spvestment Property 423 | PAS 40 Investment Property Fearning Objectives —_ 1. Define an investment property. | 2, State the initial and subseque | vite. ‘quent measurements of investment 3, Apply the fair value mod ‘is | mop lel of accounting for investment Introduction PAS 40 prescribes the accounting and disclosure requirements for investment property. Investment property Investment Property — is land and/or building held to earn rentals ot for capital appreciation or both. Investment property includes only land and building. It does not include any other type of asset. Investment property is held to earn rentals or for capital appreciation or both. Meaning, it generates its own cash flows independently from the other assets of an entity and is not: a. Owner-occupied property (i.e., held for use in the production or supply of goods or services or for administrative purposes). Owner-occupied property is classified as PPE; b. Held for sale in the ordinary course of business (this is classified as inventory); OF « Classified as “held for sale” under PFRS 5 Non-current assets Held for Sale and Discontinued Operations. Eamples of investment property: 7 a a d held for long-term capital appreciation rather than for short-term sale in the ordinary course of business. b. Land held for a currently undetermined future use.424 Pas PS a0 d A building owned by the entity (or a right-of-use asset relatin, to a building held by the entity) and leased out under One of more operating leases. A building that is vacant but is held to be leased out under one or more operating leases. Property that is being constructed or developed for future use as investment property. (PAS 40.8) The following are not investment property: a. b. c. Property acquired exclusively for sale in the near future or for development and resale. Owner-occupied property, including: i. Property held for future use as owner-occupied property; i, 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. iv. Owner-occupied Property awaiting disposal. Property that is leased out to another entity under a finance lease. iii. (PAS 40.9) Illustration: The following information pertains to Entity A: Land held for long-term capital appreciation 1,000,000 Land held for a currently undetermined future use 700,000 Land held for future plant site 600,000 Land held for sale in the ordinary course of business 500,000 Building leased out under finance lease 1,900,000 Building leased out under operating lease 800,000 Right-of-use asset relating to a building held by the entity and leased out under an operating lease 1,200,000 Equipment leased out under an operating lease 100,000 The total investment Property is determined as follows:4 nt Property jcpov aa i ee 425 eid for long-term capital y and here pital appreciati ara held for @ currently undetermined fanaie 1,000,000 puilding leased out under operating lease une 700,000 pightofuse asset relating toa building held by th 800,000 nity and leased out under an operating lea a G otal investment property _1,200,000_ 3,700,000 Not eS The land !teld for future plant site ; as PPE. and the equipment are classified The land hele for sale in the ordinary course of business is classified as inventory. The building leased out under finance lease is not an asset of Entity A ~ it is the asset of the lessee. Partly investment property and partly owner-occupied A property may be partly held to earn rentals or for capital appreciation and partiy owner-occupied. A common example is a building that is partly being rented out and partly being used as office space. Such properties are accounted for as follows: > IF the portions could be sold separately (or leased out separately under a finance lease), they are accounted for separately. The portion being rented out under operating lease is classified as investment property while the owner- occupied portion is classified as PPE. # be sold separately, the entire If the portions could no’ property is classified as investment property if the owner occupied portion is insignificant. If the owner-occupied portion is significant, the entire property is classified as PPE. v Ancillary services to occupants When ancillary services are provided to the occupants of a Property held, the property is classified as investment property if Services are insignificant to the arrangement as a whole. Anee 426 Pasay es : so example is when the owner of an office building provides Security and maintenance services to the building tenants. If the services provided are significant, the entire Proper is classified as PPE. An example is services provided to hotel guests in an owner-managed hotel. An owner-managed hote] 8 classified as PPE rather than investment property. Investment property in consolidated financial statements A property that is leased by a member of a group to another ™member (parent or subsidiary) does not qualify as investment Property in the consolidated financial statements because, from the group's perspective, the property is owner-occupied. However, the property is classified as investment Property in the lessor/owner's individual financial statements. Recognition An investment property is recognized when it meets the definition of an investment property as well as the asset recognition criteria of “probable future economic benefits” and “reliable measurement of cost.” Initial measurement An investment property is initially