Investment Property

By: Dr. Angeles A. De Guzman

Dean, College of Business Education
 Definition
• PAS 40 prescribes the accounting treatment
for investment property and the related
disclosure requirements
• It is defined as property (land or building or
part of a building or both) held by an owner or
by the lessee under a finance lease to earn
rentals or for capital appreciation or both
 Investment Property
• Only land and building can qualify as
investment property
• Movable property cannot qualify as
investment property
• An investment property is not held
– For use in the production or supply of goods or
services or for administrative purposes
– For sale in the ordinary course of business
 Examples of Investment Property
• Land held for long-term capital appreciation
• Land held for a currently undetermined use
• Building owned by the reporting entity, or held by
the entity under a finance lease, and leased out
under an operating lease
• Building that is vacant but is held to be leased out
under an operating lease
• Property that is being constructed or developed
for future use as investment property
Items not considered investment property
• Owner-occupied property or property held for use in the production
or supply of goods or services or for administrative purposes
• 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, whether or not the employees pay
rent at market rate
• Owner-occupied property awaiting disposal
• Property held for sale in the ordinary course of business or in the
process of construction or development for such sale
• Property being constructed or developed on behalf of third parties
• Property that is leased to another entity under a finance lease
 Property interest held by lessee
• A property interest that is held by a lessee under
an operating lease may be calssified and
accounted for as investment property provided:
– The property meets the definition of investment
property
– The operating lease is accounted for as if it were a
finance lease
– The lessee uses the fair value model in measuring
the property interest
Partly investment and Partly owner-occupied

• Properties may include a portion that is held to earn

rentals or for appreciation and another potion that is
held for manufacturing or administrative purposes
• If these portions could be sold or leased out separately,
an entity shall account the portions separately as
investment property and owner-occupied property
• If the portions could not be sold separately, the
property is investment property if only an insignificant
portion is held for manufacturing or administrative
purposes
 Property leased to an affiliate
• Property leased to another subsidiary or its
parent is considered an investment property
• But for purposes of consolidated financial
statements, the property is treated as owner-
occupied property
 Recognition of Investment Property

• Investment property shall be recognized as an

asset when and only when:
– It is probable that the future economic benefits
that are associated with the investment property
will flow to the entity
– The cost of the investment property can be
measure reliably
 Initial recognition of Investment Property
• An investment property shall be measured initially at its cost
• Transaction costs shall be included in the initial measurement
• The cost of a self-constructed investment property is its cost at
the date when the construction or development is complete
• If payment for an investment property is deferred, its cost is the
cash price equivalent
• An investment property may be acquired in exchange for a
nonmonetary asset or a combination of monetary and
nonmonetary asset which is measured at fair value unless the
exchange lacks commercial substance
 Costs excluded from cost of investment
property
• Start up costs, unless they are necessary to
bring the property to the condition necessary
for its intended use
• Operating losses incurred before the
investment property achieves the planned level
of occupancy
• Abnormal amounts of wasted material, labor or
other resources incurred in constructing or
developing the property
 Subsequent Measurement of Investment
Property
• Fair value model – the investment property is carried at fair
value. Any changes in fair value are included in the net
income or loss of the period in which they arise, and shown
in the income statement
• Cost model – the investment property is carried at cost less
any accumulated depreciation and any accumulated
impairment losses. Fair value of the investment property
shall be disclosed.
• When a property interest held by a lessee under an
operating lease is classified as an investment property, the
fair value model shall be applied
 Fair value of Investment Property
• The fair value of investment property is the price at
which the property could be exchanged between
knowledgeable and willing parties in an arm’s length
transaction
• An entity shall determine fair value without
deduction for transaction costs it may incur on sale
or other disposal
• The fair value of investment property shall reflect
market conditions at the end of the reporting period.
 Best evidence of fair value
• The best evidence of fair value of investment property is the current
price in an active market for similar property in the same location
and condition and subject to similar lease and other contract
• In the absence of a current price in an active market, entity shall
consider the following information
– Current price in an active market for property of different nature, condition
and location adjusted to reflect those differences
– Recent price of similar property in less active market with adjustments to
reflect changes in economic conditions
– Discounted cash flow projection based on reliable estimate of future cash
flows supported by the terms of existing leased and other contract and by
external evidence such as current market rent for similar property in the
same location and condition
Inability to determine fair value reliably
• PAS 40 mandates that the entity shall measure such
investment property using the cost method until the
disposal of the investment property
• The residual value of the investment property shall be
assumed to be zero
• Entity that uses the fair value model shall continue to
measure its other investment property at fair value,
notwithstanding the fact the one investment property
is carried using the cost method due to exceptional
cases
 Transfer of Investment Property
• Transfers to and from investment property shall be
made when and only when there is a change of use
evidenced by:
– Commencement of owner occupation –transfer from
investment property to owner-occupied property
– Commencement of development with a view to sale –
transfer from investment property to inventory
– End of owner occupation – transfer from owner-occupied
property to investment property
– Commencement of an operating lease to another entity –
transfer from owner-occupied property to investment
 Measurement of Transfers
• When the entity uses the cost mode, transfers between investment property,
owner-occupied property and inventory shall made at carrying amount.
• A transfer from investment property carried at fair value to owner-occupied
property or inventory shall be accounted for at fair value which becomes the
deemed cost for subsequent accounting
• If owner-occupied property is transferred to investment property that is to be
carried at fair value, the difference between the fair value and the carrying
amount of the property shall be accounted for as revaluation of PPE
• If an inventory is transferred to investment property that is to be carried at
fair value, the remeasurement to fair value shall be included in profit or loss
• When an 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 – gain or loss from disposal of
investment property shall be determined as the
difference between the net disposal proceeds
and the carrying amount of the asset and shall
be recognized in profit or loss
• When the investment property is permanently
withdrawn from us
• When no future economic benefits are
expected from the investment property
Disclosures Related to Investment Property

• Whether the entity uses the cost model or fair

value model of measuring investment property
• The amount of rental income for the period
along with the related expense
• Restrictions on the investment property either
through rentals or sale proceeds
• Contractual obligations to purchase or construct
investment property
Disclosures when Fair Value Model Is Used

• Detailed reconciliation, showing all movements

between carrying amount of investment property at
the beginning and end of the period
• The method of determining the fair value of
investment property and whether the valuation is
carried out by an independent qualified valuer
• Net gains or losses from fair value adjustments
• Whether significant fixtures, such as lift and office
furniture, within an investment property, have been
separately recognized
 Disclosure When Cost Model Is Used
• The depreciation method or rate and useful life
• Detailed reconciliation of the gross cost of
investment property and the related
accumulated depreciation showing all
movements during the year
• Fair value of the investment property where
possible. If not possible, such fact shall be
explained