CA51016: Intermediate Accounting III

LESSON: ACCOUNTING FOR INVESTMENT PROPERTY

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NATURE OF INVESTMENT PROPERTY

Investment Property (IAS 40) – property (land or building -or a part of a building -or both) held (by the owner or by the lessee,
through operational lease, as a right-of-use asset) to earn rentals or for capital appreciation or both; rather than for:
a. Use in the production or supply of goods or services or for administrative purposes (PPE)
b. Sale in the ordinary course of business (inventory)
Nota bene: only land and building can qualify as investment property. Equipment or any movable property cannot qualfy as
investment property.

Examples of Investment Property

a. Land held for long-term capital appreciation
b. Land held for currently undetermined use
c. Building owned by an entity leased out under an operating lease
d. Building that is vacant but is held to be leased out under an operating lease
e. Property that is being constructed or developed for future use as an investment property

Items not considered as Investment Property

a. Property intended for sale in the ordinary course of business or in the process of construction or development for such sale
(inventory; IAS 2)
b. Owner-occupied property (or PPE; IAS 16) including (among other things)
i. Property held for future use as owner-held property
ii. Property held for future development and subsequent use as owner-occupied property.
iii. Property occupied by employees (whether or not the employees pay rent at market rates)
iv. Owner-occupied property awaiting disposal
c. Property that is leased to another entity under a finance lease (IFRS 16)

CLASSIFICATION ISSUES FOR INVESTMENT PROPERTY

The property is separable or non-separable
A property comprising a portion that is held to earn rentals or for capital appreciation and another portion that is held for use in
operation is to be accounted as investment property for the portion held for rentals or capital appreciation, and as property, plant
and equipment for the portion that is held for use in operations.
● If the property could not be apportioned and only an insignificant portion is used in operations for production of goods or
services or for administrative purposes, the property is an investment property.
○ Property is mostly owner-occupied than for rental income = PPE
○ Equally for owner occupied and for rental income = PPE
Entities finding difficulty to determine whether a property qualifies as investment property shall set criteria which property qualify
as investment property and apply such criteria consistently. IAS 40 requires entities to disclose these criteria when classification is
difficult.

Provisions of ancillary or support services

a. If ancillary is insignificant → investment property → condominium (the property owner provides security and
maintenance services to its tenants)
b. If ancillary is significant → owner-occupied property → hotel (owner-managed hotel)

Financial statement perspective

This is applicable when a company owns a property that is leased to and occupied by its parent or subsidiary
a. Lessor’s separate financial statements (individual entity) → investment property
b. Group’s consolidated financial statements (group) → owner-occupied property

INITIAL RECOGNITION AND MEASUREMENT

Initial Recognition:
Investment property shall be recognized as an asset when, an only when (IAS 40, paragraph 16)
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.
Initial measurement:
An investment property shall be measured initially at cost. Transaction cost shall be included in the initial statement.
Purchase Price xxx
Directly Attributable Costs xxx
Cost of Investment Property xxx

Directly Attributable Expenditures: Exclusions from the initial measurement (recorded as expenses):
1. Professional fees for legal services 1. Start-up costs
2. Property transfer taxes 2. Operating losses incurred before achieving the planned level of
3. Other transaction costs occupancy
3. Abnormal number of wasted resources incurred during construction or
development

An investment property may be acquired through:

1. By cash purchase
2. On a deferred payment plan
3. In exchange for a non-monetary asset
4. By issuing the company’s own equity securities
5. Under a lease contract; as a right-of-use asset

SUBSEQUENT MEASUREMENT
Except for investment property backing liabilities that pay a return linked directly to the fair value of, or returns from, specified
assets, an entity may choose either
a. The fair value
b. Cost model
Nota bene: regardless of its accounting policy choice for that investment property, the entity shall choose as its accounting policy
either the fair value model or the cost model for all other investment propertyy held.

NOTABLE DIFFERENCES

Features Cost Model Fair Value Model

Cost xxx
Amount to be reported
Accum. Depreciation (xxx)
in the Financial Fair value at year-end
Impairment Loss (xxx)
Statement
Carrying Value xxx

Depreciation The property is depreciated over its useful life The property is not depreciated

Change in Value Not recognized but disclosed in the financial statements Reported in profit or loss

Use of the Fair Value Model

Under the fair value model, an entity shall measure all of its investment property at fair value. A gain or loss arising from a change
in fair value shall be recognized in profit or loss during the period in which it arises.