measured at cost. The measurement of cost depends on the mode of acquisition. Acquisition by Purchase The cost of a purchased investment purchase price and any directly attributable costs incurred in bringing the asset to its intended condition, e.g., professional fees for legal services, property transfer taxes and other transaction costs. If the payment is deferred, the cost is the cash price equivalent. The difference between this amount and the total Payments is recognized as interest expense over the credit period, unless it qualifies for capitalization under PAS 23, Property comprises theHL _etnsent Property ne E — BF re cost of an investment Property exclud, start-up costs, unless they are rit les the following: to the cone necessary for it to the manner intended by Manageme : Operating, losses incurred before achieves the planned level of occupa Abnormal amounts of wasted resources incurred in constructin, pas40.23) a nt; the investment property Icy; or materials, labor or other 8 Or developing the property. c exchanges of assets The measurement of an investment Property acquired in exchan jor another non-monetary asset depends on whether the chores transaction has commercial substance or not. . a. With Commercial Substance — an exchange has a commercial substance if the entity’s subsequent cash flows are expected to change as a result of the exchange. The asset received is measured using the following order of priority: 1. Fair value of the asset Given up; 2. Fair value of the asset Received; or 3. Carrying amount of the asset Given up. b. Lacks Commercial Substance - The asset received is measured at the Carrying amount of the asset Given up No gain or loss arises if the asset received is measured at the carrying amount of the asset given up. Subsequent measurement After initial recognition, an entity ¢ the fair value model as its accounting Policy to all of its investment property. { Only one model shall be used. Using both models nt property is prohibited, except ®kectively for items of investme ‘the following cases: | When the fair value mo investment property cannot hooses either the cost model or policy and applies that del-is used but the fair value of one be reliably determined on initial=o recognition, that investment property will be measured Unde; the cost model; the rest are measured under the fair Value model. For purposes of depreciation, the residual value of the said property is assumed to be zero. Separate choices of accounting policy may be made for (a) investment property that backs liabilities that pay return linkeg directly to the fair value of, or returns from, Specified assets including that investment property and (b) all other investmen; Property. PAS 40 requires an entity to determine the fair value of its investment property, regardless of the accounting policy used, Under the fair value model, fait value is used for measurement Purposes while under the cost model, fair value is used for disclosure purposes. PAS 40 encourages, but does not require, the use of an independent valuer in determining the fair value of an investment property. An entity may subsequently change its accounting policy from the cost model to the fair value model, subject to the Provisions of PAS 8. However, PAS 40 states that it is highly unlikely that a change from the fair value model to the cost model will result in a more relevant presentation. Accordingly, if the fair value model is chosen, it shall be applied until the investment property is derecognized or reclassified to another asset classification, even if fair value becomes less readily determinable. Cost model An entity that chooses the cost model shall measure the investment property using the cost model under PAS 16 (PPE). The entity uses PFRS 5 Non-current Assets Held for Sale and Discontinued Operations if it classifies an investment property a5 “held for sale” or PFRS 16 Leases if the investment property is 4 right-of-use asset resulting from a lease.«_tanent Property pees SS 429 pair value model ' the fair value under model, an investment property is cabsequently measured at its fair ontue prod at the end of each reporting > Fair value is “the Price that would be received to sell an asset or paid to tr angie a liability in an orderly transaction between market participants at the measurement date.” (PAS 40.5) Gains or Ipsges arising from changes in fair value are recognized in profit or loss. Assets measured under the fair value model are not depreciated . If the investment property is a right-of-use asset, fair value js measured for the right-of-use asset and not the underlying property. ‘An entity uses the principles in PFRS 13 Fair Value Measurement when determining the fair value of an investment property. To avoid double-counting, assets and liabilities that are integral parts of the investment property are not recognized separately. For example, elevator and air-conditioning are an integral part of a building and are necessarily included in the building’s fair value. Therefore, these items are included in the measurement of the investment property (i.