FINANCIAL ACCOUNTING AND REPORTING

FAR12 Investment Property

12.1. Introduction.................................................................................................................. 1

12.2. Classification ................................................................................................................ 1

12.3. Recognition and Initial Measurement ............................................................... 2

12.4. Subsequent Measurement ...................................................................................... 2

12.4.1. Fair Value Model ......................................................................................... 3
12.4.2. Cost Model ..................................................................................................... 3

12.5. Transfers and Disposals .......................................................................................... 4

12.6. Presentation and Disclosures................................................................................ 5

FAR12 Investment Property
12.1. Introduction
 PAS 40 shall be applied in the recognition, measurement and disclosure of investment property. This
standard applies to the measurement in a lessee's (accounted for as finance lease) financial statements of
investment property interests held under a lease and to the measurement in a lessor's (accounted for under
operating lease) financial statements of investment property provided to a lessee. However, all other
aspects relating to leases, their accounting, and their disclosure, are dealt with in PAS 17/PFRS 16.
 Additionally, PAS 40 does not apply to:
a. biological assets related to agricultural activity (see PAS 41 and PAS 16); and
b. mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources
(see PFRS 6)
 PAS 40 defines investment property as property (land or a building-or part of a building-or both) held
(by the owner or by the lessee under a finance lease) 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
b. sale in the ordinary course of business.
 On the other hand, owner-occupied property is a property held (by the owner or by the lessee under a
finance lease) for use in the production or supply of goods or services or for administrative purposes.

12.2. Classification
 One of the distinguishing characteristics of investment property (compared to owner-occupied property)
is that it generates cash flows that are largely independent from other assets held by an entity. Owner-
occupied property is accounted for under PAS 16.

 The following table shows a list of examples of items that are considered investment properties and those
that are not:
Investment Property
1. Land held for long-term capital appreciation
2. Land held for undecided future use
3. Building leased out under an operating lease
4. Vacant building held to be leased out under
an operating lease
5. Property under construction as investment
property
Not Investment Property
1. Property held for use in the production or
supply of goods or services or for
administrative purposes (PAS 16)
2. Property held for sale in the ordinary course
of business or in the process of construction
of development for such sale (PAS 2)
3. Property being constructed or developed on
behalf of third parties (PAS 11)
4. Property leased to another entity under a
finance lease (PAS 17)
5. Owner-occupied property, including 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 and owner-occupied property
awaiting disposal

 The following table summarizes other classification issues related to investment property and the
appropriate treatment of such issues:

A property interest that is held by a lessee under an operating lease may be

classified and accounted for as investment property provided that:
– The rest of the definition of investment property is met
– The operating lease is accounted for as if it were a finance lease in
Property held under
accordance with PAS 17/PFRS 16
operating lease
– The lessee uses the fair value model set out in this Standard for the asset
recognized
– An entity may make the foregoing classification on a property-by-
property basis

– If the portions can be sold or leased out separately, they are accounted
for separately. Therefore, the part that is rented out is investment
property.
Partial own use
– If the portions cannot be sold or leased out separately, the property is
investment property only if the owner-occupied portion is insignificant.

FAR12 INVESTMENT PROPERTY 1

 – If those services are a relatively insignificant component of the
arrangement as a whole (for instance, the building owner supplies
security and maintenance services to the lessees), then the enterprise
Ancillary services may treat the property as investment property.
– Where the services provided are more significant (such as in the case of
an owner-managed hotel), the property should be classified as owner-
occupied.

– Not investment property in consolidated financial statements that

include both the lessor and the lessee, because the property is owner-
occupied from the perspective of the group.
Intercompany rentals
– However, such property could qualify as investment property in the
separate financial statements of the lessor, if the definition of investment
property is otherwise met.

Case Study 1
ABC Company and its subsidiaries provided the following properties owned by the group.
Land held for undetermined future use P1,000,000
Vacant building to be leased out under an operating lease 2,000,000
Property held for use in production 4,000,000
Property held by a subsidiary, a real estate firm, in the ordinary course of business 3,000,000
Building owned by subsidiary and for which the subsidiary
provides security and maintenance services to the lessees 2,500,000
Land leased to a subsidiary under an operating lease 1,500,000
Land leased to a subsidiary under a finance lease 2,000,000
Equipment leased out under an operating lease 500,000
Building under construction for use as investment property 3,500,000

Required
In the consolidated statement of financial position of ABC Company and its subsidiaries, what total amount should be
reported as investment property?

