MODULE 6 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

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A synchronous discussion for this lesson will be scheduled on September 8, 2020 (Tuesday
7:30 – 8:30 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]

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.

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]

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]

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, including transaction costs. Such cost should
not include start-up costs, abnormal waste, or initial operating losses incurred before the invest-
ment 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.

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]

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]

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 6 Post-test
PRACTICAL ACCOUNTING 1 – REVIEW
INVESTMENT PROPERY
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 September 11, 2020 (Friday)

1. Tricia Company and its subsidiaries own the following properties:

Land held for future factory site 4, 000, 000

Machinery leased out by Tricia to an unrelated party under an operating lease 1, 500, 000
Land held by Tricia for undetermined use 5, 000, 000
A vacant building owned by Tricia and to be leased out under an operating lease 3, 250, 000
Land leased by Tricia to a subsidiary under an operating lease 2, 000, 000
Property held by a subsidiary of Tricia, a real estate firm, in the ordinary course of 2, 610, 000
business
Property held by Tricia for use in production 3, 950, 000
Building owned by a subsidiary of Tricia and for which the subsidiary provides 1, 750, 000
security and maintenance services to the lessees
Property under construction for use as investment property 5, 550, 000

What is the total investment property that should be reported in the consolidated statement of financial position of the
parent and its subsidiaries?
a. 15, 550, 000 b. 15, 550, 000 c. 17, 170, 000 d. 21, 660, 000

2. On January 1 2020, Jerome company acquired property consisting of ten identical freehold detached houses each
with separate legal title including the land on which it is built for P200,000,000 , 20% of which is attributable to the
land. The units have a useful life of 50 years.

The following costs are also incurred on such date:

• Nonrefundable transfer taxes not included in the purchase price 20,000,000
• Legal cost directly attributable to the acquisition 1,000,000
• Reimbursement to the previous owner for
prepaying nonrefundable property taxes
for the sixth-month period ending June 30, 2020 10,000
• Advertising campaign 500,000
• Opening function to celebrate new rental business 200,000

On June 30 2020, the entity paid local property taxes of 20,000 for the year ending June 30 2021. Throughout 2020
the entity incurred repairs and maintenance of 120,000.
 The entity used one of the ten units to accommodate the administration and maintenance staff. The other nine units
are rented out to independent parties under an operating lease.

On December 31 2020, the fair value of each unit was reliably estimated at 25,000,000. The fair value of the units
can be measured reliably. The accounting policy is to use the fair value model for investment property.

What is the gain from the increase in fair value of investment property for the current year?
a. 51,100,000 b. 27,000,000 c. 45,000,000 d. 26,100,000

3. Jelly Company acquired a real property for speculation purpose with the intention of selling it at a higher price in the
long term. The property was acquired at cash price of 3,000,000. The property has 100,000 unpaid real property tax
assumed by Jelly Company. In addition, the company also paid the following transaction costs: broker’s commission
of 20,000 and registration cost of 35,000.

How much should Jelly Company record the Investment Property?

a. 3,155,000 b. 3,100,000 c. 3,055,000 d. 3,000,000

4. The construction of the condominium was completed and the property was placed in service on January 1, 2020.

The cost of the construction was 40,000,000. The useful life of the condominium is 20 years and the residual value is
4,000,000.

An independent valuation expert provided the following fair value at each subsequent year-end:

12/31/2020 50,000,000
12/31/2021 43,000,000
12/31/2022 55,000,000

1. Under the cost model, what amount should be reported as depreciation of investment property 2020?
a. 1,800,000 b. 2,000,000 c. 2,200,000 d. 0

2. Under the fair value model, what amount should be recognized as gain from change in fair value in 2020?
a. 7,000,000 b. 10,000,000 c. 12,000,000 d. 0

3. Under the fair value model, what amount should be recognized as gain from change in fair value in 2022?
a. 7,000,000 b. 10,000,000 c. 12,000,000 d. 0

5. Considerate Company has a single investment property which had an original cost of 5,800,000 on January 1, 2018

On December 31, 2020 the fair value was 6,000,000 and on December 31, 2021 the fair value was 5,900,000.

