‭PAMANTASAN NG LUNGSOD NG VALENZUELA‬

‭ OLLEGE OF BUSINESS AND ACCOUNTANCY ADMINISTRATION‬

C
‭Department of Accountancy‬ ‭FAR 3 :‬‭Investment Property‬

‭Investment Property‬

I‭ nvestment‬‭Property‬‭is‬‭property‬‭(land‬‭or‬‭a‬‭building‬‭or‬‭part‬‭of‬‭a‬‭building‬‭or‬‭both)‬‭held‬‭(by‬‭the‬‭owner‬‭or‬‭by‬‭the‬‭lessee‬‭under‬‭a‬‭finance‬
‭lease) to earn rentals or for capital appreciation or both. (IAS 40.5]‬

‭ he‬‭property‬‭held‬‭by‬‭an‬‭owner‬‭or‬‭by‬‭the‬‭lessee‬‭under‬‭a‬‭finance‬‭lease‬‭for‬‭use‬‭in‬‭the‬‭production‬‭or‬‭supply‬‭of‬‭goods‬‭or‬‭services,‬‭or‬‭for‬
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‭administrative‬‭purposes‬‭is‬‭known‬‭as‬‭owner-occupied‬‭property‬‭.‬‭The‬‭cash‬‭flow‬‭generated‬‭is‬‭attributable‬‭not‬‭merely‬‭to‬‭the‬‭property‬‭but‬
‭also to other assets used in production or supply process.‬

‭Examples of Investment Property:‬

‭●‬ ‭Land held for‬‭long-term capital appreciation‬
‭●‬ ‭Land held for a‬‭currently undetermined future use‬
‭●‬ ‭Building‬‭leased out‬‭under an operating lease‬
‭●‬ ‭Vacant building‬‭held to be leased out‬‭under an operating‬‭lease‬
‭●‬ ‭Property that is being‬‭constructed or developed‬‭for‬‭future use as investment property‬

‭NOT considered as Investment Property:‬

‭●‬ ‭Owner-occupied‬ ‭Property‬ ‭or‬ ‭property‬ ‭held‬ ‭for‬ ‭use‬ ‭in‬ ‭the‬ ‭production‬ ‭or‬ ‭supply‬ ‭of‬ ‭goods‬ ‭or‬ ‭services‬ ‭or‬‭for‬‭administrative‬
‭purposes.‬
‭●‬ ‭Property held for future use as owner-occupied property‬
‭●‬ ‭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 rate.‬
‭●‬ ‭Owner-occupied property awaiting disposal.‬
‭●‬ ‭Property held for sale in the ordinary course of business or in the process of construction or development for such sale.‬
‭●‬ ‭Property being constructed or developed on behalf of third parties‬
‭●‬ ‭Property that is leased to another entity under a finance lease‬

‭Investment Property held by lessee‬

‭●‬ ‭IFRS 16, requires a lessee to recognize a right of use of asset and a lease liability‬
‭●‬ ‭The right of use asset is initially recognized at cost which includes the following:‬
‭○‬ ‭The present value of the lease payment‬
‭○‬ ‭Lease payment made to the lessor at or before commencement date less any lease incentive‬
‭○‬ ‭Initial direct cost incurred by the lessee‬
‭○‬ ‭Estimate of cost of dismantling and restoring the underlying asset for which the lessee has a present obligation‬

‭ ubsequent measurement - Investment Property held by lessee‬

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‭○‬‭IFRS‬‭16,‬‭paragraph‬‭34,‬‭provides‬‭that‬‭if‬‭a‬‭lessee‬‭applies‬‭the‬‭fair‬‭value‬‭model‬‭in‬‭measuring‬‭Investment‬‭Property,‬‭the‬‭lessee‬‭shall‬‭also‬
‭apply the fair value model to the right of use asset that meets the definition of Investment Property.‬

