ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 42  October 2021 CPA Licensure Exam  Week No. 8

FINANCIAL ACCOUNTING & REPORTING C. Uberita  G. Macariola  J. Binaluyo

FAR-4210: INVESTMENT PROPERTY & OTHER FUND INVESTMENTS

Investment Property – is defined as
Property (land or building or part of a building or both) held (by the owner or 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 administrative purposes; or
b) sale in the ordinary course of business

Examples of investment property

A. Land held for long-term appreciation rather than for short-term sale in the ordinary course of business
B. Land held for currently undetermined future use. (If the entity has not determined that it will use the land as owner-
occupied property or for short-term sale in the ordinary course of business, the land is regarded as held for capital
appreciation)
C. A building owned by the entity (or a right-of-use asset relating to a building held by the entity) and lease out under one or
more operating leases
D. A building that is vacant, but held to be leased out under one or more operating leases
E. Property that is being constructed or developed for future use as investment property

Investment Property does not include

(1) Property intended for sale in the ordinary course of business or in the process of construction or development
for such sale
(2) Owner-occupied property, including property held for use as owner-occupied property, property held for
future development and subsequent use as owner-occupied property, property occupied by employees
(whether or not the employees pay rent at market rates) and owner occupied property awaiting disposal.
(3) Property that is leased to another entity under a finance lease

Measurement and Recognition

An investment property shall be measured initially at its cost. Transaction costs shall be included in the initial measurement.

a. The cost of a purchased investment property comprises its purchase price and any directly attributable expenditure. Direct
attributable expenditure of investment property includes professional fees for legal services, property transfer taxes and
other transaction costs.
b. The cost of a self-constructed investment property is its cost at the date when the construction or development is completed.
c. If payment for an investment property is deferred, its cost is the cash price equivalent. The difference between this amount
and the total payment is recognized as interest expense over the period of credit.
d. One or more property may be acquired in exchange for a non-monetary asset or assets, or a combination of monetary and
non-monetary assets. The cost of such an investment property is measured at fair value unless (a) the exchange
transaction lacks commercial substance or (b) the fair value of neither the asset received nor the asset given up is reliably
measurable. The acquired asset is measured in this way even if an entity cannot immediately derecognize the asset given
up. If the acquired asset is not measured at fair value, its cost is measured at the carrying amount of the asset given up.

The Cost of an Investment Property is not Increased By:

o 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).
o Operating losses incurred before the investment property achieves the planned level of occupancy, or
o Abnormal amounts of wasted material, labor or other resources incurred in constructing or developing the property.

Measurement Subsequent to Acquisition

An entity must choose as its accounting policy either a cost model or fair value model and shall apply this policy to all of its
investment property.

Cost model
After initial recognition, an entity that chooses the cost model shall measure all of its investment property at cost less
accumulated depreciation less any impairment losses. Where the cost model is followed, the fair value of the property should
be disclosed.

Fair value model

Fair value is defined as the amount for which the property could be exchanged between knowledgeable, willing parties in an
arm’s length transaction. Fair value will normally be obtainable by reference to current prices on an active market for similar
properties in the same location and condition as the property under review. In the absence of such an active market, information
from variety of sources may have to be consistent, including: (a) current prices on an active market for properties of a different
nature, condition or location, adjusted to reflect those differences and (b) discounted cash flow projections based on reliable
estimates of future cash flows. If it becomes impossible to measure fair value reliably, the cost-based-policy should be adopted
and retained until the property is disposed of.

The fair value policy requires the enterprise to revalue its investment properties each year, any gain or loss being
included in the net profit or loss for the period.

If an entity has previously measured an investment property at fair value, it shall continue to measure the property at fair value
until disposal (or until the property becomes owner-occupied property or the entity begins to develop the property for
subsequent sale in the ordinary course of business) even if comparable market transactions become less frequent or market
prices become less readily available.