12.3. Recognition and Initial Measurement

 Recognition principles are similar to those contained in IAS 16. Investment property shall be recognized
as an asset when, and only when:
a. it is probable that the future economic benefits that are associated with the investment property will
flow to the entity; and
b. the cost of the investment property can be measured reliably.
 An investment property shall be measured initially at its cost. Transaction costs shall be included in the
initial measurement.
 However, property held under an operating lease shall be measured initially using the principles contained
in PAS 17/PFRS 16—at the lower of the fair value and the present value of the minimum lease payments.
 The cost of a purchased investment property comprises its purchase price and any directly attributable
expenditure. Directly attributable expenditure includes, for example, professional fees for legal services,
property transfer taxes and other transaction costs.
 The cost of an investment property is not increased by:
a. start-up costs (unless they are necessary to bring the property to the condition necessary for it to be
capable of operating in the manner intended by management),
b. operating losses incurred before the investment property achieves the planned level of occupancy,
c. abnormal amounts of wasted material, labor or other resources incurred in constructing or developing
the property.

12.4. Subsequent Measurement

 An entity shall select either the cost model or the fair value model for all of its investment property.
There are, however, two exceptions, as follows:
a. If an entity elects to classify property held under an operating lease as investment property, then it
must select the fair value model for all of its investment property.
b. If the entity has investment property backing liabilities that pay a return linked to the fair value of the
assets; if so, regardless of which model is selected for measuring such investment property, the entity
continues to have a choice of models for its other investment property.
 Change is permitted only if this results in a more appropriate presentation. PAS 40 notes that this is
highly unlikely for a change from a fair value model to a cost model.

FAR12 INVESTMENT PROPERTY 2

 12.4.1. Fair Value Model
 After initial recognition, an entity that chooses the fair value model shall measure all of its investment
property at fair value.
 A gain or loss arising from a change in the fair value of investment property shall be recognized in profit or
loss for the period in which it arises.
 An entity is encouraged, but not required, to measure the fair value of investment property on the basis of
a valuation by an independent valuer who holds a recognized and relevant professional qualification and
has recent experience in the location and category of the investment property being valued.
 If, on acquisition, it is not possible to determine fair value reliably on a continuing basis, then the asset shall
be measured using the cost model under IAS 16 until disposal. Residual value shall be assumed to be zero.
Therefore, it is possible for an entity to hold investment property, some of which is measured at fair value
and some under the cost model.
 If an entity measures investment property at fair value, it shall continue to do so until disposal, even if
readily available market data become less frequent or less readily available.

12.4.2. Cost Model

 After initial recognition, investment property is accounted for in accordance with the cost model as set
out in PAS 16, that is, cost less accumulated depreciation and less accumulated impairment losses.
 Investment properties that meet the criteria to be classified as held for sale (or are included in a disposal
group that is classified as held for sale) shall be measured in accordance with PFRS 5.

Case Study 2
Investors Galore Inc., a listed company in Germany, ventured into the construction of a mega shopping mall in south
Asia, which is rated as the largest shopping mall of Asia. The company’s board of directors after market research
decided that instead of selling the shopping mall to a local investor, who had approached them several times during
the construction period with excellent offers, which he progressively increased during the year of construction, the
company would hold this property for the purposes of earning rentals by renting out space in the shopping mall to
tenants. For this purpose it used the services of a real estate company to find an anchor tenant (a major international
retail chain) that then attracted other important retailers locally to rent space in the mega shopping mall, and within
months of the completion of the construction the shopping mall was fully rented out.

The construction of the shopping mall was completed, and the property was placed in service at the end of 2019.
According to the company’s engineering department the computed total cost of the construction of the shopping mall
was P100 million. An independent valuation expert was used by the company to fair value the shopping mall on an
annual basis. According to the fair valuation expert the fair values of the shopping mall at the end of 2019 and at each
subsequent year-end thereafter were:
2019 P100 million 

2020 120 million 

2021 125 million 

2022 115 million 


The independent valuation expert was of the opinion that the useful life of the shopping mall was ten years and its
residual value was P10 million.