‭Partly Investment Property & Partly Owner-occupied Property‬

‭●‬ ‭If these portions could be sold or leased out separately, an entity shall account it separately.‬
‭●‬ ‭If‬ ‭the‬ ‭portion‬ ‭could‬ ‭not‬ ‭be‬ ‭sold‬ ‭separately,‬ ‭the‬ ‭property‬ ‭is‬ ‭investment‬ ‭property‬‭if‬‭only‬‭an‬‭insignificant‬‭portion‬‭is‬‭held‬‭for‬
‭manufacturing or administrative purposes.‬
‭○‬ ‭EXAMPLE:‬‭the‬‭owner‬‭of‬‭an‬‭office‬‭building‬‭provides‬‭security‬‭and‬‭maintenance‬‭services‬‭to‬‭the‬‭lessee.‬‭The‬‭building‬
‭being leased out is an investment property.‬
‭●‬ ‭However, if it is more significant, the property is treated as Owner-occupied Property‬
‭○‬ ‭EXAMPLE:‬ ‭an‬ ‭entity‬ ‭owns‬ ‭and‬ ‭manages‬ ‭a‬ ‭hotel,‬ ‭services‬ ‭provided‬ ‭to‬ ‭guests‬‭are‬‭a‬‭significant‬‭component‬‭of‬‭the‬
‭arrangement as a whole‬

‭Property leased to an affiliate‬

‭●‬ ‭From‬‭the‬‭perspective‬‭of‬‭the‬‭individual‬‭entity‬‭that‬‭owns‬‭it,‬‭the‬‭property‬‭leased‬‭to‬‭another‬‭subsidiary‬‭or‬‭its‬‭parent‬‭is‬‭considered‬
‭as an Investment Property.‬
‭●‬ ‭From‬‭the‬‭perspective‬‭of‬‭the‬‭group‬‭as‬‭a‬‭whole‬‭and‬‭for‬‭purposes‬‭of‬‭consolidated‬‭financial‬‭statements,‬‭the‬‭property‬‭is‬‭treated‬‭as‬
‭Owner-occupied Property.‬

‭ ecognition of Investment Property‬

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‭Investment Property is an asset 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.‬

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 ‭PAMANTASAN NG LUNGSOD NG VALENZUELA‬
‭ OLLEGE OF BUSINESS AND ACCOUNTANCY ADMINISTRATION‬
C
‭Department of Accountancy‬ ‭FAR 3 :‬‭Investment Property‬

I‭ nitial measurement of Investment Property‬

‭AT COST (plus transaction cost)‬
‭●‬ ‭Cost‬ ‭of‬ ‭purchase‬ ‭-‬ ‭purchase‬ ‭price‬ ‭&‬ ‭directly‬ ‭attributable‬ ‭expenditure‬ ‭(e.g.,‬ ‭professional‬ ‭fees‬ ‭for‬ ‭legal‬ ‭service,‬ ‭property‬
‭transfer taxes and other transaction costs.)‬
‭●‬ ‭Cost EXCLUDED from cost of purchase‬
‭○‬ ‭Start up costs, unless necessary‬
‭○‬ ‭Operating losses incurred BEFORE the IP achieves the planned level of occupancy‬
‭○‬ ‭Abnormal amounts of wasted material, labor or other resources incurred in constructing or developing the property‬

‭Subsequent measurement of Investment Property‬

‭●‬ ‭Fair value method‬‭- Investment Property is carried‬‭at fair value‬
‭●‬ ‭Cost Model -‬‭Investment Property is carried at cost‬‭less any accumulated depreciation and any accumulated impairment loss‬

‭Fair value of Investment Property‬

‭●‬ ‭It is the price that would be received to sell an asset‬
‭○‬ ‭Equipment‬‭such‬‭as‬‭lift‬‭or‬‭air-conditioning‬‭is‬‭often‬‭an‬‭integral‬‭part‬‭of‬‭a‬‭building‬‭and‬‭is‬‭generally‬‭included‬‭in‬‭the‬‭fair‬
‭value of Investment Property.‬
‭○‬ ‭If an office is leased on a furnished basis, the fair value of the office generally includes the fair value of the furniture‬
‭●‬ ‭The price in the principal market used to measure fair value shall not be adjusted for transaction cost.‬
‭●‬ ‭The fair value excludes prepaid or accrued operating lease income‬

