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THEORY OF ACCOUNTS INVESTMENT PROPERTY (PAS 40)

1. BACKGROUND AND INTRODUCTION 1.2 This Standard prescribes criteria for the accounting treatment for, and disclosures relating to, investment property. 2.2 The Standard shall be applied in the recognition, measurement, and disclosure of investment property. 3.2 The Standard applies to the measurement in lessees financial statements of investment property held under a finance lease and to the measurement in the lessors financial statements of investment property leased out under an operating lease. However, all other aspects relating to leases, their accounting and their disclosure, are dealt with in PAS 17, Leases. Additionally, the Standard does not deal with biological assets related to agricultural activity (see PAS 41) or to mineral rights reserves such as oil, natural gas and similar nonregenerative resources (see PFRS 6). 2. DEFINITIONS OF KEY TERMS (in accordance with PAS 40) Investment property Land or building, part of a building, or both, held by the owner or the lessee under a finance lease to earn rentals and/or for capital appreciation, rather than for use in production or supply of goods and services or for administrative purposes or for sale in the ordinary course of business. Owner-occupied property Property held by the owner or the lessee under a finance lease for use in production or supply of goods and services or for administrative purposes. 3. INVESTMENT PROPERY 3.1 Property interests held by a lessee under an operating lease may (i.e., it is optional) be classified and recognized as an investment property if and only if the property would otherwise meet the definition of an investment property and the property is measured using the fair value model described later. This aspect of recognizing investment property is a comparatively recent addition and was included in response to the fact that in some countries, properties are held under long leases that provide, for all intents and purposes, rights that are similar to those of an outright buyer. The inclusion in the Standard of such interests permits the lessee to measure such assets at fair value. 1.2 One of the distinguishing characteristics of investment property (compared to owner-occupied property) is that it generates cash flows that are largely independent from other assets held by an entity. Owner-occupied property is accounted for under PAS 16, Property, Plant, and Equipment. 3.3 In some instances, an entity occupies part of a property and leases out the balance. If the two portions can be sold separately, then the entire property is treated as investment property only if an insignificant proportion is owner-occupied. 3.4 Sometimes a property owner provides ancillary services, such as cleaning, maintenance, and security. Provided that such services are insignificant to the arrangement as whole, then the property is an investment property. 3.5 In other casesfor instance, a hotelservices can be significant, such as services provided to guests. Some hotel management arrangements render the owner merely a passive investor. Judgment must be used in determining whether the property satisfies the definition of an investment property. 3.6 An issue arises with groups of companies wherein one group company leases a property to another. At group, or consolidation level, the property is owner-occupied. However, at individual company level, the owning entity treats the building as investment property. Appropriate consolidation adjustments would need to be made in the group accounts. 4. RECOGNITION 4.1. Investment property shall be recognized as an asset when and only when

2 It is probable that future economic benefits will flow to the entity; and The cost of the investment property can be measured reliably.

4.2 Recognition principles are similar to those contained in PAS 16. 5. MEASUREMENT 5.1 Measurement at Recognition 5.1.1 An investment property shall be measured initially at cost, including transaction charges. Again, the principles for determining cost are similar to those contained in PAS 16, in particular for replacement and subsequent expenditure. 5.1.2. However, property held under an operating lease shall be measured initially using the principles contained in PAS 17, Leasesat the lower of the fair value and the present value of the minimum lease payments. A key mater here is that the item accounted for at fair value is not the property itself but the lease interest. 5.2. Measurement After Recognition An entity shall select either the cost model or the fair value model for all its investment property. There are, however, two exceptions. If an entity elects to classify property held under an operating lease as investment property, then it must select the fair value model for all its investment property. The second exception is I the entity has investment property backing liabilities that pay a return linked to the fair value of the assets; if so, regardless of which model is selected for measuring such investment property, the entity continues to have a choice of models for its other investment property. 5.3. Fair Value Model 5.3.1. If the fair model value is selected, after initial recognition, investment property shall be measured at fair value. Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arms-length transaction. 5.3.2 Any gains and losses arising from changes in fair value shall be recognized in the income statement. This is quite a radical divergence from previous practices but is consistent with other Standards wherein assets are held in part for capital appreciation. The issue is that any gain on such remeasurement is unrealized, and, in many jurisdictions, the retained earnings of an entity are considered distributable (although some jurisdictions have legal definitions of distributable reserves). Consequently, many entities then transfer an amount from retained earnings to a capital reserve that may be treated as distributable only upon disposal of the related asset. 5.3.3 When applying the fair value model, the fair values should reflect the market conditions at the balance sheet date. Valuations, therefore, carried out at date too far removed from the balance sheet date and would be unacceptable. In addition, care needs to be taken as equipment, such as lifts, air conditioning, and the like, may be recognized as separate assets. Valuations usually include such assets, which should not be double counted. 5.3.4 If, on acquisition, it is not possible to determine fair value reliably on a continuing basis, then the asset shall be measured using the cost model under PAS 16 until disposal. Residual value shall be assumed to be zero. Therefore, it possible for an entity to hold investment property, some of which is measured at fair value and some under the cost model. If an entity measures investment property at fair value, it shall continue to do so until disposal, even if readily available market data become less frequent or less readily available.

