SUBJECT: Accounting 17 NC

Descriptive Title: Auditing and Assurance: Concepts and Applications 2

Instructor: Alfredo R. Cabiso

LESSON NO. 2 – Audit of Investment Property

Page | 1
Learning Objectives:
The students should be able to:
 Describe investment property
 Explain different classification issues for investment property
 Describe the initial recognition, initial measurement, subsequent measurement,
derecognition and financial presentation of investment property

Investment Property
Investment property is property (land or a building or part of a building- or both) held ( by the
owner or by the lessee under finance lease) to earn rentals or for capital appreciation or both.

Examples of Investment property

1. Land held for long-term capital appreciation rather than for short-term sale in the ordinary
course of business.
2. Land held for a currently undetermined future use (if an entity has not determined that it will
use the land as owner-occupied property or for short-term sale in the ordinary course of
business, the land is regarded as held for capital appreciation).
3. A building owned by the entity (or a right-of-use asset relating to a building held by the entity)
and leased out under one or more operating leases.
4. A building that is vacant but is held to be leased out under one or more operating leases.
5. Property that is being constructed or developed for future use as investment property. (under BC
17 of PAS 40, this investment property under construction is to be measured at cost if fair value
cannot be measured reliably until such time as the fair value becomes reliably measurable or
construction is completed (whichever comes earlier)

Not included in investment property

1) Property intended for sale in the ordinary course of business or in the process of construction or
development for such sale, , for example, property acquired exclusively with a view to
subsequent disposal in the near future or for development and resale.
2) Owner-occupied property (PAS 16 and PFRS 16), including (among other things)property held for
future use as owner-occupied, property held for future development and subsequent use as
owner-occupied property, property occupied by employees (whether or not the employees pay
rent at market rates) and owner-occupied property awaiting disposal.
3) Property that is leased to another entity under a finance lease.

Other classification issues

Partial own use
1. If the portions can be sold or leased out separately
a) Investment property-those portions of the property that is rented out or for capital appreciation
b) owner-occupied property-those portions that are used by the company for administrative purposes
2. If the portions cannot be sold or leased out separately
a) Investment property-if the owner-occupied portion is insignificant
b) owner-occupied property – if the investment property portion is insignificant

Intracompany rentals

This study source was downloaded by 100000861999640 from CourseHero.com on 12-05-2023 09:56:01 GMT -06:00

https://www.coursehero.com/file/106984110/Audit-of-Investment-Propertydocx/
 Property rented to a parent, subsidiary, or fellow subsidiary is accounted for as follows:
1. Consolidated financial statements – it is an owner-occupied property from the perspective of the
group
2. Separate financial statement- if is accounted as investment property, by the lessor if the
definition of investment property is met.

Page | 2
Illustration: Classification as Investment Property

The following data was extracted during the financial statement preparation of Brena Company. Brena
Co.’s accountant is unsure how to classify the following items in the statement of financial position due
to Brena Co.’s diverse activities.

Item Amount
1) Factory which due to a decline in activity is no longer required and is now being
held for sale in accordance with PFRS 5 P500,000
2) Farming land was purchased for its investment potential. Planning permission
has not been obtained for building construction of any kind 800,000
3) A factory which is in the process of being constructed on behalf of the
government 1,260,000
4) A building being constructed on behalf of Marky Company 1,000,000
5) A new office building which is used by one of its subsidiaries as its head office
which was purchased specifically in the center of Makati City in order to exploit
its capital gains potential 1,200,000
6) A property that is in the process of construction for sale 950,000
7) A property intended for sale in the ordinary course of business 450,000
8) Owner-occupied property 1,600,000
9) Building occupied by employees. The employees pays rent on the building they
occupied 760,000
10 A building occupied by employees, who do not pay market rent on the building
) they occupied. 240,000
11 A building that is leased to a third party under a finance lease 1,110,000
)
12 A building that is held under mixed use; half of it is owner-occupied and the
) other half is to earn rentals 1,720,000
13 A property wherein significant ancillary services are provided to occupants 960,000
)
14 Land and building that is leased to a subsidiary 2,100,000
)
15 A building that leased to an associate 1,620,000
)
16 A new machine leased to another associate 530,000
)
17 A machine that is leased under operating lease 420,000
)
18 A building that is being constructed for future use as administration building 870,000
)
19 A building held by the entity under a finance lease and leased out under one or
) more operating leases 1,100,000
20 A building owned by the company and being leased out under one or more
) operating leases 1,300,000
21 A building that is being constructed or developed for future use as investment
) property 1,150,000

Required: Identify and compute the amounts to be included in the consolidated financial statement of
Brena Company and its subsidiaries.