After initial recognition, an entity that chooses the cost model shall measure all of its investment property in accordance with
PAS 16’s requirements for that model, other than those 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) in accordance with PFRS 5 Non-current Assets Held for Sale and

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FAR-4210
Week 8: INVESTMENT PROPERTY & OTHER FUND INVESTMENTS

Discontinued Operations (Chapter 20 in this book). 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.

Transfer to or from Investment Property Classification - it should only be made when there is a change in use, evidenced
by:
(a) Commencement of owner-occupation [transfer from Investment Property to Property, Plant and Equipment (PPE)].
(b) Commencement of development with a view to sale (transfer from Investment Property to Inventories).
(c) End of owner-occupation (transfer from PPE to Investment Property).
(d) Commencement of an operating lease to another party (transfer from Inventories to Investment Property).
(e) End of construction or development (transfer from PPE to Investment Property).

Transfer under the fair value model

1. Investment property becomes owner-occupied property – a transfer should be made from investment property to
owner-occupied property at the commencement of owner-occupation. Where the investment property has been carried at
fair value, the fair value at the date of transfer becomes the deemed cost for subsequent accounting under PAS 16.

2. Investment property is to be developed for sale – a transfer should be made from investment property to inventory
at the date of commencement of development with a view to sale. Where the investment property has been carried at fair
value, the fair value at the date of transfer becomes the deemed cost for subsequent accounting under PAS 2.

3. Owner-occupied property becomes investment property – a transfer should be made from owner-occupied property
to investment property when owner-occupation ceases. If the investment property is to be carried at fair value, PAS 16
is applied up to the date of transfer. The owner-occupied property is fair value up to the date of transfer and any revaluation
gain or loss, being the current fair value and previous carrying amount, is accounted for as a revaluation surplus or deficit
in equity in accordance with PAS 16. Increases are recognized directly in equity, unless there was an impairment loss
recognized for the same property in prior years and a portion of the increase is recognized in profit or loss for any excess
of the amount included in the revaluation surplus for that property.

4. Property held as inventory becomes investment property – when an operating lease is granted to a third party on a
property held as inventory, the inventory should be transferred to investment property as soon as the operating lease
commences. If the investment property is to be held at fair value, any difference between the fair value and previous
carrying amount at the date of transfer is recognized in profit or loss.

5. Self-constructed or developed property becomes investment property – when construction or development of a

self-constructed property is complete it should be transferred to investment property. Until this point the property is
accounted for under PAS 16. If the investment property is to be carried at fair value, any difference between fair value
and previous carrying amount at the date of transfer should be recognized in profit or loss.

As noted, as part of the “Improvements to International Financial Reporting Standard 2008” property that is under
construction or development for future use as investment property will be within IAS/PAS 40’s scope. Previously such
property was within the scope of IAS/PAS 16.

The amendment of IAS/PAS 40’Investment Property’, and consequential amendments to IAS/PAS 16’Property, plant and
equipment’, that deals with property under construction or property that is under construction or development for future
use as investment property, should be applied prospectively for annual periods beginning January 1, 2009.

Transfer under the cost model

Where an entity has a policy of carrying investment property at cost less depreciation (the cost model), properties are
transferred in the same way and under the same circumstances as described on the above transfers. However, such transfers
do not change the carrying amount of the property transferred, that is, no revaluation gains or losses arise, nor they change
the cost of the property for measurement or disclosure purposes (PAS 40 par. 59).

Two specific situations where transfers do not take place

• Investment property sold without development – where an investment property is to be disposed of without development,
there has been no change in use and the property is not transferred to inventory. Instead, it is retained in investment
property until disposal or until it is otherwise derecognized (PAS 40 par. 58).

• Investment property developed for continuing future use as investment property – if an investment property is to be
developed for continued future use as an investment property it is also retained in investment property and is not
transferred to inventory or to owner-occupied property. It is because there has been no change of use (PAS 40 par 58).

