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Accounting for Investment Property

DEFINITION

What is investment property (IP)?

MFRS140 defines IP as property (land or building, or part of a building or both) held by

the owner or by the lessee under a finance lease for ‘rentals’ or for ‘capital
appreciation’ or both. IP is property that is not substantially occupied by the owner
(NOT use in the production or supply of goods or services or for administrative purposes
and NOT for sale in the ordinary course of business).

Can the following property be classified as IP?

• Land held for capital appreciation. YES

• Land held for undetermined future use. YES
• A building acquired under a finance lease and held for capital appreciation YES
• A building owned by an entity but leased out to a third party under operating lease.
YES
• A building acquired under a finance lease but leased out to a third party under
operating lease. YES
• A building that is rented out to tenants. YES
• A building used as the headquarters of the entity. NO
• A factory building used in producing goods. NO
• A building held by a developer for sale. NO
• A building being constructed on behalf of a third party. NO
• Land held for short term sale. NO
• Owner occupied property. NO
• A building leased out to another party under a finance lease. NO
4E 4F

Can a building that is partly occupied be classified as IP?

Yes, if it is not substantially occupied. E.g., less than 10% of a building is occupied.

Can a building that is rented out to tenants be classified as IP if the owner earns fees for
providing ancillary services (such as security and maintenance services)?

Yes, if the amount of fees is insignificant. No, if the amount of fees is significant.

Usage of IP is an important factor in determining whether the asset is an IP or not.

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RECOGNITION OF IP

When can an IP be recognised as asset in the financial statements?

According to MFRS140, an IP can be recognised as asset when:

i. The entity has a control over the resources arising from past event;

ii. It is probable that the future economic benefits associated with the IP will flow to
the entity; and

iii. The cost of the IP can be measured reliably.

What are the potential economic benefits from IP?

Rental income and the appreciation in value of IP.

INITIAL MEASUREMENT

How should the IP be initially measured in the FS?

An IP shall initially be measured at its cost, plus the associated transaction costs (capital
expenditure).

How should the revenue expenditure on IP be treated?

Revenue expenditure should be expensed-off to P/L.

(Refer to TLT example 33) (Example 4 page 400)

MEASUREMENT AFTER RECOGNITION (SUBSEQUENT MEASUREMENT)

An entity may choose to adopt a policy of accounting for IP either by using:

i) the fair value model or

ii) the cost model.

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Fair value model:

IP shall be measured at fair value. A change in the fair value of the IP shall be
recognised in the P/L for the period in which it arises.
(SOPL – Fair value gain [if the value increases];
Fair value loss [if the value decreases])

How should an entity determine the fair value of the IP using fair value model?

The fair value shall reflect the market conditions at the end of the reporting period based
on:

i) Fair value of recently transacted prices of similar properties.

ii) External professional valuation (by an independent professional valuer).

How should an entity treat the profit or loss arising from the change in fair value of IP?

The gain or loss arising from a change in fair value of IP shall be recognised in P/L for
the period in which it arises.

(Refer to TLT example 35)… Read also from page 510-526

(Example 6 page 402)

*** Under the fair value model, any gain or loss on subsequent measurement or
revaluation will be accounted in the SOPL as realised profit or loss for the year.

The fair value model is different from revaluation model (PPE) even though both
are using the fair market value. The major differences are:

a. The fair value model (IP) does not consider depreciation but revaluation
model (PPE) does consider depreciation.

b. The gain or loss under fair value model (IP) is realised in the SOPL
whereas under the revaluation model the gain is credited to Asset
Revaluation Reserve (ARR) and is not realised immediately, unless there
is no earlier surplus on revaluation.

Cost model:

How should an entity determine the carrying value of the IP using cost model?

i) If the IP has a finite life (such as building), the IP shall be measured at cost less
accumulated depreciation less accumulated impairment losses.

ii) If the IP has infinite life (such as freehold land), the IP shall be measured at cost
less accumulated impairment losses.
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Illustration

Meelopa Bhd acquired a building on 1.1.2013 at RM5 million and it qualified as

investment property. The economic life of the building was estimated to be 40 years.
The fair market value of the building as at 31.12.2013 was RM 5.5 million and as at
31.12.2014 was RM5.3 million. The relevant journal entries for the year ended 31
December 2013 and 2014 are as follows:

Cost model

1.1.2013

Dr Investment property/ Building 5,000,000

Cr Bank 5,000,000

31.12.2013

Dr Depn exp (SOPL) 125,000

Cr Acc. depreciation 125,000

31.12.2014

Dr Depn exp (SOPL) 125,000

Cr Acc. depreciation 125,000

Fair value model

1.1.2013

Dr Investment property/ Building 5,000,000

Cr Bank 5,000,000

31.12.2013

Dr Investment property / Building 500,000

Cr Fair value gain on IP / SOPL 500,000

31.12.2014

Dr Fair value loss on IP / SOPL 200,000

Cr Investment property / Building 200,000
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TRANSFER TO OR FROM IP

Transfer to or from IP shall be made when, and only when there is a change in use:
i. From IP to owner occupied property (PPE): Upon commencement of owner-
occupation.
ii. From IP to inventories: Upon commencement of development with a view to sale.
iii. From owner-occupied property (PPE) to IP: When the owner-occupation ends.
iv. From inventories to IP: Upon commencement of operating lease to another party.

DISPOSAL OF IP

An IP shall be derecognised on disposal.

Gains or losses on retirement or disposal of IP shall be determined as the difference
between the net disposal proceeds and the carrying amount of the asset, and shall be
recognised in P/L.

DISCLOSURE REQUIREMENTS

An entity is required to disclose:

a. Whether it applies / adopts the fair value model or the cost model.

b. If it applies a fair value model, in what circumstances the property interests held
under operating leases are classified.

c. The criteria it uses to distinguish IP from owner-occupied property.

d. The methods and significant assumptions applied in determining the fair value of
IP.

e. Whether the fair value of IP was based on a valuation by an independent

professional valuer or not. (The entity shall disclose if a valuer was not engaged)

f. The amount recognised in P/L for:

i. rental income from IP;

ii. direct operating expenses (including repairs and maintenance) arising from
IP that generated rental income;

iii. direct operating expenses (including repairs and maintenance) arising from
IP that did not generate rental income;

iv. the cumulative change in fair value recognised in P/L.

Jismi Md Salleh - Free class notes – Not for sale
Jismi Md Salleh - Free class notes – Not for sale
Jismi Md Salleh - Free class notes – Not for sale
Jismi Md Salleh - Free class notes – Not for sale
Jismi Md Salleh - Free class notes – Not for sale
 Jismi Md Salleh - Free class notes – Not for sale

IP if we do not significantly use the building for production…..

IP if insignificantly use the building….