CHAPTER 22

INVESTMEN T PROPERTY
Cash surrender value

TECHNICAL KNO WLEDGE

To understand the nature and purpose of investment

property.

To distinguish investment property and ownerooccupied

property.

To understand the requirements for the recognition of

investment property.

To know the initial and subsequent measurement of

investment property.

To know the recognitionof transfersbetweeninvestment

property and owner-occupiedprOperty.

To know the meaning and recognition of cash surrender

value.
 Definition

Investment pfogertyis definedasproperty(land or building0)

part of atuddmg Or both) held by an owner_07'by the less;e
undera financeleaseto earnrentalsor for capital aPPreCiOtio
or both.

In other words, only land and building can qualify as

investment property.

An equipment or any movable property cannot qualify as

investment prOperty.

An investment prOperty is not held:

a. For use in the production or supply of goods or services or

for administrative purposes.
1). For sale in the ordinary course of business.

The property held by an owner for use in the production or

supply of goods or services, or for administrative purposes is
known as owner-occupied prOperty.

Examples of investment property

a. Land held for long-termcapitalappfeciation
b. Land held for a currently undetermined use

For example, if an entity has not determined that it Will use

the land either as ownerooccupied property or for
short-term sale in the ordinary courseof business, the land
is considered to be held for capital appreciation arid
therefore investment property

Building owned by the reporting entity leased out under an

operating lease

(1. Building that is vacant but is held to be leased out under an

operating lease

Property that is being constructedor developed for futuw

use as investment propezty .
 Items not considered investment property

a.
Owner-occupied property or property held for use in the
production or supply of goods or services or for
'
administrative purposes.

1). Property held for future use as owner-occupiedproperty.

6. Property held for future development and subsequent use
as owner-occupied property.

d, Property occupied by employees, whether or not the

employees pay rent at market rate.

e. Owner-occupied property awaiting disposal.

f. Property held for sale in the ordinary course of business or
in the process of construction or development for such sale.

g. Property being constructed or developed on behalf of third

parties.

h. Property that is leased to another entity under a finance

. lease.

Investment property held by lessee

IFRS 16, the new standard on leases, requires a lessee to
recognize a right of use asset and a lease liability.
The "right of use" asset is initially recognized at-cost which
includes the following: .

a. The present value of the lease payment

b. Lease payment made to the lessor at or before
commencement date less any lease incentive
0. Initial direct cost incurred by the lessee
(1. Estimate of cost of dismantling and restoring the underlying'
asset for which the lessee has a present obligation

Subsequent measurement
IFRS 16, paragraph 34, provides that if a lessee applies the
fair value model in measuring investment property, the lessee
shall also apply the fair value model to the right of use asset
that meets the dehnition of investment property.

\ of
Partly inVeStment and partlyowneroccupied
CertainpIOperties mayinclude that is heldto
a portion
rentalsor fer appreciation
earn
andanotherportionthat is heldf0r
manufacturing or administrative
purposes.
'
If these portions could be sold or leasedout separately, an en
the portions
shallaccount as investment
separately prepel-ty
and owner-occupiedproperty.

If the portions could not be sold separately, the property is

investmentpropertyif only an insignificantportion is held for
manufacturing or administrative purposes.

When ancilliary services are provided by the entity to the

occupants of the property and these services are a relatively
insignificant component of the arrangement, the property is
treated as investment property.

An examplewould be whefethe ownerof an office building

provides security and maintenance servicesto the lessees. The
building being leased out as officesis investment pro'perty.

However, if the. services provided are a more significant

component of the arrangement, the property is treated as
'
owner-occupied property.

For example, if an entity owns and manages a hotel, services

provided to guests are a significant component of the
arrangement as a whole.

Therefore, the owner-managed hotel is treated as

owner-occupied property, rather than investment property.

Property leased to an affiliate . »

From the perspective of the individual entity that owns it.

the property leased to another subsidiary or its parent is
considered an investment property.

However, from the perspectiveof the group as a whole and for

purposesof consolidated financialstatements, the property
'
is
treated as owner-occupiedproperty.
Recognition of investment property
Investmant property shall be remgrmzed as an asset when and
only when:

9.. It 18 probable bhart the future economic benefits that are

aseomated Wlth bhe mestment property will flow so the
enmty.

b. The cost 0f the mvestment property can be measured

reliably.