Fair value in the previous year xxx Acquisition Cost of the first year (xxx)
Less: Fair value at the current year (xxx) Less: Fair Value at the end of first year xxx
Fair Value Gain (Loss) xxx Fair Value Gain (Loss) xxx

Pro-forma entries:
1. Increase in fair value
Investment Property xxx
Fair Value Gain on Investment Property xxx

2. Decrease in fair value

Fair Value Loss on Investment Property xxx
Investment Property xxx
Fair value of an asset – the price that would be received to sell an asset in an orderly transaction between market participants at
the measurement date
● The fair value of the investment property must be determined in accordance with IFRS 13 Fair Value measurement
○ Fair value of the investment property shall take into account
i. the entity’s highest and best use of the asset or
ii. its price by selling to another market participant that would use the asset in its highest and best use
● Considerations in measuring fair value
○ The price in the principal market used to measure fair value shall not be adjusted for transaction costs
○ 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 office generally includes the fair value of the
furniture because the rental income relates to the furnished office.
○ The fair value of investment property excluded the prepaid or accrued operating lease (rental) income.
● A lease that classified its right-of-use asset as investment property:
○ Shall measure the right-of-use asset, and not the whole underlying asset, at fair value
● During period of construction, the fair value may or may not be reliably determinable
○ In such a case, the entity shall measure the investment property under construction at cost, until either a fair value
of the asset under construction becomes reliably determinable or the asset is completed, whichever is earlier.
○ Any difference → recognized in profit or loss
● When an entity uses the fair value model and the fair value of a specific investment property cannot be reliably determined
on a continuing basis;
○ The entity shall measure that investment property using the cost model until disposal
○ The residual value of that property is presumed to be zero
○ Entity shall continue to measure all the remaining investment property using the fair value model

Use of the cost model

An entity using the cost model shall measure its investment property using the cost model in accordance with IAS 16 (or IFRS 16
for right-of-use assets classified as investment property). Under the cost model;

Cost xxx
Less: Accumulated Depreciation (xxx)
Less: Accumulated Impairment Loss (xxx)
Carrying value xxx

RECLASSIFICATION OF INVESTMENT PROPERTY

Transfers to, and from, investment property shall made when and only when there is a change of use, evidenced by:
a. Commencement of owner occupation or development with view to owner-occupation, for a transfer from investment to
owner-occupied property.
b. Commencement of development with a view-to-sale, for a transfer from investment property to inventory
c. End of owner-occupation, for a transfer from owner-occupied property to investment property
d. Inception of an operating lease to another entity, for a transfer from inventories to investment property

Transfers using fair value model

a. From investment property
○ For a transfer from investment to PPE or inventories, the fair value is deemed cost in its new classification. Before
recording the transfer, the fair value must be updated first.

Change in Fair Value:

Investment Property xxx
Fair Value Change xxx

Reclassification
Inventories/PPE xxx
Investment Property xxx

○ Thereafter, the asset will be measured in accordance with the applicable standard (IAS 2 or IAS 16). The
difference is recognized in the profit or loss
 b. From owner-occupied (PPE) to investment property
○ An entity shall apply the requirements of IAS 16 to account for the difference of the Fair Value and its Carrying
amount at the date of the transfer

1. Fair value > carrying value = Revaluation surplus

Investment Property (Land/Building) xxx

Accumulated Depreciation xxx
Land or Building (at cost) xxx
Revaluation Surplus xxx

2. Fair value < Carrying value = Charge to revaluation surplus, then revaluation loss.

Investment Property (Land/Building) xxx

Revaluation Surplus xxx
Impairment Loss* xxx
Land or Building xxx

c. From inventory to investment property

○ When an inventory item of land or building is reclassified as investment property, the entry is

Investment property (land/building) xxx

Inventory xxx
Fair value gain on transfer of inventories xxx

Transfer using cost model

Reclassifications between investment property, owner-occupied property, and inventory shall be made at the carrying amount.
● No gain or loss shall be recognized on the transfer

Building (at cost) xxx

Accumulated depreciation – building held as investment property xxx
Building held as investment property (at cost) xxx
Accumulated depreciation – building xxx

Inventory xxx
Land held as investment property xxx

Building held as investment property xxx

Inventories xxx

DERECOGNITION
An investment property shall be derecognized:
1. On disposal
2. When the investment property is permanently withdrawn from use and no future economic benefits are expected from its
use and disposal

Net proceeds (Selling Price) xxx

Carrying value at date of derecognition (xxx)**
Gain (loss) on disposal – profit or loss xxx

**latest fair value prior to the sale if at fair value