, 2018.
 If the company uses the fair value model, what amount of realized gain on sale of the
investment property should Pau Company recognize?

Selling price Php 6,250,000

Carrying value 6,200,000
-------------------------
Gain on sale Php 150,000
==============

The gain or loss on disposal should be the difference between the net disposal proceeds and
the carrying amount of the asset and should be recognized in profit and loss in the income
statement (unless PAS17 leases requires otherwise on a sale and leaseback) in the period of
disposal. Compensation from third parties for investment property that was impaired, lost or
given up shall be recognized in profit and loss when the compensation becomes receivable.

The investment property should be removed from the balance sheet under the following
circumstances: (a) when sold, (b) when the subject of finance lease and leaseback deal, and (c)
when it is withdrawn from use and no further economic benefits are expected to arise.
Compensation from third parties for investment property that was impaired, lost or given up shall
be recognized in profit and loss when the compensation becomes receivable.

12. On January 2, 2002, Pau Company acquired a building costing Php6,000,000. Pau
Company estimated that the useful life of the property id 20 years. Pau Company’s policy is
to depreciate all depreciable assets using the straight line method, with scrap.

On January 2, 2007, the building was remeasured at Php3,000,000 and with remaining
revised useful life of 20 years. On January 2, 2012, Pau Company converted the property
into investment property when the fair value is Php3,500,000.

On January 2, 2024, what amount of gain or impairment recovery should the company
recognize?

Historical Cost Php 6,000,000

Less: Accumulated depreciation
(Php6,000,000/20yrs. X 5 yrs) ( 1,500,000)
--------------------------
Carrying value as of January 2007 Php 4,500,000
===============

Carrying value, Jan , 2007 Php 4,500,000

Fair market value, Jan 2007 3,000,000
---------------------------
Impairment loss-to profit or loss (2007) 1,500,000
================

Fair market value-Jan 2007 Php 3,000,000

Depreciation-2007 to 2011
(3,000,000/20yrs x 5 yrs.) 750,000
------------------------
Carrying value as of Jan , 2012 Php 2,250,000
 ==============

Carrying value-Jan 2, 2007 Php 4,500,000

Depreciation – 2007 t0 2011
(4,500,000/20 yrs x 5 yrs) 1,125,000
------------------------
Carrying value as of Jan 2012
Had no impairment loss Php 3,375,000
==============

Carrying value-Jan 2, 2012 had

No impairment loss Php 3,375,000
Carrying value as of Jan 2, 2012 2,250,000
------------------------
Impairment recovery – to profit
And loss Php 1,125,000
==============