Investment property

Definition:
1. Property – land and/or building
2. Purpose:
a. Capital appreciation (including undetermined future use); and/or
b. Rent to others under operating lease

Owner-occupied property – not an investment property because it is a property held by the owner for use in
production or supply of goods or services or for administrative purposes (PPE)

If the ancillary services provided to lessees or tenants is considered as material, the property is deemed to be
a PPE (example: hotels)

Accounting for investment property:

Initial measurement – similar to PPE

Example: Purchased
• Cost of purchase (purchase price + direct attributable cost)
• Cost of development
• PV of initial estimate of restoration costs (PV of ARO)

Subsequent measurement – accounting policy choice between:

1. Cost model (similar to PPE)
2. Fair value model
a. No depreciation
b. Effects of fair value – profit or loss
c. No impairment

If the entity elected to measure using fair value model and the fair value cannot be determined reliably, the
entity will use the cost model until such time when fair value can be determined

Separate FS of Consolidated FS of
ABC ABC and
Subsidiaries
Property held by a subsidiary of ABC, a real estate firm, in the ordinary course of business P3,500,000 Not recognized Inventory
Land held by ABC for undetermined use Investment Investment
4,350,000 Property Property
Property under construction for use as investment property Investment Investment
6,700,000 Property Property
Land held for future use as factory site 5,200,000 PPE PPE
Building awaiting disposal 1,120,000 PPE/NCA HFS PPE/NCA HFS
Machinery leased out by ABC to a third party under an operating lease 590,000 PPE PPE
Equipment leased out by ABC to a third party under a finance lease 710,000 Not recognized Not recognized
Machinery awaiting disposal 345,000 PPE/NCA HFS PPE/NCA HFS
Building owned by a subsidiary of ABC and for which the subsidiary provides security and maintenance Not recognized Investment
services to the lessees (services are not significant) 3,890,100 property
Land leased by ABC to a subsidiary under an operating lease Investment PPE (interco lease
2,200,000 property is eliminated)
Land leased by ABC to a subsidiary under a finance lease Not recognized PPE (interco lease
2,340,000 is eliminated)
A vacant building owned by ABC and to be leased out under an operating lease Investment Investment
5,500,000 property property
Property held by ABC for use in production 1,750,000 PPE PPE
Building held by ABC under a finance lease currently being leased out to a third party (sublease) ROU/Investment ROU/Investment
4,150,000 Property Property
Property leased by ABC from its subsidiary under a finance lease 5,263,000 ROU PPE
Property being constructed on behalf of Sniffles, an outside company Inventory/CIP Inventory/CIP
2,400,000 under IFRS 15 under IFRS 15

Cost model – same as PPE

Illustration of fair value model

AB Company is a real estate company. On June 30, 2017, it purchased a piece of property (land and building)
at an installment price of P100 million. The appraised value of land is P30,000,000, while there is no ready
market value for building). The Company made a down-payment of 10%, and issued a noninterest-bearing
note payable at the end of June of each year for 9 years (P10 million each). As of the transaction date, the
market rate for 9 years is 12%. The property has unpaid real property tax of P100,000 which was assumed by
the company, and also paid broker’s commission, legal costs, and other direct taxes amounting to P50,000.

AB Company elected to use Fair Valuation Model to account for Investment Property. According to its
external valuers, the market value of the property as at December 31, 2017 is the following:
Land…………………………………..P 40 M
Building……………………………….. 30 M

Down payment 10,000,000

PV of note (10,000,000 per year x PVFOA 5.3282) 53,282,000
Total purchase price 63,282,000
Assumed real property taxes in arrears 100,000
Other direct costs 50,000
Total cost of the investment property 63,432,000

Allocation:
Land (given FV or appraised value) 30,000,000
Building (no FV given, residual) 33,432,000

6/30/2017 Investment Property – Land 30,000,000

Investment Property – Building 33,432,000
Cash 10,150,000
Note Payable, net of discount 53,282,000

12/31/2017 Investment Property – Land 10,000,000

Gain on change in FV 10,000,000

Loss on change in FV 3,432,000

Investment Property – Building 3,432,000