INVESTMENT

PROPERTY
PAS 40
LEARNING OBJECTIVES

1. To determine which items are considered as investment property and which

are not.

2. To determine the initial measurement of investment property

3. To determine the subsequent measurement of investment property

4. To account for any transfer to and from investment property

Answer: A
DEFINITION

Investment property 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.
In other words, only land and building
can qualify as investment property. An
equipment or any movable property
cannot qualify as investment property.

An investment property is not held:

a. For use in the production or supply of
goods or services for administrative
purposes.
b. For sale in the ordinary course of
business.
 DEFINITION

Owner Occupied Property – are

properties held for use in the
production or supply of goods or
services or for administrative
purpose.
ANSWER: C
ANSWER: B
Company A is a financial service entity that is involved in real estate development. Company A
has purchased land in Quezon City through the exercise of a purchase option that had been
acquired some years ago. The purchase price was P20,000,000 and the land's fair value as
determined by an independent value is P46,400,000 on December 31, 2014. Company A is
undecided about whether to develop the land for sale to a third party or sell it, but will
determine a use within the next accounting period. On December 31, 2014, Company A should
report the property as -

The land should be classified as inventory.

Although the entity is still undecided on what to do with the land, the property is being held
either for sale or for further development and eventual sale in the ordinary course of business.
Had the entity decided to hold the land for long-term capital appreciation rather than short-
term sale in the ordinary course of business, then it would be classified as an investment
property.
Company B owns, hotel resort, which includes a casino, housed in a separate building that is
part of the premises of the entire hotel resort. Its patrons would be largely limited to tourists
and non-resident visitors only.

The owner operates the hotel and other facilities on the hotel resort, with the exception of the
casino, which can be sold or leased out under an operating lease. The casino will be leased to
an independent operator. Company B has no further involvement in the casino. The casino
operator will not be prepared to operate it without the existence of the hotel and other
facilities.

On December 31, 2014, the following are relevant information for the purpose of measuring
the above assets:
Hotel P200,000,000
Casino 50,000,000
Other facilities 150,000,000

What amount of investment property should Company B report in its December 31, 2014
statement of financial condition?
Management should classify the

1. hotel and other facilities as property, plant and equipment and;

2. the casino as investment property since it can be sold separately or

leased out under an operating lease.

If the casino could not be sold or leased out separately on an operating

lease, because the owner-occupied portion is not insignificant, the whole
property would be treated as an owner-occupied property (IAS/PAS 40 par.
10).

Answer: 50 M
Answer: C
Certain properties may include a portion that is held to earn rentals or for appreciation and another
portion that is held for manufacturing or administrative purposes.
If these portions [1] could be sold or leased out separately, an entity shall account the portions
separately as investment property and owner-occupied property. [2] 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.

When ancillary services are provided by the entity to the occupants of the property and these services
are a relatively insignificant component of the arrangement, the property is treated as investment
property. An example would be where the owner of an office building provides security and maintenance
services to the lessees.

The building being leased out as offices is investment property. However, if the services provided are a
more significant component of the arrangement, the property is treated as owner-occupied property. For
example, if an entity owns and manages a hotel, services provided to guests are a significant component
of the arrangement as a whole. Therefore, the hotel is treated as owner-occupied property, rather than
investment property.
Answer: B
Which of the following statements is true
concerning property leased to an affiliate?
I. From the perspective of the
individual entity that owns it, the property
leased to an affiliate is considered an
investment property.
II. From the perspective of the
affiliates as a group and for purposes of
consolidated financial statements, the property
is treated as owner-occupied property.
A. I only C. Both I and II
B. II only D. Neither I nor II

Answer: C
Property leased to an affiliate:

1. Perspective of the owner/lessor [separate FS] – Investment property

2. Perspective of the group as a whole [consolidated FS] – Owner Occupied

Company M owns a hotel, Company N, a fellow subsidiary of Company M, manages a chain of hotels and
receives management fees for operating its chains, except for the hotel owned by Company M. Company
M's owned hotel is leased to Company N for P3,000,000 a month for a period of 6 years. Any profit or
loss from operating Company M's hotel rests with Company N. The hotel that Company M owns has an
estimated remaining useful life of 40 years. The carrying value of the hotel as of December 31, 2014, is
P85,000,000 but a reliable measure of fair value showed a P82,000,000 value in use.
How should Company M report the property on its December 31, 2014 consolidated statement of financial
position?
a. as investment property at its value in use of P82,000,000
b. as investment property at its carrying value of P85,000,000
c. as property, plant and equipment at its value in use of P82,000,000
d. as property, plant and equipment at its carrying value of P85,000,000