5.3.5

5.4 Cost Model An entity that selects the cost model shall measure all of its investment property in accordance with PAS 16s requirements for that model except those classified as held for sale in accordance with PFRS 5. 5.5 Transfers

5.5.1

3 Transfers to and from investment property shall be made when and only when there is a change of use evidence by Commencement of owner occupation (transfer from investment property to property, plant, and equipment) Commencement of development with a view to sale (transfer from investment property to inventories) End of owner occupation (transfer from property, plant, and equipment to investment property) Commencement of an operating lease to another party (transfer from inventories or property, plant, and equipment to investment property) End of construction or development (transfer from property under construction, covered by PAS 16, to investment property) In cases where the fair value model is not used, transfers between classification are made at the carrying value: the lower of cost and net realizable value if inventories, or cost less accumulated depreciation and impairment losses if property, plant, and equipment. If owner-occupied property is transferred to investment property that is to be carried at fair value, then, up to the change, PAS 16 is applied. This is to say, any revaluation in fair value, is treated in accordance with PAS 16. Transfers from investment property at fair value to property, plant, and equipment shall be at fair value, which becomes deemed cost. For transfers from inventories to investment properties that are to be carried at fair value, the remeasurement to fair value is recognized in the income statement. When a property under construction is completed and transferred to investment property to be carried at fair value, the remeasurement to fair value is recognized in the income statement.

5.5.2

5.5.3

5.5.4 5.5.5 5.5.6

6 DISPOSALS An investment property shall be derecognized on disposal or at the time that no benefit is expected from future use or disposal. Any gain or loss is determined as the difference between the net disposal proceeds and the carrying amount and is recognized in the income statement. 7 DISCLOSURES 7.1 Fair Value and Cost Model An entity shall disclose Whether it applies the cost or fair value model If it applies the fair value model, whether and under what circumstances property interest held under operating leases are classified and accounted as investment property When classification is difficult, the criteria used to distinguish investment property, owneroccupied property and property held for disposal in the ordinary course of business The methods used and significant assumptions made in determining fair value The extent to which fair values are based on assessments by an independent and qualified valuer. If there are no such valuations, that fact shall be stated The amount recognized in the income statement for o Rental income from investment property o Direct operating expenses that generated rental income o Direct operating expenses that did not generate rental income o Cumulative change in fair value recognized in the income statement on sale of investment property from a pool of assets in which the cost model is used to a pool in which the fair value model is used Existence and amounts of restrictions on the realizability of investment property; or for the remittance of income and proceeds on disposal Contractual obligations to purchase, construct, or develop investment property or for repairs, maintenance, or enhancements 7.2 Fair Value Model

7.2.1 7.2.2

4 If an entity applies the fair value model, it shall also disclose a reconciliation of the opening and closing carrying values of investment property, showing Additions, showing separately acquisitions, subsequent expenditure, and additions through business combinations Assts classified as held for sale under PFRS 5 Net gains or losses from fair value adjustments Net exchange differences arising on translation of financial statements in a different reporting currency Transfers to and from inventories and owner-occupied property Other changes When a valuation for an investment property is adjusted to avoid double counting of assets such as equipment that may be recognized separately, a reconciliation of the adjustments shall be disclosed. When fair value cannot be measured reliably and the asset is stated in accordance with PAS 16, such assets shall be disclosed separately from those at fair value. In addition to the movement disclosures set out above, disclosures shall be made of the Description of properties stated in accordance with PAS 16 Explanation as to why fair value cannot be reliably measured Range of estimates, if possible within which the fair value is highly likely to fall Disposals of investment property not carried at fair value