IFRS for SMEs Full IFRS

Investment property whose fair value can be measured reliably without
undue cost or effort must be measured at fair value through profit or
loss. All other investment property is accounted for as property, plant
and equipment using the cost-depreciation model.
Mixed-used property should be separated between investment property
and property, plant and equipment, except where to do so would entail
undue cost or effort.
When the fair value of investment property is no longer available
without undue cost or effort, the investment property becomes property,
plant and equipment. This is a change in circumstances, hence does not
constitute a change in accounting policy.
Accounting policy choice between fair value and cost is applied to all
investment property.
Portions of the property are only accounted separately if they could be
sold (or leased under a finance lease) separately.
An entity may only account for investment property at cost in exceptional
cases, where an entity first acquires an investment property (or when an
existing property first becomes investment property after a change in
use), and the fair value of the property cannot be reliably determined on
continuing basis.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FAR-4210
Week 8: INVESTMENT PROPERTY & OTHER FUND INVESTMENTS

1. Spongebob Company has the following property items on December 31, 2021:

Land held not intended for any specific use in the future P3,000,000
Land held for future plant site 2,000,000
Building being leased out under finance lease 2,500,000
Equipment being leased out under operating lease 1,000,000
Condominium building that is being constructed
intended for sale in the ordinary course of business 4,500,000
Building being used for administrative purposes 5,000,000
Hotel building for which significant services are provided to the guests 6,500,000

How much should be classified as investment properties on December 31, 2021?

a. 3,000,000 c. 9,500,000
b. 4,000,000 d. 10,500,000

2. On January 2, 2021, Patrick Company has an investment property acquired at cost of P3,000,000 including
directly attributable transaction cost of P 100,000. Estimated useful life of the property is 20 years using a
straight-line method. On December 31, 2021, the fair value of the property is P3,200,000. Estimated cost to sell
is P50,000.

Q1: What should be the carrying value of the investment at the end of 2021 using the cost model?
a. 2,755,000 c. 2,850,000
b. 3,150,000 d. 3,200,000

Q2: How much is the carrying value of the investment at the end of 2021 using the fair value model?
a. 2,755,000 c. 2,850,000
b. 3,150,000 d. 3,200,000

3. On July 1, 2021, Mr. Krabs Company purchases an investment property at a cost of P50,000,000 including
transaction costs for a total amount of P500,000. On October 1, 2021, the fair value of the property increases
to P51,000,000. At December 31, 2021, the fair value of the property is P 48,000,000. The rental income
received per quarter is P1,500,000. The property has a useful life of 50 years.

Q1: If the company uses the cost model, what is the net effect on the profit or loss for the six months ended
December 31, 2021 in relation to the investment property?
a. (P500,000) c. 1,500,000
b. P1,000,000 d. 2,000,000

Q2: 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, 2021 in relation to the investment property?
a. 1,000,000 c. 2,000,000
b. 1,500,000 d. 3,500,000

4. On January 1, 2019, Squidward Company which uses the fair value model, purchases an investment property
at a cost of P50,000,000. At December 31, 2019 the fair value of the property is P60,000,000. The fair 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 c. 55,000,000
b. 50,000,000 d. 60,000,000

5. Gary Company has a building with a carrying value of P2,400,000 as of May 31, 2020. On June 1, 2020, the
company decided to convert the plant asset to investment property to be carried at Fair Value.

Q1: If the fair value of the building at date of conversion is P2,600,000. The conversion would result to a
recognition of
a. 200,000 gain to Profit or Loss c. 2,400,000 Investment Property
b. 200,000 revaluation surplus to OCI d. 2,600,000 Building

Q2: If the fair value of the building at date of conversion is P2,200,000. The conversion would result to a
recognition of
a. 200,000 loss to Profit or Loss c. 2,400,000 Investment Property
b. 200,000 loss to OCI d. 2,200,000 Building

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FAR-4210
Week 8: INVESTMENT PROPERTY & OTHER FUND INVESTMENTS

6. On January 2, 2019, Sandy Company made a test of impairment on one of its building 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 2, 2021, Sandy Company decided to convert this building into an investment property that is to
be carried at fair value. The fair value of the building is P7,000,000 on the date of transfer.