¢, the building as a whole) rather than as separate items of PPE. Wustration: £ 10,000,000 and Entit i il ta purchase price 0: 1,00U,! ity A acquires a building at a pu iding to the pends an additional 3,000,000 in getting the bil : ; condition for its intended use. The building is inten led to be leased out under various operating leases. Accordingly, it is ‘ssified as investment property: The building becomes availatite ‘or lease on January 1, 20x1, at which date, Entity A estimates its “Seful life to be 20 years, with no residual value. aa 31, 1, the investment property's fair value is #12,000,000.430 PAS gy Se > Initial measurement The building is initially measured at its cost of #73 000, 1,009 Purchase price + 3M direct costs). This is irrespectiyg “iM accounting policy chosen for the subsequent measuremen, » Subsequent measurement - Dec. 31, 20x1 (Cost model) Under the cost model, the investment property is carried at its a less accumulated depreciation and accumulated imapairment losses" Statement of financial position: | Cost 13,000 009 Accumulated depreciation [(13M +20) x 1 yrJ (650,009) Carrying amount - 12/31/x1 12,350,009 a Statement of profit or loss: Depreciation expense (13M +20) 650,000 oS > Subsequent measurement ~ Dec. 31, 20x1 (Fair value model) Under the fair model, the investment property is carried at its far value at the end of each reporting period. Changes in fair value are recognized in profit or loss. The investment property is m0! depreciated. Statement of financial position: Carrying amount - 12/31/x1 (fair value) 12,000,000 Statement of profit or loss: Unrealized loss * 1,000,000 ©» The unrealized loss from the fair value change is analyzed below: Carrying amount 13, oor Fair value - 12/31/x1_. 2000 Decrease in value - unrealized loss 100000 eada trnont Property poten tet opt te gut ee EET a ‘ost mode __ gnaw Te Fair value model iancial position: : : : > Initial measurement: 13,000,000 ent measirement: s, ‘ |, Subsequent » Subsequent measurement: | Carrying amount: 12,350,000 Carrying amount: ®12,000,000 | | 431 | gtonent of profit or loss: Statement of profit or loss: (> Depreciation expense: P650,000 SS se ee > Unrealized loss: 1,000,000 Transfers transfers to or from investment property are made only when there is a change in use, as evidenced by the following: 3, Commencement of owner-occupation, for a transfer from investment property to PPE; b. End of owner-occupation, for a transfer from PPE to investment property; «. Commencement of an operating lease to another party, for a transfer from inventories to investment property; or Commencement of development with a view to sale, for a transfer from investment property to inventories. In the absence of a change in use, no transfer is made to or fom investment property. For example, in (d) above, a building that is dassified as investment property which the entity decides 'o dispose of without development (e.g., no renovation) remains as investment property until it is derecognized, and not transferred ‘vinventories, because there is no change in use. Similarly, an investment property that is redeveloped for Ontinued use as investment property remains as investment Property, If the entity uses the cost model, transfers between {Vestment property, PPE and jnventories are accounted for at the ing amount of the asset transferred. No gain or loss arises Prese the asset's measurement remains the same before and te the transfer.If the entity uses the fair value model, transfers bety, investment property, PPE and inventories are accounted jo, _ asset's fair value at the date of change in use, and: Fora transfer from investment property to PPE or inven, the entity applies PAS 40 until the date of transfe Accordingly, the entity recognizes the change in fair Value fer, that date as unrealized gain of loss in profit or loss, jus..." would if the investment property is remeasured to fair vik at the end of the period. The asset's fair value at the date $f transfer becomes its deemed cost for subsequent accounting using PAS 16, PFRS 16 or PAS 2. b. For a transfer from PPE to investment property, the entity applies PAS 16 until the date of transfer. Accordingly, the entity recognizes any depreciation on the asset until that date, Any difference between the fair value and carrying amountis recognized in other comprehensive income as an adjustment io the asset’s revaluation surplus, except if the difference represents an impairment loss or a reversal thereof. c. For a transfer from inventories to investment property, the difference between the fair value on the date of transfer and the previous carrying amount is recognized in profit or loss. so at the a Otis Derecognition ‘An investment property is derecognized when it is disposed of ot when no future economic benefits are expected from it. On derecognition, the difference between the carrying amount and the net disposal proceeds, if any, is recognized * gain or loss in profit or loss (unless PFRS 16 Leases requires otherwise ona sale and leaseback). Self-constructed investment property A self-consiructed investment property is accounted for in mu" the same way as a purchased investment property. The initial oF of a self-constructed investment property includes all airec!S attributable costs of constructing and preparing the prope"' intended use, such as materials, labor and.construction OV ty forts erheedpeso Property 433 ae ae qe cost excludes abnormal amounts of wasted material, labor or giher, resources incurred in constructing or developing the property A self-constructed investment Property is subsequently measured using either the cost model or the fair value model. The fair value model may be applied even during the