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Lecture Notes Investment Property

Investment property, as defined by IAS 40 / PAS 40, includes land and buildings held for rental income or capital appreciation, distinct from properties used for business operations or sale in the ordinary course. Initial measurement requires recognition at cost, including purchase price and directly attributable costs, with specific considerations for self-constructed properties and those acquired through deferred payments or exchanges. Subsequent measurement can follow either the cost model or fair value model, with specific rules for transfers and depreciation applicable only to buildings under the cost model.

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6 views

Lecture Notes Investment Property

Investment property, as defined by IAS 40 / PAS 40, includes land and buildings held for rental income or capital appreciation, distinct from properties used for business operations or sale in the ordinary course. Initial measurement requires recognition at cost, including purchase price and directly attributable costs, with specific considerations for self-constructed properties and those acquired through deferred payments or exchanges. Subsequent measurement can follow either the cost model or fair value model, with specific rules for transfers and depreciation applicable only to buildings under the cost model.

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Jhean Erica Rose Ferriol
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Lecture Notes on Investment Property (Based on IAS 40 / PAS 40)

Definition of Investment Property

According to IAS 40 / PAS 40 - Investment Property, investment property is land, buildings,


or part of a building (or both) held to earn rentals, for capital appreciation, or both rather
than:

 Use in production, supply of goods/services, or administrative purposes (classified


as Property, Plant, and Equipment under IAS 16).
 Use by employees, whether they pay rent or not (classified as owner-occupied
property).
 Sale in the ordinary course of business (classified as inventory under IAS 2).
 Leased out under a finance lease (classified under IFRS 16 - Leases).

Examples of Investment Property

1. Land held for capital appreciation (e.g., a developer buys land, holds it for years
expecting its price to increase).
2. Land held for an undetermined future use (if not immediately used, it is classified as
investment property until determined otherwise).
3. A building leased out under an operating lease (e.g., a shopping mall or office space
rented to tenants).
4. A vacant building held for leasing in the future (even if currently unused, the intent to
lease makes it an investment property).
5. Property under construction for future use as an investment property (if intended
for rental income or appreciation).

Illustration:

IN COGNITO Corporation purchases an office building and leases it to various businesses for
rental income. This building is classified as investment property because its purpose is to
generate income rather than being used for business operations.

Recognition and Initial Measurement

IAS 40 requires that investment property be initially recognized at cost, including:

 Purchase price
 Directly attributable costs, such as:
o Legal fees
o Property transfer taxes
o Professional fees (valuation and legal services)

Special Cases in Initial Measurement

1. Self-Constructed Investment Property


oCost includes construction expenses up to the completion date (similar to
IAS 16).
o Example: A company builds an apartment complex to rent out—costs incurred up
to completion are capitalized as investment property.
2. Investment Property Acquired Through Deferred Payments
o Measured at its cash price equivalent, and any difference is recognized as
interest expense over the payment period.
o Example: XYZ Co. buys a warehouse for ₱5 million with deferred payments over
five years. The present value of the payments is recorded as cost, and the
remaining amount is treated as interest expense.
3. Investment Property Acquired Through Exchange (Non-Monetary Transaction)
o Recognized at fair value unless it cannot be measured reliably.
o Example: A company exchanges a factory building for an office space. If fair
value is determinable, the office is recorded at its fair value; otherwise, it is
recorded at the carrying amount of the factory.

Subsequent Measurement Models (IAS 40 / PAS 40)

After initial recognition, entities must choose either:

1. Cost Model (IAS 16 - Property, Plant & Equipment)


o Investment property is carried at cost less accumulated depreciation and
impairment losses.
o Depreciation applies to buildings but not land.
o Example: A warehouse bought for ₱10 million is depreciated over 25 years.
Annual depreciation is ₱400,000 (assuming straight-line method).
o Disclosure requirement: Fair value must still be disclosed even under the cost
model.
2. Fair Value Model
o Investment property is revalued to fair value at each reporting date, with gains
or losses recognized in profit or loss.
o Fair value is based on:
 Market prices for similar properties.
 Discounted cash flow (DCF) method if market prices are unavailable.
o Example: A rental property initially valued at ₱5 million is reassessed at ₱6
million at year-end. The ₱1 million increase is recognized as a gain in profit or
loss.

Important: If a company chooses the fair value model, it must apply it to all investment
properties consistently and cannot switch to the cost model unless the property is sold or
reclassified.

Transfers of Investment Property

A property is transferred when there is a change in use, evidenced by:


1. Investment Property → Owner-Occupied Property (IAS 16 - PPE)
o Occurs when an investment property starts being used for business operations.
o Under the fair value model, the fair value at transfer becomes the deemed cost
under IAS 16.
o Example: A company moves its headquarters into a previously leased office
building—this must now be classified as PPE.
2. Investment Property → Inventory (IAS 2 - Inventories)
o Occurs when an entity decides to sell the property instead of holding it for rental
income or appreciation.
o Under the fair value model, the fair value at transfer becomes the deemed cost
for inventory purposes.
o Example: A real estate firm originally held a building for rental but decides to sell
condo units instead—this is reclassified to inventory.
3. Owner-Occupied Property → Investment Property
o Occurs when a business stops using a property for operations and begins
leasing it.
o If the fair value model is chosen, the fair value at transfer date is recorded as
investment property.
4. Inventory → Investment Property
o If a company decides to lease a property originally intended for sale, it is
reclassified as investment property.

Two situations where transfers do not occur:

1. Investment property is sold without development—it remains investment property until


disposal.
2. Investment property is developed for future use as investment property—it is not
transferred to inventory or PPE.

Depreciation and Impairment of Investment Property

1. Depreciation (Applicable to Cost Model)


o Only applies to buildings (not land).
o Useful life and residual value must be reviewed annually.
o Common depreciation method: Straight-line method.
2. Impairment (IAS 36 - Impairment of Assets)
o If an investment property’s value declines permanently, an impairment loss is
recorded.
o Example: A rental building’s market value drops due to economic downturn—
impairment must be recognized.

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