Initial measurement of investment property

An investment property shall be measured initially at its cost.
Transaction casts shall he mdnded m the initial measurement.

The cost of a purchased investmn't property comprises the

purchase price and any directly attributable expendlture.

Directly attrihutable expandmure includes pmfeasimal fees

for legal sarvixms, property transfer tam and mther Wham
casts.

Costs excluded from cast of investment property

a. Startnpauats, memgthepmpemm
themditmnmmyfmrmsmdadm
b. Opm'atingmmadhefwethememtpmperty
achievesthepilmmedlevel-mfocmpamy
c. Momml Wafwamed mmenal, labororother moms
mum in mung or developing the property

Subsequent measurement of investment property

An entity shall choose either of the following models as the
accounting policy and shall apply that policy to all of the
investment property:
a. Fair value model - The investment property is carried at
fair value.
b. Cost model -Ihe investment property is carried at cost
less any accumulated depreciation and any accumulated
impairment loss.
Fair value of investment property
Fair valueof an assetis the pricethat would be receivedto Sell
an asset in an orderly transaction between market PartiCipanta
at the measurement date.

The price in the principal market used to measure fair Value

shall not be adjusted for transaction cost.

Equipment such as lift or air-conditioning is often an integral

part of a building and is generally included in the fair Value
of the investment property.

If an office is leased on a furnished basis, the fair value of the

officegenerally includes the fair value of the furniture because
the rental income relates to the furnished office.

The fair value of investment property excludes prepaid or

accrued operating lease income.

Inability to determine fair value reliably

In exceptional cases, when an entity first acquires an

investment property, or when an existing property becomes
investment property because there has been a change of use,
there may be clear evidence that the fair value of the investment
property cannot be determined reliably on a continuing basis.

Undersuchexceptional PAS40,paragraph
cases, 53,mandates
that the entity shall measure such investment property using
the cost method until the disposal of the investment prOperty.

Moreover, under such exceptional cases only, the residual value

of the investment property shall be assumed to be zero.

PAS 40, paragraph 54, states that an entity that uses the fair
value model shall continue to measure other investment
property at fair value, notwithstanding the fact that one
investment property is carried using the cost model due to
exceptional cases.
Illustration

An entity ventured into construction of a mega ehcpping mall

in South Asia which is rated as the largest shopping mall of
Asia.

The board of directors decided that instead of selling the

ghopping mall to a local investor, the entity would hold this
property for purposes of earning rentals by letting out space
in the shopping mall to tenants

The construction of the shopping mall was completed and the

property was placed in serviceon January 1, 2019.

The cost of the construction of the shepping mall was

P100,000,000.

The useful life of the shopping mall is 10 years and the residual
value is P10,000,000.

An independent valuation expert provided the following fair

value at each subsequent year-end:

December 31, 2019 120,000,000

'
December 31, 2020 125,000,000
December 31, 2021 115,000,000

Unquestionably, the mega shopping mall shall be recognized

as an investment property.

The entity shall selecteither the costmodelor the fair value

model in measuring such investment property becausethe fair
qalue of the investment property can be determined reliably.
Cost model
If theentitydecides
tomeasurethe 1111
the cost model, the asset shall investmegtfroperty
be carrle at 003; 193
accumulated andany accumulated
depreciation Impairme
loss. .

Fluctuations in the fair value-of the investmentprOpertyfrom

year to year are not recognized.

Instead, the annual depreciationof the investmentpropertyis

the charge against profit or loss for the year.

J ournal entries

1. To record the acquisition of the investment property: .

Investment property 100,000,000

Cash 100,000,000

'2. To record the subsequentanhual depreciation:

Depreciation 9,000,000
Accumulated depreciation 9, 000, 000

Acquisition cost 100,000,000

Residual value . ( 10,000,000
J
Depreciable amount 90,000,000

Annual depreciation (90,000,000/ 10 years) 9,000,000

Any change in fair value is not recognized.

However, the fair value of the investment property is

disclosed at every year-end.
 Fair value model

Ifthe91th decades
30measure
theinvestment under
the fairvalue
model,
thechanes fan property
-, valuefromyearto
are
year recogmzed
inPPOfit
or5333.!
N0 deprecwtwn3 recordedfor the investment
preperty-
Thenet gainsand108888
fromfair valueadjustments
shallbe
disclosed.