construction period. If, however, fair value cannot be determined antl construction is finished, the investment property is temporarily measured under the cost model. Upon completion, the difference between the investment Property’s cost and fair yalue is recognized in profit or loss, Subsequent expenditures Subsequent expenditures on recognized investment property are generally expensed, unless they clearly meet the recognition aiteria. For example, costs of day-to-day servicing of an investment property are expensed in the period in which they are incurted (i.e., as repairs and maintenance expense), PAS 40 states an instance where a subsequent expenditure is capitalized, which is the replacement of parts of an investment property. Replacements are accounted for as follows: a Under the cost model, the cost of the replacement part (new part) is capitalized to the investment property, if it meets the Tecognition criteria. The carrying amount of the replaced part (old part) is derecognized and charged as loss, regardless of whether it had been depreciated separately. If the carrying amount of the replaced part cannot be determined, the cost of the replacement part is used as an indication of what the cost of the replaced part was at the time it was acquired or constructed. so Under the fair value model, the cost of the replacement Part (new part) is capitalized to the investment property. The investment property's fair value is then reassessed and any difference between the fair value and the carrying amount is "ecognized in profit or loss. _a PAS 4g Impairment ‘An investment property that is subsequently measured ungo, fi cost model is tested for impairment using PAS 36. = There is no separate accounting for impairment losses 5 investment property measured under the fair value because = increase or decrease in fair value is simply recognized as ging loss in profit or loss. Any compensation from a third party for an investmery property that is impaired, lost or given up is recognized in prof or loss when the compensation becomes receivable. Th, impairment or loss, the compensation from the third party, ang any subsequent acquisition of a replacement asset are separaty economic events and are accounted for separately. Disclosure General disclosures: a. Whether the entity uses the fair value model or the cost model b. When classification is difficult, the criteria used to distinguish investment property from PPE and inventory. c. The extent to which the fair value of investment property is based on a valuation by an independent valuer. If an independent valuation is not obtained, that fact is disclosed. d. The amounts recognized in profit or loss for rental income and related expenses. e. The existence and amounts of restrictions on investment property. f. Contractual obligations to purchase, construct or develop investment property or for repairs, maintenance ° enhancements. Additional disclosures under the Fair value model a. Reconciliation showing increases and decreases in investme™* property. s b. When a valuation obtained for investment propery adjusted to avoid double-counting, of assets.or liabilities acee west t Property 435 ee $$ are recognized as separate assets and liabilities, the entity discloses a reconciliation between the valuation obtained and the adjusted valuation. pisclosure of an investment property whose fair value on jnitial recognition cannot be reliably measured and hence measured under the cost model using the exception allowed under PAS 40. ‘Additional disclosures under the Cost model 3. The depreciation methods used, the useful lives, and the depreciation rates used; p. Reconciliation showing increases and decreases in investment property and related accumulated depreciation and accumulated impairment loss.eg — Summary: __ $< «Investment Property ~ is land and/or building held ig a) | rentals or for capital appreciation or both. e The portions of a property that is partly being renteg out partly owner-occupied are accounted for Separately ig portions can be sold separately (or leased out separately Under a finance lease). If not, the entire property is classified as ithe, investment property or PPE, whichever portion is more | significant. | ° Ifancillary services provided to occupants are insignificant, the | property is classified as investment property. | * A property that is leased between members of a group ig| classified as PPE in the group's consolidated financial | statements. Investment property is initially measured at cost. © Investment property is subsequently measured using either the cost model or the fair value model. © An investment property that is measured under the cost model is accounted for using PAS 16 (PPE). ® An investment property that is measured under the fair value model is remeasured to fair value at the end of each reporting petiod. Changes in fair value are recognized in profit or loss. The investment property is not depreciated. | ¢ Regardless of which model is used, an entity is required to) | determine the fair value of an investment property. | ° Transfers to or from investment property are made only when| | there is a change in use. © When an investment property is derecognized (eg., disposed of), the difference between the carrying amount and the net disposal proceeds, if any, is recognized as gain or lossin profit or loss (unless PFRS 16 requires otherwise on a sale leaseback.). oo |