7.2.3

7.3 Cost Model For investment properties measured under the cost model, an entity shall disclose Depreciation methods used Useful lives or depreciation rates used A reconciliation of the opening and closing gross carrying amounts and the accumulated depreciation and impairment losses, showing o Addition, showing separately acquisitions, subsequent expenditure, and addition through business combinations Assets classified as held FOR SALE UNDER PFRS 5 Impairment losses recognized and reversed Net exchange difference Transfers to and from inventories and owner-occupied property Other changes The fair value of investment property and, if fair value cannot be reliably measured o Explanation as to why fair value cannot be reliably measured o Range of estimates, if possible within which the fair value is highly likely to fall o Disposals of investment property not carried at fair value

AGRICULTURE (PAS 41)

1. BACKGROUND AND INTRODUCTION The main objective of PAS 41 is to establish accounting standards for agricultural activity.This Standard applies to biological assets,agricultural produce at the point of harvest,and government grants.The standard does not apply to land related to agricultural activity,which is covered by PAS 16,Property,Plant, and Equipment,and PAS 40,Investment Property,or to intangible assets related to agricultural activity,which are covered by PAS 38,Intangible assets. 2. DEFINITION OF KEY TERMS (in accordance with PAS 41) Biological assets.Living plants and animals. Agricultural produce. The harvested product of the entity's biological asset,for example,milk and coffee beans. Biological transformation.Relates to the processes of growth,degeneration,and production that can cause changes of quantitative or qualitative nature in a biological asset. Active market.One where the conditions exist:the items traded in the market are homogeneous;willing buyers and sellers normally can be found at any time; and prices are available to the public. Fair value.The amount for which an asset can be exchanged or a liability settled in an arm's length transaction between knowlegeable and willing parties. The fair value of an aseet is based on its present location and condition. Government grants.Those as defined in PAS 20,Accounting for Government Grants and disclosure of Government Assistance. 3. RECOGNITION AND MEASUREMENT 3.1 An entity should recognized a biological asset or agricultural produce when the enterprise Controls the asset as a result of past events; and It is probable that future econoic benefits will flow to the entity Additionally,the fair value or cost of the asset should be able to be measured reliably.Any biological asset should be measured initially and at each balance sheet date,at its fair value less estimated point-of-sale costs.The ony exception to this is where the fair value cannot be measured reliably. 3.2 Agriculutural produce should be measured at fair value less estimated point-of-sale costs at the point of the harvest.Unlike a biological asset,there is no exception in cases in which fair value cannot be measured reliably.According to PAS 41,agricultural produce can always be measured reliably.Point-ofsale costs include brokers'and dealers' commission,any levies by regulatory authorities and commodities exchanges,and any transfer taxes and duties.They exclude transport and other costs necessary to get the assets to a market. 3.3In deciding of the fair value for a biological asset or agricultural produce,it is possible to group together items in accordance with,for example,their age or quality.Entities often contract to sell their biological asset or produce at a future date.These contract prices do not necessarily present fair value.Therefore,the fair value of a biological asset or produce is not necessarily adjusted because if the existence of a contract.In many cases these contracts may in fact be onerous contracts,as defined in PAS 37.If an active markte exists for the asset or produce,then the price in the market maybe the best way of determining fair value. 3.4If an entity has access to different active markets,then the entity will choose the most relevant and reliable price that is the one at which it is most likely to sell the asset. If an active market does not exists,then these methods can be used to determine fair value: The most recent market transaction price Market prices for similar asset after adjustment to reflect any differences in the asset Any benchmarks within the sector,such as the value of cattle per kilogram