Answer: C
In the consolidated financial statements, the hotel should be classified as property, plant and equipment.
This is because it is both owned and managed by the group from the perspective of the group and
therefore, it should be recognized as owner-occupied property for use in the supply of goods or services.
However, in the stand alone entity accounts of Company M the property (subject to an operating lease)
should be classified as an investment property, whereas Company N should recognize the transaction as
an operating lease arrangement in its individual financial statements and charge the rental payments to
the profit or loss over the period of the lease.
Answer: A
Answer: A
SAME WITH PPE

An investment property shall be measured initially at its cost. Transaction costs shall be included in the
initial measurement. The cost of a purchased investment property comprises the purchase price and any
directly attributable expenditure. Directly attributable expenditure includes professional fees for legal
services, property transfer taxes and other transaction costs. If payment for an investment property is
deferred, the cost is the cash price equivalent. The difference between the cash price and the total
payments is recognized as interest expense over the credit period.

Costs that are excluded from cost of investment property/PPE.

a. Start up costs, unless they are necessary to bring the property to its working condition.
b. Initial 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.
Directly attributable expenditures related to investment property include
A. Start up costs.
B. Professional fees for legal services, property transfer taxes and other transaction
cost.
C. Initial operating losses incurred before the investment property achieves the
planned level of occupancy.
D. Abnormal amounts of wasted material, labor and other resources incurred in
constructing or developing the property.

Answer: B
Act Company acquired an investment property with an installment price of
P2,400,000. The acquisition of the property requires a down payment of
20% and a non-interest bearing note payable at the end of each year for
five years. The prevailing market rate of interest for similar instrument is
12%. The present value of factor of annuity of 12% for four periods is
3.605. Act Company incurred transaction costs amounting to P50,000 for the
property.

What is the cost of acquiring the property?

Down Payment (P2,400,000 x 20%)

480,000
PV of future payments (P2,400,000 x 80% ÷ 5 x 3.605) 1,384,320
Fair value of the investment property
P1,864,320
Add: Transaction costs
50,000
Historical cost of the investment property
Answer: D
What is the best evidence of fair
value?
A. Unobservable input price
for the asset.
B. Quoted price in an active
market for identical asset.
C. Quoted price in an active
market for a similar asset.
D. Quoted price in an inactive
market for identical asset.

Answer: B
Answer: C
NOTE:
There is a rebuttable presumption that an entity can reliably determine the fair value of an
investment property on a continuing basis.

However, IF the fair value of the investment property is not reliably determinable on a continuing basis.
the entity shall measure such investment property using the cost model until the disposal of the
investment property.
Moreover, under such exceptional cases only, the residual value of the investment property shall be
assumed to be zero.

Paragraph 54 further states that an entity that uses the fair value model shall continue to measure its
other investment property at fair value, notwithstanding the fact that one investment property is carried
using the cost model due to exceptional cases.
At the beginning of the year 2014, Trunk Company has an investment property acquired at a cost of
P4,000,000 that is to be accounted under the cost model. Depreciation of P100,000 is recognized
annually and periodic continuing maintenance costs of P10,000 per year as well as property tax of
P10,000 are incurred by the company on an annual basis.

What should be the carrying value of the investment at the end of the year 2014?

Historical cost P4,000,000

Less: Depreciation 100,000
Carrying value on December 31, 2014 P3,900,000
Answer: A
Dayanara Company owned three properties which are classified as investment properties. Details of the
properties are as follows:
Fair value Fair value
Initial cost 12/31/2014 12/31/2015
Property 1 2,700,000 3,200,000 3,500,000
Property 2 3,450,000 3,050,000 2,850,000
Property 3 3,300,000 3,850,000 3,600,000
Each property was acquired in 2011 with a useful life of 25 years. The accounting policy is to use the fair
value model for investment properties. What is the gain or loss to be recognized for the year ended
December 31, 2015?