On acquisition, the property had a useful life of 40 years.

What is the expense recognized in profit or loss for 2021 under the fair value model and cost model?

Fair value model Cost model

a. 147,500 145,000
b. 100,000 145,000
 c. 145,000 100,000
d. 100,000 147,500

6. Janna Company purchased an investment property in January 1, 2018 for 3,450,000. The property had a useful life
of 35 years and on December 31, 2020 had a fair value of 4, 000,000. On December 31, 2020, the property was sold
for net proceeds of 3,900, 000. The entity used the cost model to account the investment property.

What is the gain or loss to be recognized for the year ended December 31, 2020 regarding the disposal of the
property?
a. 645, 315 b. 735, 451 c. 745, 715 d. 815, 669

7. Company A is a financial service entity that is involved in real estate development. Company A has purchased land in
Quezon City through the exercise of a purchase option that had been acquired some years ago. The purchase price
was P 20,000,000 and the land’s fair value as determined by an independent value is P 46,400,000 on December 31,
2020.

Company A should report the property as

a. Investment property at its original cost of P 20,000,000
b. Investment property at its fair value of P 46,400,000
c. Inventory at its original cost of P 20,000,000
d. Inventory at its fair value of P 46,400,000

8. Brian’s investment property has a historical cost of 1,400,000. On December 31, 2020, the fair value of this
investment property is 1,800,000. If Brian Company uses the fair value model to account for the difference, Brian
should
a. Recognized a 400,000 unrealized gain in shareholder’s equity
b. Recognized a 400,000 unrealized gain in income statement
c. Recognized a revaluation surplus of 400,000
d. Not recognized the 400,000 increase

9. On January 2, 2021, Lighty Company converted its occupied property to investment property that is to be carried at
fair value. The carrying value of property in the company’s books is 4,000,000.

Assuming the fair value of the property on that date of transfer or conversion is 4,400,000, Mighty Company should
recognize
a. A 400,000 unrealized gain in the profit or loss
b. A 400,000 revaluation surplus in the share holders’ equity
c. A 400,000 unrealized gain in the liability section
d. A 400,000 direct credit to accumulated profits and losses

10. On January 2, 2020, Maxwell Company acquired an investment property and the initial cost of investment property
was 4,000,000. As December 31, 2021, it has a carrying value of 3,900,000 at fair value model. On December 31,
2022, the company decided to transfer the investment property to owner occupied property. On the date of transfer,
the fair value of property is 3,700,000.

What amount of gain or loss on transfer should the company recognize on December 31, 2022?
 a. No gain or loss
b. 100,000 loss
c. 200,000 loss
d. 300,000 loss

11. On January 2, 2021, Sintas Corporation has an investment property that was carried at fair value with a carrying
amount of P2,500,000 (historical cost, P,2,400,000). As of December 31, 2021, the carrying value of the property is
P2,600,000. On December 31, 2021, the fair market value of the property was P2,800,000. On this date, Sintas
Corporation decided to reclassify/transfer the property to inventory.

On the date of transfer, what amount should the inventory be valued?

a. 2,400,000 b. 2,500,000 c. 2,600,000 d. 2,800,000

12. On January 1, 2021, Casper Company acquired an investment property at a total cost of 1, 000,000. At December
31, 2021, the carrying value of the property in the company’s books is 2, 000,000. On December 31, 2022. Casper
Company decided to use the property and immediately reclassified as plant asset.

1. What would be the initial cost of the plant assert if it has a fair value of 2,500,000 at conversion date?
a. 1,000,000 b. 1,500,000 c. 2,000,000 d. 2,500,000

2. What amount of revaluation surplus Casper Company would recognize at the time of conversion?
a. None b. 500,000 c. 1,000,000 d. 1,500,000