Required
What would be the impact on the profit and loss account of the company if it decides to treat the shopping mall as an
investment property under PAS 40?
a. Using the fair value model
b. Using the cost model
(Since the rental income for the shopping mall would be the same under both the options, for the purposes of this exercise
do not take into consideration the impact of the rental income from the shopping mall on the net profit or loss for the
period.)
Case Study 3
ABC Company owns three properties, which are classified as investment properties. Details of the properties are as
follows:
Initial cost Fair value, 12/31/19 Fair value, 12/31/20
Property 1 P2,700,000 P3,200,000 P3,500,000
Property 2 3,450,000 3,000,000 2,800,000
Property 3 3,300,000 3,900,000 3,400,000
Each property was acquired in 2014 with a useful life of 50 years. The entity’s accounting policy is to use the fair value
model for investment properties.

Required
a. Determine gain or loss for 2020.
b. Determine the balance of investment property on 2020.
c. Assuming the company is using the cost model for investment properties, how much should be the balance of
investment property on December 31, 2020?

FAR12 INVESTMENT PROPERTY 3

12.5. Transfers and Disposals
 Transfers to and from investment property shall be made when and only when there is a change of use
evidenced by:
a. Commencement of owner occupation (transfer from IP to PPE)
b. Commencement of development with a view to sale (transfer from IP to inventories)
c. End of owner occupation (transfer from PPE to IP)
d. Commencement of an operating lease to another party (transfer from inventories or PPE to IP)

 The following table summarizes the measurement principles used when there are transfers to or from the
investment property classification:
From To Initial Subsequent
Measurement Measurement
Investment property Property, plant and Cost Cost less
equipment (FV or CA at date of accumulated
transfer) depreciation and
impairment losses
(PAS 16)
Investment property Inventories Cost Lower of cost or net
(FV or CA at date of realizable value
transfer) (PAS 2)
Property, plant and Investment property Fair Value, any Cost model or fair
equipment difference from CA value model
shall be treated as (PAS 40)
revaluation (PAS 16)
Inventories Investment property Fair Value, any Cost model or fair
difference value model
recognized in PL (PAS 40)
(PAS 2)

 An investment property shall be derecognized on disposal or at the time that no benefit is expected from
future use or disposal. Any gain or loss is determined as the difference between the net disposal proceeds
and the carrying amount and is recognized in profit or loss.
 Compensation from third parties for investment property that was impaired, lost or given up shall be
recognized in profit or loss when the compensation becomes receivable.

Case Study 4
The following are independent situations:
1. Chyna, Inc. completed the construction of a building at the end of 2018 for a total cost of P100 million. The building
is estimated to be economically useful for 25 years. The building was constructed for the purpose of earning rentals
under operating leases. The tenants began occupying the building after its completion. The company opted to use
the fair value model to measure the building. An independent valuation expert was used by the company to
estimate the fair value of the building on an annual basis. According to the expert the fair values of the building at
the end of 2018, 2019 and 2020 were P105 million, P120 million and P118 million, respectively.
The company’s business expanded in 2019. As a result, the company started to use the building in its operations
on January 1, 2020. Because of the change in use, the company reclassified the building from investment property
to property, plant and equipment.
2. Deena, Inc. owns a building purchased on January 1, 2016 for P100 million. The building was used as the
company's head office. The building has an estimated useful life of 25 years. In 2020, the company transferred its
head office and decided to lease out the old building. Tenants began occupying the old building by the end of 2020.
On December 31, 2020, the company reclassified the building as investment property to be carried at fair value.
The fair value on the date of reclassification was P85 million.
3. Ellah Company, a property developer, completed the development of 30 units of office building for sale. Upon
completion, 5 units remain unsold and classified as inventories. The cost of these remaining units is P2,000,000
per unit whilst the net selling price is P2,500,000 per unit. Management subsequently decides to hold the units as
investment property by letting out to tenants.
4. On January 2, 2019, Finnick Company made a test of impairment on one of its buildings carried as plant asset. The
test on impairment revealed a recoverable value of P8,250,000 on that building. The carrying value of this building
as of January 2, 2019 is P12,000,000 with a remaining useful life of 10 years.
On January 1, 2021, Finnick Company decided to convert this building into an investment property that is to be
carried at fair value. The cost of converting the building is insignificant but as a result of the change in the usage,
the fair market value of the building was reliably valued at P10,500,000.

Required
Journalize the above transactions.