‭Inability to determine fair value reliably (because there has been a change of use)‬
‭●‬ ‭PAS‬ ‭40,‬ ‭paragraph‬ ‭53,‬ ‭mandates‬ ‭that‬ ‭the‬ ‭entity‬ ‭shall‬ ‭measure‬ ‭such‬ ‭Investment‬ ‭Property‬ ‭using‬ ‭the‬ ‭cost‬ ‭method‬ ‭until‬ ‭the‬
‭disposal of the Investment Property,‬
‭●‬ ‭The residual value of the Investment Property shall be assumed to be zero‬

‭Transfer of Investment Property‬

‭●‬ ‭only when there is a change of use evidenced by:‬
‭a.‬ ‭Commencement‬ ‭of‬ ‭owner‬ ‭occupation‬ ‭or‬ ‭development‬ ‭with‬ ‭view‬ ‭to‬ ‭owner-occupation‬ ‭transfer‬ ‭from‬ ‭Investment‬
‭Property to Owner-occupied property‬
‭b.‬ ‭Commencement of development with a view to sale - transfer from Investment Property to inventory‬
‭c.‬ ‭End of owner occupation - transfer from Owner-occupied property to Investment Property‬
‭d.‬ ‭Inception of an operating lease to another entity - transfer from Owner-occupied property to Investment Property‬

‭Measurement of Transfers‬
‭1.‬ ‭When‬‭the‬‭entity‬‭uses‬‭the‬‭cost‬‭model,‬‭transfers‬‭between‬‭Investment‬‭Property,‬‭Owner-occupied‬‭property‬‭&‬‭Inventory‬‭shall‬‭be‬
‭made at carrying amount.‬
‭2.‬ ‭A‬‭transfer‬‭from‬‭Investment‬‭Property‬‭carried‬‭at‬‭Fair‬‭value‬‭to‬‭Owner-occupied‬‭property‬‭or‬‭Inventory‬‭shall‬‭be‬‭accounted‬‭for‬‭at‬
‭Fair value which becomes the deemed cost for subsequent accounting.‬
‭3.‬ ‭lf‬‭the‬‭Owner-occupied‬‭property‬‭is‬‭transferred‬‭to‬‭Investment‬‭Property‬‭that‬‭is‬‭to‬‭be‬‭carried‬‭at‬‭Fair‬‭value,‬‭the‬‭difference‬‭between‬
‭the fair value and carrying amount or the property shall be accounted for as revaluation of PPE.‬
‭4.‬ ‭If‬‭an‬‭inventory‬‭is‬‭transferred‬‭to‬‭Investment‬‭Property‬‭that‬‭is‬‭to‬‭be‬‭carried‬‭at‬‭fair‬‭value,‬‭the‬‭remeasurement‬‭to‬‭fair‬‭value‬‭shall‬‭be‬
‭included in profit or loss.‬
‭5.‬ ‭When‬ ‭an‬ ‭Investment‬ ‭Property‬ ‭under‬ ‭construction‬ ‭is‬ ‭completed‬ ‭and‬ ‭to‬ ‭be‬ ‭carried‬‭at‬‭fair‬‭value,‬‭the‬‭difference‬‭between‬‭fair‬
‭value and carrying amount shall be included in profit or loss‬

‭Derecognition of Investment Property‬

‭●‬ ‭shall be derecognized:‬
‭○‬ ‭On disposal‬
‭○‬ ‭Withdrawal of IP‬
‭○‬ ‭When no future economic benefits are expected from the Investment Property‬

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 ‭PAMANTASAN NG LUNGSOD NG VALENZUELA‬
‭ OLLEGE OF BUSINESS AND ACCOUNTANCY ADMINISTRATION‬
C
‭Department of Accountancy‬ ‭FAR 3 :‬‭Investment Property‬

‭Disclosures related to Investment Property‬

‭●‬ ‭General disclosure:‬
‭○‬ ‭Whether the entity uses the cost model or fair value model‬
‭○‬ ‭The amount of rental income with the related expense‬
‭○‬ ‭Restrictions on the Investment Property‬
‭○‬ ‭Contractual obligations to purchase or construct Investment Property‬