Answer:
Fair value Fair value Gain (loss)
12/31/2014 12/31/2015
Property 1 3,200,000 3,500,000 300,000
Property 2 3,050,000 2,850,000 (200,000)
Property 3 3,850,000 3,600,000 (250,000)
Net loss from change in fair value (150,000)
Answer: B
Transfers or Reclassification
Transfer to and from investment property shall be made when there is a change of use. Such change of
use is evidenced by:

a. Commencement of owner occupation - transfer from investment property to owner-occupied property.

b. Commencement of development with a view to sale – transfer from investment property to inventory.
c. End of owner occupation - transfer from owner-occupied property to investment property.
d. Commencement of an operating lease to another entity – transfer from inventory to investment
property.
Answer: B
1. When the entity uses the cost model, transfer between investment property, owner-occupied property and
inventory shall be made at carrying amount.

2. 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.

3. 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 property, plant and
equipment.

4. 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.

5. 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.
1. When the entity uses the cost model, transfer between investment property, owner-occupied property and
inventory shall be made at carrying amount.

2. 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.

3. 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 property, plant and
equipment.

4. 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.

5. 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.
Answer: D
Answer: A
Answer: A
On January 1, 2014, Jim Company acquired an investment property at a total costs of P5,000,000. At
December 31, 2014, the carrying value of the property in the company's books is P6,000,000.

On December 31, 2015, Jim Company decided to use the property and immediately reclassified as
plant asset (owner occupied property).

What would be the initial cost of the plant asset if it has a fair value of P6,500,000 at conversion date?
a. P5,000,000 c. P6,000,000
b. P5,500,000 d. P6,500,000

Answer: D
Transfer from investment property carried at fair value to owner-occupied property (PPE) or to
inventories - the fair value at the time of transfer is the measure of its new classification.

What amount of revaluation surplus Jim Company would recognize at the time of conversion?
a. none c. P1,000,000
b. P500,000 d. P1,500,000

The accounting standard requires an entity to use PAS 40 from initial recognition up to the time the
asset is disposed of. Therefore, the difference between the carrying value and the fair value of the
investment property at the time of transfer/conversion is recognized as an unrealized gain related to
the investment property and be reported in the current year profit and loss. Application of PAS 16 (PPE
Revaluation) will come to into play only after the transfer.
On January 2, 2014, Silent Corporation has an investment property that was
carried at fair value with a carrying amount of P2,500,000 (historical cost,
P2,400,000). As of December 31, 2014, the fair market value of the
property is P2,600,000. On December 31, 2015, the fair market value of the
property was P2,800,000. On this date, Silent Corporation decided to
reclassify/transfer the property to inventory.
What amount should the inventory be valued?

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).
 On January 2, 2014, Mighty Company converted its occupied property to investment property that is to be carried
at fair value. The carrying value of the property in the company's books is P4,000,000.

Assuming the fair value of the property on the date of transfer or conversion is P3,800,000, Mighty Company
should recognize
a. A loss of P200,000 in the profit or loss
b. A P200,000 deferred loss as an asset
c. A P200,000 unrealized loss in the shareholders' equity
d. A P4,000,000 cost of the investment property

Answer: A
Market value, date of transfer P3,800,000
Carrying value, date of transfer 4,000,000
Loss or impairment loss to profit or loss P 200,000

Assuming the fair value of the property on the date of transfer or conversion is P4,400,000, Mighty Company
should recognize
a. A P400,000 unrealized gain in the profit or loss
b. A P400,000 revaluation surplus in the shareholders' equity
c. A P400,000 unrealized gain in the liability section
d. A P400,000 direct credit to accumulated profits and losses

Answer: B
Market value, date of transfer P4,400,000
Carrying value, date of transfer 4,000,000
On January 2, 2002, Tower Company acquired a building costing P10,000,000. Tower Company
estimated that the useful life of the property is 20 years. Tower Company's policy is to depreciate all
depreciable assets using the straight-line method, without scrap.

