Assignment No 1 FAR-1

IAS-40 Investment Property

BASIC CONCEPT
Definition
 Property (Land or a Building – or a part of building - or both)
 Held (by the owner or by the lessee as a right of use)
 To earn rental or capital appreciation or both, rather than for
Use in the production of supply of goods & services or for administrative purposes.
Sale in the ordinary course of business.
 Owner occupied Property is property held (by the owner or the lessee as a right of use
of asset)
 For use in the production or supply of goods & services or
 For administration purposes. (IAS-16)
Why separate classification is important?
Investment property is held to earn rental or capital appreciation or both.
Therefore, an investment property generates cash flows largely independently on the other assets
held by an entity. This create difference investment property from owner occupied property.
The production or supply of goods or services (or the use of property for administrative purposes)
generate cash flows that are attributable not only to property , but also the other assets used in the
production or supply process.
IAS-16 applies to owned owner occupied property and IFRS-16 applies to owner occupied
property held by a lessee as a right of use asset.
Examples of investment property:
The following examples of investment property:
 Land held for long term capital appreciation rather than the sale in the ordinary course of
business.
 Land held for currently determined for future use (If an entity has not determined that it
will use the land for owner occupied property or for short term sale in the ordinary course
of business, the land is regarded as held for capital appreciation—undecided property)
 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.
 A building that is vacant but is held for the leased out under one or more operating leases.
 Property that is being constructed or develop for future use as investment property.
Examples of Non investment property:
An following are examples of items that are not investment property and are therefore outside the
scope of IAS-40
 Property intended for sale in the ordinary course of business or in the process of
construction or development for such sale (IAS-2), e.g., property acquired exclusively with
a view to subsequent disposal in the near future or for develop or resale.
 Owner occupied (see IFRS-13 and IAS-16), including (among other things) 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 (weather or
not the employees pay rent at market rates) and owner occupied property awaiting disposal.
 Property that is lease to another entity under a finance lease.
Impact of party owner occupied property for classification:
Situation Sometime properties comprises a portion that is held to earn rentals or for capital
appreciation and another portion that is held for use in the supply of goods and services or
for administrative purposes.
If portion are separable means could be sold separable ( or leased out separable under a
finance lease), an entity accounts for the portions separately.
If portion are not seperable , the property is investment property only if an insignificant
portion is held for use in the production of supply of goods and services for administrative
purposes.
Impact of additional services on classification:
In some cases , an entity provides additional services to the occupants of a property it holds:
If the services are insignificant to the arrangement as a whole then classify investment property
.e.g., the owner of an office building provides security and maintenance services to the lessee who
occupied the building.
If the services are significant to the arrangement as a whole then not classified as investment
property e.g., an entity owns and manages a hotel and services provided to guests are significant
to the arrangement as a whole.
When classification is very difficult then judgement is needed. It is required by the IAS-40 that an
entity is required to develop (and disclose) criteria so that it can exercise that judgment
consistently.
EXCEPTION
 If there is a clear evidence at the initial recognition of IP that the fair value of an IP is not
reliably measureable on an continuing basis, then the entity shall measure that IP using cost
model and continue to apply cost model until the disposal of that propertity. The residual
value of such property shall be assumed to be zero.
 If an entity determines tat fair value of IP under construction is not reliably measureable
but expect the fair value to be reliable measureable when construction is complete then it
will be measure the property under construction at cost until it comes reliably measureable.
  Property carried at fair value , and subsequently fair value is difficult to identify then the
last fair value will be considered as current year fair value.

TRANSFER
An entity shall transfer a property to or from IP when and only when there is a change in
use . A change in use occurs when:
 The property needs or ceases to meet the definition of investment property.
 And there is evidence of the change in use.(in isolation a change in management
intentions is not an evidence of change in use.)
 Transfer out:
Transfer to
Property carried in IAS-40 PPE (IAS-16) Inventory (IAS-2)
Cost Model Carrying amount (i.e., Cost Carrying amount (at NBV)
– Accumulated of investment property will
Depreciation)of investment not be considered as Cost
property will be considered of inventory .
as Carrying amount of
PPE.
Fair Value Model Property shall be re measured to fair value model on the
date of transfer as per IAS-40. This updated fair value
will be considered as cost of PPE (IAS-16) , or
Inventory(IAS-2)
 Transfer In:

Transfer From
Property carried in IAS-40 PPE (IAS-16) Inventory (IAS-2)
Cost Model Carrying amount (i.e., Cost Carrying amount of
– Accumulated property as per IAS-2(i.e.,
Depreciation)of investment lower of cost or NRV) will
property will be considered now be considered as
as Carrying amount of investment property .
investment property.
Fair Value Model Property shall be revalued Property shall be measured
as per IAS-16 at the date of to fair value at the date of
transfer. transfer and any gain / loss
shall be recognized in
profit and loss.
Update the PPE on fair value model, and now
updated value transfer to IAS-40 from IAS-2, an IAS-
16.

Q.No1 Briefly discuss, with reasons, whether following properties may be classified as investment
properties or not:
(a) An entity rents out a building it owns to independent third parties under operating leases.
(b) An entity owns a building that it rents out to an independent third party (the lessee) under an
operating lease. The lessee operates a hotel from the building and provides a range of services
commonly provided by such hotels. The entity does not provide any services to the hotel guests
and its rental income is unaffected by the number of guests that occupy the hotel.
(c) An entity acquired a tract of land to divide it into smaller plots to be sold in the ordinary course
of business at an expected 40% profit margin. No rentals are expected to be generated from the
land.
(d) An entity owns a building that it rents out to independent third parties under operating leases.
The entity provides cleaning, security and maintenance services for the lessees of the building. To
do this, the entity’s building administration and maintenance staff occupies a part of the building
that measures less than 1% of the floor area of the building.
(e) An entity owns a two-story building.
Floor 1 is rented out to independent third parties under operating leases.
Floor 2 is occupied by the entity’s administration and maintenance staff. The entity can measure
reliably the fair value of each floor of the building without undue cost or effort.

Q.No 2 Briefly discuss, with reasons, whether following properties may be classified as investment
properties or not:
(i) An entity rents out a building it owns to independent third parties under operating leases. The
entity provides cleaning, security and maintenance services for the lessees of the building.
(ii) An entity acquired a tract of land as a long-term investment because it expects its value to
increase over time. No rentals are expected to be generated from the land in the foreseeable future.
(iii) An entity owns a building which it operates as a hotel (i.e. it rents out rooms to independent
third parties in return for payments). The entity provides hotel guests with a range of services
commonly provided by hotels. Some of the services are included in the room daily rate (e.g.
breakfast and television); other services are charged for separately (e.g. other meals, minibars, and
guided tours of the surrounding area).
(iv) An entity owns a building it rents out to independent third parties under operating leases. The
entity’s building administration and maintenance staff occupies 25% of the building’s floor area.

Q.No 3 Hassan Fertilizers(HS) owns following two properties:

Property X An office building owned by AL was purchased on January 01, 2011 for Rs. 12
million. This building is mainly used for administrative activities of HS. Total estimated useful
life of building was 20 years. This building had a fair value of Rs. 8.8 million on January 1, 2015.
On January 1, 2018 its fair value as determined at Rs. 8.32 million. There has been no change in
estimate of useful life.
Property Y Another building owned by AL was purchased on July 1, 2017 for Rs. 8 million. This
building was purchased for the objective of earning rentals. However it could be rented out on July
1, 2018. It had a fair value of Rs. 8.5 million on December 31, 2017 which was increased to Rs.
9.4 million on December 31, 2018. Estimated useful life of this building was 15 years. HS follows
revaluation model for property, plant and equipment and fair value model for investment
properties.
Required: Prepare journal entries for the year ending December 31, 2018.
Q.No 4 On May 1,2019 a building was purchased for Rs.2 million. It was classified as investment
property to be carried at fair value model. On 1st July,2021 this building was vacated and it was
decided to use this building for administration purposes, on that date remaining life was estimated
at 10 years. Fair values of this buildings are as follows:
31-12-19 1900000
31-12-20 2400000
01-07-21 2500000
31-12-21 2650000
Company follows Revaluation model for PPE.
Required: Journal entries from May,2019 to 31ST December,2021.Accounting year is on
December each year. (Example of Transfer Out)