‭●‬ ‭Fair value model:‬

‭○‬ ‭Detailed reconciliation between carrying amount of Investment Property at the beginning and end of the period.‬
‭○‬ ‭Method‬ ‭of‬ ‭determining‬ ‭the‬ ‭fair‬ ‭value‬ ‭of‬ ‭Investment‬ ‭Property‬ ‭and‬ ‭whether‬ ‭the‬ ‭valuation‬ ‭is‬ ‭carried‬ ‭out‬ ‭by‬ ‭an‬
‭independent qualified valuer.‬
‭○‬ ‭Net gains and losses from fair value adjustments.‬
‭○‬ ‭Whether significant fixtures (lift & office furniture) within an Investment Property, have been separately recognized.‬

‭●‬ ‭Cost model:‬

‭○‬ ‭The depreciation method or rate and useful life.‬
‭○‬ ‭Detailed reconciliation of the gross cost of Investment Property and the related accumulated depreciation.‬
‭○‬ ‭Fair value of the Investment Property where possible. If it is not possible, such a fact shall be explained.‬

‭Cash Surrender Value (Non Current Investment)‬

‭●‬ ‭The entity may insure the life of its officers and name itself as beneficiary.‬
‭○‬ ‭If‬ ‭the‬ ‭beneficiary‬ ‭is‬ ‭the‬ ‭officer‬ ‭insured‬ ‭or‬ ‭any‬ ‭person‬ ‭other‬ ‭than‬ ‭the‬ ‭entity‬ ‭(wife‬ ‭of‬ ‭the‬ ‭officer),‬ ‭no‬ ‭accounting‬
‭problem because the payment of premium is simply charged to insurance expense‬
‭○‬ ‭If the beneficiary is the entity itself, accounting problem arises‬

‭●‬ ‭Life insurance policy has a cash surrender value and loan value.‬
‭○‬ ‭Cash‬‭surrender‬‭value‬‭is‬‭the‬‭amount‬‭which‬‭the‬‭insurance‬‭firm‬‭will‬‭pay‬‭upon‬‭the‬‭surrender‬‭and‬‭cancellation‬‭of‬‭the‬
‭life insurance policy. It arises if the following are present:‬
‭1.‬ ‭The policy is a life policy.‬
‭2.‬ ‭Premiums for three full years must have been paid‬
‭3.‬ ‭Policy is surrendered at the end of the third year or any time thereafter.‬
‭■‬ ‭Thus,‬ ‭Cash‬ ‭surrender‬ ‭value‬ ‭legally‬‭commences‬‭to‬‭accrue‬‭at‬‭the‬‭end‬‭of‬‭the‬‭third‬‭year.‬‭However,‬‭there‬‭are‬
‭some insurance firms that allow less than that.‬

‭○‬ L‭ oan‬‭value‬‭is‬‭the‬‭amount‬‭which‬‭the‬‭insured‬‭can‬‭borrow‬‭from‬‭the‬‭insurance‬‭firm‬‭with‬‭the‬‭Cash‬‭surrender‬‭value‬‭as‬
‭collateral security‬
‭■‬ ‭The loan shall not be deducted from the CsV but accounted for as an ordinary obligation.‬

‭Theory of Cash Surrender Value‬

‭●‬ ‭The‬‭Cash‬‭Surrender‬‭Value‬‭of‬‭a‬‭life‬‭policy‬‭arises‬‭from‬‭the‬‭fact‬‭that‬‭the‬‭fixed‬‭annual‬‭premium‬‭is‬‭much‬‭in‬‭excess‬‭of‬‭the‬‭annual‬
‭risk during the earlier years of the policy‬
‭●‬ ‭Such‬‭excess‬‭in‬‭the‬‭premium‬‭paid‬‭over‬‭the‬‭annual‬‭cost‬‭of‬‭insurance,‬‭wit‬‭accumulated‬‭interest,‬‭constitutes‬‭the‬‭Cash‬‭Surrender‬
‭Value.‬

‭Reference:‬‭Valix, C.T.,‬‭Peralta, J.F. & Valix, C.A.M. (2022).‬‭Intermediate‬‭Accounting‬‭(Volume‬‭1). GIC Enterprises & Co., Inc.‬

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