On January 2, 2007, the building has a recoverable value of P9,000,000 base on its revised remaining
useful life of 20 years and Tower Company immediately remeasured the building. It is the company's
policy to transfer portion of any revaluation surplus to retained earnings to all depreciable assets. On
January 2, 2012, Tower Company converted the property into investment property when the fair value
is P5,000,000.
On January 2, 2012, what amount of revaluation surplus should be reversed?
a. None c. P1,125,000
b. P625,000 d. P1,250,000

What amount of impairment loss should Tower Company recognize in its income statement on the date
of transfer?
a. None c. P1,125,000
b. P625,000 d. P1,250,000
 Historical cost P10,000,000
Less: Accumulated depreciation for 5 years
(P10,000,000 ÷ 20 years x 5 years). ( 2,500,000)
Carrying value as of January 2, 2007 P 7,500,000

Fair market value - Jan. 2, 2007 9,000,000

Carrying value - Jan. 1, 2007 P 7,500,000
Revaluation Surplus -to shareholders' equity (2007) P 1,500,000

Fair market value -January 2, 2007 P9,000,000

Depreciation- 2007 to 2011 (9,000,000 ÷ 20 years x 5 years) 2,250,000
Carrying value as of January 2, 2012 6,750,000

Carrying value - January 2, 2007 P7,500,000

Depreciation - 2007 to 2011 (7,500,000 ÷ 20 years x 5 yrs.) 1,875,000
Carrying value as of Jan. 2, 2012 had no revaluation P5,625,000

Carrying value as of January 2, 2012 (per book) P6,750,000

Carrying value as of Jan. 2, 2012 had no revaluation 5,625,000
Reversal of revaluation surplus P1,125,000

Fair market value - January 2, 2012 P5,000,000

Carrying value - January 2, 2012 had no revaluation 5,625,000
Impairment loss -to profit or loss in 2012 P 625,000
On January 2, 2013, Haven Corporation acquired a track of land that is to be sold in the ordinary conduct
of business. The purchase price of the property of P50,000,000 was paid in cash and a total transaction
costs of P500,000 related to the acquisition of the property was also paid at a later date. The land was
subdivided into 2,000 lots (200 square meters for every lot) for an additional cost of P5,500,000. On
December 31, 2010, the market value of the lot was P1,500 per square meter.

As of December 31, 2014, only 20,000 square meters are still unsold and market value of the lot had
increased to P1,600 per square meter. On this date, Haven Corporation decided to transfer the remaining
lots into investment property that is to be carried under the fair value model. There was no additional
cost incurred on the change of intention on the property.

What amount of gain should Haven Corporation recognize as a result of the transfer?
 Cash price of the property P50,000,000
Transaction cost 500,000
Total P50,500,000
Subsequent cost - development cost 5,500.000
Total cost of the inventory P56,000,000
÷ Number of lots 2,000
Unit cost per lot P 28,000
÷ Number of square meters per lot 200
Unit cost per square meter P 140

Fair value on the date of transfer (20,000 x P1,600) P32,000,000

Cost of inventory (20,000 sq.m. x P140/sq.m.) 2,800,000
Gain on transfer P29,200,000

Transfer from inventories to investment property at fair value - any difference between the fair value at the date of transfer and the
previous carrying amount should be recognized in net profit or loss for the period.
Answer: A
Answer: A
the disclosures related to investment property?

The general disclosures are:

1. Whether the entity uses the cost model or fair value model of measuring investment property.
2. The amount of rental income for the period along with the related expense.
3. Restrictions on the investment property either through rentals or sale proceeds.
4. Contractual obligations to purchase or construct investment property.

When the fair value model is used, the disclosures are:

1. Detailed reconciliation, showing all movements, between carrying amount of investment property at the
beginning and end of the period.
2. The method of determining the fair value of investment property and whether the valuation is carried out by an
independent qualified valuer.
3. Net gains or losses from fair value adjustments.
4. Whether significant fixtures, such as lift and office furniture, within an investment property, have been
separately recognized.

When the cost model is used, the disclosures are:

1. The depreciation method or rate and useful life.
2. Detailed reconciliation of the gross cost of investment property and the related accumulated depreciation
showing all movements during the year.