Journal entriés

2019

Jan. 1 Investmentproperty 100,000,000

Cash ~ 100,000,000
Dec.31 Investmentprogeny 20,000,000
Gam from changein fair value 20,000,000
-«December
Fair 17311.1(: 31, 2019 120,000,000
Acqulsmon cost 100,000,000
Increase infair value in 2019 . 20,000,000

2020 .
Dec. 31 Investment property 5,000,000
Gain from change in fair value 5,000,000

Fair value-December 31, 2020 125,000,000

Carrying amount December 31, 2019 120,000,000
Increase infajrvalue in 2020 5,000,000

2021

infajrvalue' 10,000,000
bee.31 Lossfromchange
Investmentproperty 10,000,000

Fair valueDecember 31, 2021 1 15,000,000

Carrying amount December31,2020 125,000,000
Decreaseinfairvaluein2021 ( 10,000,000)
 Transfers of investment property
to andfrominvestment
Transfers shallmadeWhen
property
and only when there is a change of use evidencedby:

a. Commencement of owner occupation or development With

view to owner-occupation - transfer from investment
property to owner-occupied property.
Commencement of development with a view to sale a
transfer from investment property to inventory.

End of owner occupation - transfer from owner-occupied

property to investment property.
(1. Inception of an operating lease to another entity - transfer
from owner-occupied property to investment property.

Measurement of transfers

1. When the entity uses the cost model, transfers between

investment property, owner-occupied property and
inventory shall be made at carrying amount.

A transfer from investment property carried at fair value

to owner-occupied property or inventory shall be accounted
for at fair value which becomes the deemed cost for
'
subsequent accounting.

If owneroccupied property is transferred to investment

property that is to be carried at fair value, the difference
between the fair value and the carrying amount of the
property shall be accounted for as revaluation of property,
plant and equipment.

If an inventory is transferred to investment property that

is to be carried at fair value, the remeasurement to fair
value shall be included in profit or loss.

When an investment property under construction is

completed and to be carried at fair value, the difference
between fair value and carrying amount shall be included
in profit or loss.
Derecognition of investment property
An investment property shall be derecognized:
a. On diSposhl.
b. When the investment property is permanently withdrawn
from use.

c. When no future economic benefits are expected from the

investment property.

Disclosures related to investment property

The general disclosures are: '
a. Whether the entity uses the cost model'or fair value model
b. The amount of rental income With the related expense
c. Restrictions on the investment property
,d. Contractual obligations to purchase or construct investment
property

thefair traluemodelis used,thedisclosures

When are:
a. Detailed reconciliation between carrying amount of
investment property at, the beginning and end of the period

b. The method of determining the fair value of investment

property and whether the valuation is carried out by an
independent qualified valuer

0. Net gains or losses from fair value adjustments

(1. Whether significant fixtures, such as lift and office furniture,

within an investment property, have been separately
recognized

When the cost model is used, the disclosures are:

a. The depredation method or rate and useful life.

5. Detailed reconciliation of the gross cost of investment

property and the related accumulated depreciation

e. Fair value of the investment property where possible. If it

is not possible, such fact shall be explained
Cash surrender value
The entity may insure the life of its oflicers and name itself an
beneficmry. .

The accounting for the payment of the insurancepremiume

will depend on whether the beneficiary is the enttty Ltself 01
the officer insured.

If the beneficiary is the om'cer insured or any person other than

the entity like the wife of the officer, no accounting problem is
encountered because the payment of the premium is simply
charged to insurance expense.
An accounting problem will arise when the beneficiqry is the
entity itself. It is on this assumption that the following discussion
is geared.

Under our law, a life insurance policy has a cash surrender

value and loan value.

Cash surrender value is the amount which the insurance firm

will pay upon the surrender and cancelation of the life insurance
policy. Cash surrender value arises if the following requisites
are present:

a. Thepolicyis a life policy.Thereis no cashsurrendervalue

in fare, accident and other nonljfe policies. 9

b. Premiums for three full years must have been paid.

c. The policy is surrendered at the end of the third year or
anytime thereafter.

Thus, a cashsurrendervalue legally coinmencesto accrue

at the end of the third year.