FAR12 INVESTMENT PROPERTY 4

12.6. Presentation and Disclosures
 Investment properties are aggregated and presented as one line item under the heading “Investment
property” on the face of the statement of financial position. Investment properties are normally classified
as non-current assets. The breakdown of the line item is disclosed in the notes.
 The entity shall disclose the following:
a. Whether the fair value or the cost model is used
b. If the fair value model is used, whether property interests held under operating leases are classified
and accounted for as investment property;
c. If classification is difficult, the criteria to distinguish investment property from owner-occupied
property and from property held for sale.
d. The methods and significant assumptions applied in determining the fair value of investment property.
e. The extent to which the fair value of investment property is based on a valuation by a qualified
independent valuer; if there has been no such valuation, that fact must be disclosed.
f. The amounts recognized in profit or loss for:
– Rental income from investment property;
– Direct operating expenses (including repairs and maintenance) arising from investment property
that generated rental income during the period; and
– Direct operating expenses (including repairs and maintenance) arising from investment property
that did not generate rental income during the period.
g. Restrictions on the realizability of investment property or the remittance of income and proceeds of
disposal.
h. Contractual obligations to purchase, construct, or develop investment property or for repairs,
maintenance or enhancements.

Quizzer – Problem 1
1. Akie Company purchases a landed property at a cost of P100,000,000. In the sale and purchase agreement,
P20,000,000 of the purchase price is attributed to the land portion. The building consists of 10 floors of equal space.
Two floors are used for administrative purposes and the balance are let out to tenants. Akie also incurs the following
costs in connection with the purchase of the property: Legal and agency fees, P3,000,000; Soft launching cost to
market for tenants, P500,000; Feng Shui costs for re-arrangements of interiors, P300,000; and administrative
expenses, P200,000. At what amount should the investment property be initially recognized?
A. P82,400,000
B. P82,800,000
C. P83,200,000
D. P103,000,000

2. Billie Company leases an entire shopping complex from Complex Company under a 20-year operating lease. Under
the lease agreement, Billie would manage and take the risks of operating the shopping complex for 20 years. It pays
a yearly rental of P40,000,000 to Complex Company. Billie uses 20% of the floor area for its own operations. The
rest of the floor area is sub-leased to other tenants. Billie Company expects rental income from the sublease to be
about P35,000,000 per year for 20 years. The borrowing costs of Billie Company is 8% per year. The cost of
constructing the complex incurred by Complex Company is P480,000,000, transaction and other incidental costs
amount to P20,000,000. If Billie Company elects to treat its interest in the shopping complex as an investment
property, being its interest in the underlying asset, at what amount should the investment property be initially
recognized by Billie Company?
A. None
B. P343,640,000
C. P400,000,000
D. P500,000,000

3. At the beginning of the year 2019, Dory Company has an investment property, acquired at cost of P1,000,000.
Depreciation of P50,000 is recognized annually and periodic continuing repair costs of P5,000 per year as well as
property tax of P5,000 are incurred by the company on an annual basis. As of December 31, 2019, the property has
no determinable fair value. What should be the carrying value of the investment property on December 31, 2019?
A. None
B. P900,000
C. P940,000
D. P950,000

4. On January 2, 2019, Frankie Company’s investment property has a carrying value of P3,600,000 under the fair value
model. On December 31, 2019, the property has a fair value of P3,000,000, what amount of gain or loss should
Frankie continue to recognize if Frankie would shift to cost model?
A. Gain of P600,000 reported in other comprehensive income
B. Loss of P600,000 reported in the profit or loss
C. Loss of P600,000 reported in equity as decrease in revaluation surplus
D. Zero

FAR12 INVESTMENT PROPERTY 5

5. On July 1, 2019, Eevy Company purchases an investment property at a cost of P50,000,000 including transaction
costs. On October 1, 2019, the fair value of the property increases to P52,000,000. At December 31, 2019, the fair
value of the property is P51,500,000. The rental income received per quarter is P1,000,000. The property has a
useful life of 50 years.

Question 1: If the company uses the cost model, what is the net effect on the profit or loss for the six months ended
December 31, 2019 in relation to the investment property?
A. P(500,000)
B. P1,000,000
C. P1,500,000
D. P2,000,000

Question 2: If the company uses the fair value model, what is the net effect on the profit or loss for the six months
ended December 31, 2019 in relation to the investment property?
A. P1,000,000
B. P1,500,000
C. P2,000,000
D. P3,500,000

6. On January 1, 2019, Gellie Company which uses the fair value model, purchases an investment property at a cost of
P50,000,000. At December 31, 2019, the market value of the property is P60,000,000. The fair market value of the
property on December 31, 2020 is P55,000,000. On January 1, 2021, the property was reclassified to property, plant
and equipment. At what amount should the property, plant and equipment be initially recorded?
A. Zero
B. P50,000,000
C. P55,000,000
D. P60,000,000

