MODULE 2: INVESTMENT PROPERTY AND FUND & OTHER INVESTMENTS

OVERVIEW
The module discusses nature of investment property and proper accounting for such property. This module
also discusses funds and other investments and their recognitions and focuses more on funds with non-
current purposes.

OBJECTIVES
1. To understand the nature and purpose of investment property
2. To distinguish investment property and owner-occupied property
3. To understand the recognition and measurement of investment property
4. To understand the nature and purpose of fund
5. To distinguish between current and non-current fund
6. To understand the recognition and measurement of funds
7. To understand the recognition of cash surrender value of life insurance policy.
Required reading: Financial Accounting Volume I Part 1 Conrado Valix (Reference or Source Book)
DISCUSSION
PAS 40: INVESTMENT PROPERTY

 Pertains to land or building or part of building or both. It does not include movable property like
machines or equipment.
 Held by the owner or by lessee under finance lease to earn rentals or for capital appreciation. It is
not held for production of goods or services or for administrative purposes or for sale in ordinary course
of business. It would be considered as owner-occupied property or under property, plant and equipment
if it is held for production of goods or services or for administrative purposes while it is considered
inventory if it is held for sale in ordinary course of business.
EXAMPLES of INVESTMENT PROPERTY
1. Land held for long-term capital appreciation.

2. Land held for a currently undetermined use

3. Building owned by the reporting entity or held by the entity under

finance lease and leased out under operating lease

FINANCE LEASE OPERATING LEASE

4. Building that is vacant but is held to be leased out under operating lease
5. Property that is being constructed or developed for future use as investment
property

ITEMS NOT CONSIDERED INVESTMENT PROPERTY

X Owner-occupied property or under property, plant and equipment which is held for production of goods
or services or for administrative purposes
X Property held for future use as owner-occupied property
X Property held for future development and subsequent use as owner-occupied property
X Property occupied by employees
X Owner-occupied property awaiting for disposal
X Property held for sale in ordinary course of business
X Property constructed or developed for others
X Property leased out under finance lease

PROPERTY INTEREST HELD BY LESSEE as INVESTMENT PROPERTY

 Entity or lessee held an asset under operating lease but accounted for as if it were a finance lease
 The asset meets the definition of investment property and measured as lower amount between the
fair value and the present value of the minimum payments
 The lessee uses the fair value model in measuring the property interest

PARTLY INVESTMENT PROPERTY AND PARTLY OWNER-OCCUPIED PROPERTY

If the portion could be sold or leased out separately, entity shall
account the portions separately as investment property and owner-
occupied property or under property, plant and equipment.
If the portion could not be sold or leased out separately, the
property is investment property if only an insignificant portion is
held for manufacturing or administrative purposes.

PROPERTY LEASED TO AN AFFILIATE

Individual or owner entity perspective or in separate financial statement: property leased out to another
subsidiary or its parent is considered investment property
Group entity perspective or in consolidated financial statement: property is treated as owner-occupied
or under property, plant and equipment
INITIAL MEASUREMENT OF INVESTMENT PROPERTY – at COST
a. Purchased: Purchase price plus directly attributable expenditure
b. Self-constructed: Direct Material, Direct Labor and Overhead
c. Payment is deferred: Cash price equivalent
d. Acquired from exchange: if commercial substance exists, fair value of asset given up or fair value
of asset received if asset given has no fair value. Carrying amount of asset given up if it lacks
commercial substance
SUBSEQUENT MEASUREMENT OF INVESTMENT PROPERTY
An entity shall choose either of the following models to ALL of the investment property:
a. Fair Value Model
-Any changes in fair value is included in profit or loss. No depreciation is recorded.
-Property interest held by lessee classified as investment property, fair value model shall be applied.
-Fair Value should not be adjusted for transaction costs and excludes prepaid or accrued operating
lease income.
-Under exceptional cases, PAS 40 mandates that the entity shall measure an investment property
using cost method until the disposal if there may be a clear evidence that fair value cannot be
determined reliably in continuing basis. Under such case, residual value shall be assumed to be
zero. An entity shall continue to use fair value method to measure other investment,
notwithstanding the fact that one investment property is carried using cost model.

b. Cost Model
-Investment property is carried at cost less accumulated depreciation and any accumulated
impairment losses. Fair value is disclosed.