6 3.5 In some cases, market prices or values may not be available for an asset in its present conditions.In these cases,the entity can used the present value of the expected net cash flow from the asset discounted at the current market pre tax rate.In some cirumtances,cost maybe an indicator of fair value,especially were little biological transformation has taken place or the impact of biological transformation on the price is not expected to be significant 4.GAINS AND LOSSES 4.1Any gain on the initial recognition of biological asset at fair value less estimated point-of-sale costs and any changes in the fair value less estimated point-of-sale costs of biological asset during the reporting period are included in profir or loss for the period.Any gain on the intial recognition of agricultural produce at fair value less estimated point-of-sale costs will be included in profit or loss for the period to which it relates.All costs related to biological asset that are measured at fair value are recognized in profit or loss where incurred,except for costs to purchase biological asset. 4.2 The standard does not explicitly prescribe how to account for subsequent expenditures related to biological asset.A gain or loss therefore arise when an animal is born,plants and animals grow,plants are harvested or animal generate agricultural produce. Losses can arise on the initial recognition of the purchase of the animals, as their fair value less estimated point-of-sale costs are likely to be less than the purchase price plus any transaction and transportation costs. 5 FAIR VALUE RELIABILITY 5.1 PAS 41 presumes that fair value can be measured reliably for a biological asset.However,it is possible that this presumption can be rebutted for a biological asset that,when it is first recognized does not have a quoted market price in an active market and for which other valuation methods are clearly in appropriate or unworkable.In this case,the asset is measured at costs less accumulated depreciation and any impairment losses. All the other biological asset of the entity still must be measured at fair value. If circumstances do change and fair value becomes reliably measurable,then the entity must change its valuation method to fair value less point-of-sale costs. 5.2 If a non current biological assets meets the criteria to be classified as held for sale or is included in a disposal group in accordance with PFRS 5, then t is presume that fair value can be measured reliably. 5.3 In determining costs,the depreciation,and impairment losses,the entity should used PAS 2, PAS 16, and PAS 36 6. GOVERNMENT GRANTS. 6.1 A government grant that is related to a biologiacal asset measured at fair value less estimated point-of-sale costs should be recognized as income when the government grant becomes receivable. If there are conditions attached to the government then the government shall be recognized only when those conditions are net.PAS 20 is applied only to a government grant that is related to a biological aset which have been measured at costs less accumulated depreciation and impairment losses. 6.2 PAS 41 is not deal with government grants that relates to agricultural produce,These grants may include subsidies.Subsidies are normally payable when the produce is solved and would therefore be recognized as income in the sale. 7. ISSUES IN PAS 41 7.1 The change in the fair value of biological assets is twofold: There can be a physical change through growth and there can be a price change. Seperate disclosure of these two elements is encouraged but not required. Where biological asset are harvested, then fair value measurement stops at the time of the harvest, and PAS 2,Inventories,appiles after that date. 7.2 Agricultural land is accounted for under PAS 16, but biological assets that are attached to the land are measured separately from the land. 8. DISCLOSURES An entity shall disclose the aggregate gain or loss that are arises on the initial recognition of biological assets and agricultural produce and from the change in value less point-of-sale costs of the biological assets. A description of each group of biological asset is also required. If it is not disclosed anywhere else in the financial statements, then the entity shall also set out the nature of each activities and non

7 financial measures or estimates of the physical quantity of each group of the entitys biological asset at period end. It should be supply the same information for the output for agricultural produce during the period. The methods and assumptions applied in determining fair value should also be disclosed. The fair value less estimated point-of-sale costs of agricultural produce harvested during the period shall be disclosed of the point of harvest. The existence in carrying the amount of biological asset whose title restricted in any biological assets placed as security should be disclosed. The amount of any commitments on the development or acquisition of biological assets and managements financial risks strategies should also be disclosed A reconciliation of the changes in the carrying amount of biological assets showing separately changes in value, purchases, sales, harvesting, business combination, and exchanged differences should be disclosed. Where fair value cannot be measured, then additional disclosures is required including the description of the asset, an explanation of the circumstances it possible a range within which the fair value is likely to fall, any gain or loss recognized on disposal, depreciation method and useful lives or depreciation rates. The gross carrying amount on the accumulated depreciation should also be shown. If the fair value of biological assets previously measured at costs less accumulated depreciation and impairment losses is now ascertainable, then additional disclosures are required such as description of the biological assets, an explanation as to why fair value is now reliably measurable, and the effect of the change. Regarding government grants, disclosures should be made as to the nature and extent of the grants, any conditions that have not been fulfilled, in any significant decreases in the expected level of the grants.