7. Honey Company has a plant asset with a carrying value of P1,200,000 as of December 31, 2019. On January 1, 2020,
the company decided to convert the plant asset to investment property. The fair value at date of conversion is
P900,000. The conversion would result to
A. P300,000 loss on conversion reported as other comprehensive income
B. P300,000 loss on conversion reported in profit or loss
C. P900,000 increase in investment property
D. P1,200,000 decrease in plant assets

8. Ikea Company, a property developer, completed the development of 30 units of office building for sale. Upon
completion, 5 units remain unsold and classified as inventories. The cost of these remaining units is P2,000,000 per
unit whilst the net selling price is P2,500,000 per unit. Management subsequently decides to hold the units as
investment property by letting out to tenants. What amount of gain or loss should Ikea Company recognize on the
transfer of inventories to investment property?
A. None
B. P500,000
C. P2,000,000
D. P2,500,000

9. On January 2, 2019, Jillian Company made a test of impairment on one of its buildings carried as plant asset. The
test on impairment revealed a recoverable value of P5,500,000 on that building. The carrying value of this building
as of January 2, 2019 is P8,000,000 with a remaining useful life of 10 years.

On January 1, 2021, Jillian Company decided to convert this building into an investment property that is to be
carried at fair value. The cost of converting the building is insignificant but as a result of the change in the usage,
the fair market value of the building was reliably valued at P7,000,000. What amount of revaluation surplus should
Jillian Company disclose in the shareholders’ equity as of December 31, 2021?
A. None
B. P525,000
C. P600,000
D. P2,000,000

Quizzer – Theory 1
1. PAS 40 defines this property as land or building or part of building or both held by an owner or finance lessee to
earn rentals or for capital appreciation or both.
A. Investment property C. Owner-occupied property
B. Mining property D. Rental property

2. The following properties fall under the definition of investment property, except
A. Land held for long-term capital appreciation
B. Property occupied by an employee paying market rent
C. Land held for a currently undetermined use
D. A building owned by an entity and leased out under an operating lease

FAR12 INVESTMENT PROPERTY 6

3. Which of the following statements best describes owner-occupied property?
A. Property held for sale in the ordinary course of business
B. Property held for use in the production and supply of goods or services and property held for administrative
purposes
C. Property held to earn rentals
D. Property held for capital appreciation

4. An investment property shall be measured initially at

A. Cost
B. Cost less accumulated impairment losses
C. Depreciable cost less accumulated impairment losses
D. Fair value less accumulated impairment losses

5. Subsequent to initial recognition, investment property shall be measured at

A. Fair value
B. Cost less accumulated depreciation and any accumulated impairment losses
C. Either fair value or cost less accumulated depreciation and any accumulated impairment losses.
D. Either fair value or cost.

6. In case of property held under an operating lease and classified as investment property
A. The entity has to account for the investment property under the cost model only.
B. The entity has to use the fair value model only
C. The entity has a choice between the cost model and fair value model.
D. The entity needs only to disclose the fair value and can use the cost model.

7. Which statement is incorrect in determining the fair value of an investment property?

A. An entity shall determine the fair value of investment property after deduction for transaction costs that may
be incurred upon disposal.
B. 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.
C. The fair value of investment property excludes prepaid or accrued operating lease income.
D. 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 rather than recognized separately as property, plant and equipment.

8. Transfers from investment property to property, plant and equipment are appropriate
A. When there is change of use.
B. Based on the entity’s discretion.
C. Only when the entity adopts the fair value model.
D. The entity can never transfer property into another classification once it is classified as investment property.

9. When the entity uses the cost model, transfer between investment property, owner-occupied property and
inventory shall be accounted for at
A. Carrying amount C. Fair value
B. Either at fair value or carrying amount D. Neither at fair value nor carrying amount

10. A transfer from investment property carried at fair value to owner-occupied property shall be accounted for at
A. Fair value which becomes the deemed cost C. Historical cost
B. Appraised value D. Assessed value

11. If inventory is transferred to investment property that is to be carried at fair value, the difference between carrying
amount and fair value shall be included in
A. Other comprehensive income
B. Retained earnings
C. Profit or loss
D. Either other comprehensive income or profit or loss

12. An investment property is derecognized when

A. It is disposed to a third party.
B. It is permanently withdrawn from use.
C. No future economic benefits are expected from its disposal.
D. In all of the above cases.

FAR12 INVESTMENT PROPERTY 2