TRANSFERS OF INVESTMENT PROPERTY

1. Under cost model, transfer between investment property, owner-occupied property and inventory
shall be made at carrying amount.
2. Investment property under fair value transferred to owner-occupied property or inventory, the fair
value is the deemed cost for subsequent accounting.
3. From owner-occupied property to investment property (investment to be carried at fair value),
difference between fair value and carrying amount shall be accounted for as revaluation of
property, plant and equipment.
4. From inventory to investment property (investment to be carried at fair value), re-measurement to
fair value is included in profit or loss.
5. When 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
  On disposal
 Permanently withdrawn from use
 No future economic benefits are expected from investment property
DISCLOSURES
General Disclosure
a. Whether the entity uses the cost model or fair value model
b. The amount of rental income for the period along with the related expense
c. Restrictions on investment property either through rentals or sale proceeds
d. Contractual obligations to purchase or construct investment property
Disclosures under Fair Value Model
a. Detailed reconciliation, showing all the movements, between the carrying amount of investment
property at the beginning and end of the period
b. Method of determining the fair value and whether the valuation is carried out by an independent
qualified valuer
c. Net gains or losses from fair value adjustments
d. Whether significant fixtures, such as lift and office furniture, within an investment property, have
been separately recognized
Disclosures under Cost Model
a. Depreciation method or rate and useful life
b. Detailed reconciliation of the gross cost of investment property and the related accumulated
depreciation showing all the movements during the year
c. Fair value of the investment property where possible. If it is not possible, such fact shall be
explained
FUND AND OTHER INVESTMENTS
 Fund is cash and other assets set aside for a specific purpose either by reason of management’s
actions or by contract or legal requirement
 Funds for current purpose: Petty Cash Fund, Payroll Fund, Interest Fund, Dividend Fund and Tax
Fund
 Funds for non-current purpose: Sinking Fund, Preference Share redemption fund, plant expansion
fund, Contingency fund and insurance fund

MEASUREMENT OF FUND
Long term fund shall be carried at amount of cash plus cost of securities adjusted for discount or
premium amortization and other assets in the fund.
DIFFERENT LONG TERM FUNDS AND THEIR ACCOUNTING
SINKING FUND OR REDEMPTION FUND – set aside for the liquidation of long term debt.
Classification whether current or non-current depends on the maturity or classification of liability or
payable the fund set aside for. If the liability is classified as current then the sinking fund is also classified
as current.

Sinking fund under the administration of the entity

  There is distinction whether the fund is in the form of cash, securities and other assets.
 Account names or title which will occur in the records may be Sinking fund cash, sinking fund
securities, sinking fund income and expense.
 Appropriation of retained earnings for the sinking fund is not automatic but a matter of policy
Sinking fund under the administration of the trustee

 There is no distinction whether the fund is in the form of cash, securities and other assets.
 Account used for this accounting is “Sinking fund-Trustee”. The account includes all composition
of funds.
 Individual transactions pertaining to purchase and sales of securities and to earnings and
expenses of the fund is recorded upon the receipt of report from the trustee.
PREFERENCE SHARE REDEMPTION FUND

 Fund set aside for redemption of preference share by the issuing entity.
FUND FOR ACQUISITION OF PROPERTY

 Set aside for acquisition of property, plant and equipment

 Replacement fund is cash set aside in anticipation of future replacement while plant expansion
fund is set aside for future acquisition of additional property.

CONTINGENCY FUND

 Fund set aside for purpose of meeting obligations that may arise from contingencies like pending
lawsuits or taxes in dispute
INSURANCE FUND

 Cash set aside for purpose of meeting obligations that may arise from certain risks not insured
against like fire, typhoon, explosion and other casualties.
 This fund is a result of policy of self-insurance
 When there is fire occurred in building property, a loss is recognized for the carrying amount of the
building. The entity may use this fund to establish new building in place of the destroyed building.

LIFE INSURANCE POLICY

 The purpose is to compensate the entity for the loss of services arising from untimely death of
important members of management
 The entity may insure the life of its officers and name itself as beneficiary. No accounting problem
if the beneficiary is the officer insured because the payment of premium is simply charged to
insurance expense
 Life insurance policy has loan value and cash surrender value
LOAN VALUE

 The amount which the insured can borrow from the insurance firm with cash surrender value as
collateral security
 Amount borrowed is treated as ordinary obligation and is not deducted from the cash surrender
value
CASH SURRENDER VALUE

 This only pertains to a life insurance policy and the amount which the insurance firm will pay upon
the surrender and cancelation of the life insurance policy
 Premiums for three full years must have been paid
 The policy is surrendered at the end of the third year or anytime thereafter
 Cash surrender value is classified as non-current investment
 The cash surrender value is the excess necessary to balance the deficiency of premium to meet the
annual risk during the later years of the policy.
ACCOUNTING PROCEDURES FOR CASH SURRENDER VALUE
a. Payment of the insurance premium
Life Insurance Expense XX
Cash XX

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

Prepaid Life Insurance XX
Life Insurance Expense XX

c. Dividends received on the life policy is not income but reduction of life insurance expense
Cash XX
Life Insurance Expense XX

d. Initial recognition of the cash surrender value at the end of third year. The cash surrender value
pertains to the first three years of policy
Cash Surrender Value XX
Life Insurance expense* XX
Retained Earnings** XX
* The portion of cash surrender value applicable to the current year is credited to life insurance
expense while the portion of cash surrender value pertains to prior years is credited to retained
earnings

e. Recognition of cash surrender value subsequent to the third year

Cash Surrender Value XX
Life Insurance Expense XX
*(CSV at the end of the period minus CSV, at the end of third year). The increase pertains to the
whole year and this should be proportionately recognized depending on the date of the policy and
report period.

f. Receipt of the proceeds of the life policy

Cash XX
Cash Surrender Value* XX
Life Insurance Expense** XX
Gain on life insurance settlement*** XX
* Pertains to the adjusted balance of cash surrender value
**Pertains to the unexpired premium at the time of death
***Face of policy minus cash surrender value minus unexpired premium