What amount of gain or loss should Sandy Company recognize in its profit or loss on the date of transfer?
a. 0 c. 2,000,000
b. 600,000 d. 2,600,000

Fund Investment
A. Fund Investment:
When a Fund Investment is created for a specific purpose or purposes, the Investment account is debited
and credited to cash or non-cash asset or any other account being issued. Any income earned and realized
by the fund or investment should be recognized directly as debit to the investment and credit to the
corresponding income from investment account. Any cost or expenses necessary or related to the
investment is a direct charge against the income and investment accounts.

7. The following information relates to non-current investments placed in trust by Mrs. Puff Company as required
by underwriter of its bonds.

Bond sinking fund, January 1, 2021 P 2,250,000

Additional investments to the sinking fund during 2021 450,000
Dividend revenue on equity securities 75,000
Interest revenue on debt securities 150,000
Administration cost 25,000
Carrying value of bonds payable 3,000,000

What amount should be reported in its December 31, 2021 Statement of Financial Position related to its
non-current investments for bond sinking fund?
a. 2,925,000 c. 2,875,000
b. 2,900,000 d. 2,700,000

B. Investment in Life Insurance (Cash surrender Value)

Cash surrender value of life insurance – is the amount to be paid by the insurance company upon surrender
and cancellation of the life insurance policy. Insurance companies usually allow a portion of accumulated
premiums to build up as a savings plan, when the policy is cancelled; the savings plan or cash surrender
value is returned to the insured. The cash surrender value of life insurance increases from year to year and
is stated in the policy. Any increase in the cash surrender value account will be debited to this account with
a corresponding credit to the life insurance expense account. Any cash dividend that may be received from
the insurance company should be recognized as a reduction to the life insurance expense account.

8. On January 1, 2016, Plankton Company purchased a P4,000,000 ordinary life insurance policy on its
president. Additional data for the year 2019 are: Cash surrender value, January 1, P 200,000; Cash surrender
value, December 31, P220,000; Annual insurance premium paid on January 1, 2019, P80,000; Dividend
received on August 1, P 10,000. Plankton Company is the beneficiary under the life insurance policy.

What amount of life insurance expense should Plankton Company report in its December 31, 2019 Profit or
Loss statement?
a. 50,000 c. 70,000
b. 60,000 d. 80,000

9. Pearl Corporation insures the life of its president for P4,000,000, the corporation being the beneficiary of an
ordinary life policy. The monthly premium is P6,000 payable every first day of the month. The policy is dated
January 1, 2014, and carries the following cash surrender values:

End of Policy Year Cash Surrender Value

2014 -
2015 -
2016 25,200
2017 30,000
2018 39,600
2019 50,400

The corporation follows the calendar year as its fiscal period. The president dies on October 31, 2019 and the
policy is collected on December 1, 2019. What is the gain on life insurance settlement?
a. 3,913,600 c. 3,951,400
b. 3,939,400 d. 4,000,000

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FAR-4210
Week 8: INVESTMENT PROPERTY & OTHER FUND INVESTMENTS

Answer: C
Proceeds of life insurance P4,000,000
Carrying value of Cash Surrender Value (Schedule 1) ( 48,600)
Gain on life insurance P3,951,400

Schedule 1
Cash Surrender Value, January 1, 2019 P39,600
Add: Increase during 2019 to the time
of death (Schedule 2) 9,000
Cash Surrender Value as of October 31, 2019 P48,600

Schedule 2:
Cash Surrender Value, December 31, 2019 P50,400
Cash Surrender Value, January 1, 2019 39,600
Increase for 12 months P10,800
 number of months in a year 12
Average monthly increase P 900
 number of months from January 1 to October 31 10
Increase in Cash Surrender Value up to the time of death P 9,000

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