This study source was downloaded by 100000861999640 from CourseHero.com on 12-05-2023 09:56:01 GMT -06:00

https://www.coursehero.com/file/106984110/Audit-of-Investment-Propertydocx/
 Solution:
The following items are included as part of investment property:
2) Farming land was purchased for its investment potential. Planning permission
has not been obtained for building construction of any kind 800,000
12 A building that is held under mixed use; half of it is owner-occupied and the
) other half is to earn rentals. Only the portion to earn rentals is included 860,000
(1,720,000/2) Page | 3
15 A building that leased to an associate 1,620,000
)
19 A building held by the entity under a finance lease and leased out under one or
) more operating leases 1,100,000
20 A building owned by the company and being leased out under one or more
) operating leases 1,300,000
21 A building that is being constructed or developed for future use as investment
) property 1,150,000
Total 6,830,000

The following items are not included as investment property

1) Factory which due to a decline in activity is no longer required and

is now being held for sale in accordance with PFRS 5 Non-current asset held
for sale
3) A factory which is in the process of being constructed on behalf of
the government This will be under PFRS
15
4) A building being constructed on behalf of Marky Company This will be under PFRS
15
5) A new office building which is used by one of its subsidiaries as its
head office which was purchased specifically in the center of Makati PPE under PAS 16
City in order to exploit its capital gains potential
6) A property that is in the process of construction for sale Inventory under PAS 2
7) A property intended for sale in the ordinary course of business Inventory under PAS 2
8) Owner-occupied property PPE under PAS 16
9) Building occupied by employees. The employees pays rent on the
building they occupied PPE under PAS 16
10 A building occupied by employees, who do not pay market rent on
) the building they occupied. PPE under PAS 16
11 A building that is leased to a third party under a finance lease This will be derecognized
) under PFRS 16
12 A building that is held under mixed use; half of it is owner-occupied The other half is part of
) and the other half is to earn rentals (1,720,000x1/2) PPE

13 A property wherein significant ancillary services are provided to PPE under PAS 16 since
) occupants the ancillary service is
significant
14 Land and building that is leased to a subsidiary PPE to be reported in the
) consolidated FS
16 A new machine leased to another associate A machine will never
) qualify as investment
property since it is not a
land or building
17 A machine that is leased under operating lease A machine will never
) qualify as investment
property since it is not a
land or building
18 A building that is being constructed for future use as administration This will be covered by
) building PAS 16 during and after

This study source was downloaded by 100000861999640 from CourseHero.com on 12-05-2023 09:56:01 GMT -06:00

https://www.coursehero.com/file/106984110/Audit-of-Investment-Propertydocx/
 construction

Page | 4

This study source was downloaded by 100000861999640 from CourseHero.com on 12-05-2023 09:56:01 GMT -06:00

https://www.coursehero.com/file/106984110/Audit-of-Investment-Propertydocx/
 Initial Recognition
Investment property should be recognized as an asset when it is
a. probable that the future economic benefits that are associated with the property will flow to
the enterprise, and
b. the cost of the property can be reliably measured

Initial Measurement Page | 5

Investment property is initially measured at cost, including transaction costs. Directly
attributable costs includes, for example, professional fees for legal services, property transfer
taxes and other transaction costs.

Cost of self-constructed Investment Property

The cost of a self-constructed investment property is total cost incurred at each reporting date or
at the date when the construction or development is complete whichever is earlier.

Investment property held under finance lease

The initial cost of a property interest held under a finance lease and classified as an investment
property shall be recognized at the lower of the
a) fair value of the property and
b) present value of the minimum lease payment

Subsequent Measurement
After initially recognizing the investment property at cost, an entity may choose between the:
1. Fair value model; or
2. Cost model

ILLUSTRATIVE PROBLEMS

Attached are copies of problems for discussion

This study source was downloaded by 100000861999640 from CourseHero.com on 12-05-2023 09:56:01 GMT -06:00

https://www.coursehero.com/file/106984110/Audit-of-Investment-Propertydocx/

Powered by TCPDF (www.tcpdf.org)