However, there are certain insurance firms which sell life

insurance policiesthat grant cash surrender value even at
the end of the second year only.
The cash surrender value is classified as noncurrent investment.

On the other hand, a loan value is the amount which the insured
can borrow from the insurance firm with the cash surrender
value as collateral security.

77wloanshallnotbedeductedfmm themshsumnder value but

accountedfor as an ,ordinmyobligation.
Theory on the cash surrender value

The cash surrender value of a life policy arises from the fact that
the fixed axmual premium is much in excess of the annual risk
during the earlier years of the policy.

The excess is necessary in order to balance the deficiency of the

same pmmium to meet the annual risk during the later years of
the policy.

Such excess in the premium paid over the annual cost of insurance,
with accumulated interest, constitutes the cash surrender value.

Accounting procedures
The. accounting procedures concerning the cash surrender value
are as follows:

a. Payment of the insurance premium

Life insurance expense XX
- -
Cash x x

b. Adjustment of the unexpired premium at the end of the

period:
Prepaid life insurance 1: 1:
Life insurance expense XX

0. Dividends received on the life policy are not income but a

reduction of life insurance expense.
Cash x 1:

Life insurance expense XX

d. Initial recognition of the cash surrender value at the end of

the third year:
Cash surrender value x 1:
Life insurance expense x x
Retained earnings x x

The initial cash surrender value is regarded as applicable

to three years of the life policy. That portion of the cash
surrender value applicable to the current year is credited
to life insurance expense and that portion applicable to the,
prior years is credited to retained earnings.

559
 of cashsurrendervalue subsequent t6 the
e. Recognition
third year:

Cash surrender value x 1:

Life msuranoeeXpense Xx

f. Receipt of the proceeds of the life policy:

Cash . x x
Cash surrender value xx
Life insurance expense Xx
Gain on life insurance settlement 1:x

The amount to be creditedto the cash surrender value should

be the adjustedbalanceat thetimeof deathof the insured.

The life insurahce expense account is credited for the

unexpired premium at the time of death. The gain on life
. insurance settlement is determined as follows:
. '
Face of policy xx
Less: Cash surrender value xx
Unexpired premium L13. l5
Gain on life insurancesettlement 3.25

Illustration
An entity insured the life of the president for P2, 000, 000 the
entity being the beneficiaryof an ordinary life policy. The annual
premium is P30, 000.
ThepolicywasdatedJanuary1,2019and thefollowing
cash surrender value: carried
End of the policy year Cash surrender value
2019 ..
2020 _.
2021 30,000
2022 42,000
2023 - 58,000

The entity used the calendar year as the flscal period.

The president died on June 30, 2023 and the policy was
collectedon July 31, 2023.
 Journal entries

2019

Jan.1 Life insurance expense 30,000

WZO

Jani. 1 Life insurarice expeuse 30,000

Cash 30,000
2021

Jan. 1 Life insurance expense 30,000

Cash 30,000

Dea31 Cash surrender value 30,000

Life insurance expense(1 / 3) 10,000
. Retainedearnings(priortwo 20 000
years)
To initially recognize the cash surrender value at the
end of: the 3rd policy year.

2022

.
Jan. 1 Life insuranceexpense 30,000
Cash 30,000

Dec. 31 Cash surrender value 12,000

Life insurance expense 12,000

To recognize the increase in cash-surrender value at

the end of the 4th policy year.

Balance, December 31, 2022 42,000

Balance, December 31, 2021 30,000
Increasein cashsurrender value for 2022 12,000
\
M
 2028
. . 30,000
Jam 1 foe msurance
expense 30'000
Cash
value
surrender
30 Cash
June 8000
Life insurance eXpense
8000
theincrease
Torecognize value
incashsurrender up
to time of death

31,2023
December
Balance, 58000
31,2022
Balance,December 42,000
Increase in cash surrender value for 2023 16,000

Increase from January 1 to June 30, 2028

(1 / 2 x 16,000) 8,000

. July 31 Cash 2,000,000

Cash surrender value 50,000
Life insuranceexpense 15,000
Gain onlife insurance settlement
1,935,000
Face of policy
Cashsurrender value 2,000,000
( 50,000)
Unexpiredpremium(30,000x 6/12)
( 15,000)
Gainonlife insurancesettlement
1,935 000