Investment Properties - 2

IAS 40
Learning outcomes
• Discuss how to recognise investment property that is:
• owned;
• held under a lease
• Explain and calculate the initial and subsequent measurement
of Investment property
Recognition of Investment
Property that is owned
• Investment property that is owned is recognised when it
meets the recognition criteria:
• there is a probable inflow of future economic benefits; and
• the investment property has a cost that can be measured with
reliability
Recognition of IP held under a
lease (Right of use asset (ROU)
• Recognise in terms of IFRS 16 Leases, however property
should still be presented as Investment property
• A right of use asset is recognised with a corresponding lease
liability
• The investment property will initially be recognised on the
commencement date of the lease (the date on which the
lessor makes available the underlying asset to the lessee).
• A recognition exemption could apply for a short term lease of
IP ( <12 months), in this case cost of lease is expensed on a
straight line basis
Initial measurement
• Initial measurement
• Measured at cost, including transaction costs

• What is cost?
• the amount of cash equivalents paid (or fair value (FV)
of any other consideration given) to acquire an asset
determined at the time of its acquisition or
construction; or
• the amount at which the asset is initially recognised in
terms of another IFRS.
Initial measurement (cont’d)
• Elements of cost
• purchase price (or equivalent cash cost where payment is deferred)
• directly attributable costs
• transaction costs

• Directly attributable costs

• legal fees
• construction costs (if self constructed)
• directly attributable borrowing costs for qualifying assets. (If fair
value model is chosen, capitialisation of borrowing costs is optional)

Qualifying asset – an asset that necessarily takes a substantial period of

time to get ready for its intended use or sale’ ( e . g . a building under
construction ).
Initial measurement (cont’d)
• Exclusions from cost
• start-up costs (unless they are necessary to bring property to its working
condition)
• initial operating losses
• abnormal wastage during construction process
 And a non-monetary
exchange?
• Measure at FV of asset given up/exchanged
• If not possible – at FV of asset (investment property) received
• CA of asset given up used if:
• FVs of neither asset is reliably measured; or
• the exchange lacks commercial substance
 Example 1: Exchange
A Ltd exchanges its old office building:
Cost R2 000 000
Acc depr R1 200 000
FV R 900 000
for another office building that it intends to rent out in future to
earn income
FV R1 100 000
Subsequent expenditure
• Identical to IAS 16
• Only capitalise to cost of the Investment Property if:
• Probability of future economic benefits
• Costs are reliably measureable

• Replacement of parts of property:

• Derecognise replaced part
• Recognise replaced part as part of original IP
Subsequent expenditure

To repair property Improve future use

(Normal repair and Repairs to retain and economic
maintenance rentals benefits to be
derived from it

Capitalise to extent Add to CA

the replacement (capitalise) once
Expense when part retains rentals recognition criteria
incurred are met
Example 2 - Subsequent expenditure

A Ltd owns a complex of 10 townhouses which are rented out i.t.o.

operating leases
Following expenditure transpired during 2010:
A.R1 000 000 spent on new 11th townhouse to
be rented out
B.R300 000 spent on new surface for tennis
court which all lessees are entitled to use
C.R150 000 to repair common parking that was
completely destroyed in a thunder storm. The
fair value of the old parking was R110 000
Solution 2 - Addition
A. ___Capitalise__________because:
• More future economic benefits (rentals)
• Cost can be measured reliably (R1 000 000)

____Investment Property (SFP)__________ dr 1 000 000

Bank/liability (FP)cr 1 000 000
Solution 2 - Repair
B. ______Expense_______ because:
• Earning ability of property not improved (no extra rentals)
• Cost can be measured reliably (R300 000)

_______Maintenance (SPL)__________ dr 300 000

Bank/payable (FP) cr 300 000
 Solution 2 - Restore
C. ___________Capitalise_____________________ Replacement
- parking will restore the expected future benefits (after
impairment)
• Cost can be measured reliably (R150 000)

__Impairment Loss (SPL)______________ dr 110 000

Investment property (FP) cr 110 000
and
Investment property (FP) dr 150 000
Bank/Payable (FP) cr 150 000
• Reinforce the principles learned
regarding subsequent costs by doing
example 4, page 523 (22nd edition)
Subsequent measurement
• Choose between:
• Cost model (compulsory where FV not reliably measured on continuing basis)
• Fair value model
• Model chosen will be applicable to all items of IP

• IAS 40 encourages the use of fair value model as it increases the relevance
of fin stats by giving a better reflection of the true value of the property

Change from FV- cost almost impossible because:

1. IAS 40.55 prohibits this. Where FV becomes difficult to measure

subsequently, continue to measure at last known FV

2. IAS 40:31 – states that cost model unlikely to result in more relevant
info than the FV model.
Measurement (cont’d)
Measurement (cont’d)
Fair Value defined:
• the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date (an exit price)

How is fair value determined?

• It is a market-based value that reflects:
• rental incomes from current leases; and
• other assumptions that market participants would use when pricing
IP under current market conditions
Measurement (cont’d)
Fair value model: Inability to measure fair value
• Investment property not under construction
• Assume FV will reliably be measured on a continuing basis,
unless:
• market for comparable properties is inactive; and
• alternative reliable measurements of FV are unavailable

• If IP has previously been measured at FV, but continuing FV

measurement becomes difficult/impossible, measure the IP at its
last known FV.
• Such property will always be measured at FV unless;
• It ceases to be IP – (e.g. transfer to PPE or inventory), or
• there is a voluntary change in accounting policy from FV model to
cost model
Measurement (cont’d)
Fair value model: Inability to measure fair value
• Investment property not under construction
• If on initial acquisition or change of use, it is concluded that FV
measurement of IP will not be reliably measurable on a
continuing basis then;
• account for the IP using the cost model
• Owned IP – cost model as per IAS 16 –Property, Plant and Equipment
• Leased IP (right of use asset) – cost model as per IFRS 16 – Leases
• Measure at cost model until disposal
• Assume a residual value of nil
• Other IP may be measured at fair value
Measurement (cont’d)
Fair value model: Inability to measure fair value
• Investment property under construction
• Where an entity uses the FV model, and has a property under
construction but a reliable measure of FV is currently unavailable,
but entity believes that a reliable measure of FV will be available
once construction is complete,
• measure the IP at cost until,
• the FV becomes available or
• construction is complete, whichever occurs earlier.
• If FV becomes measurable during construction phase, change the
measurement from cost to FV, gain or loss will be recognised in profit
or loss.
Example 3
Example 5 (GGAAP, p.g. 528, 22nd edition) : Fair value cannot be reliably
measured
• Clueless Limited purchased a building that it intended to hold for capital
appreciation:
• The building was purchased on 31 March 20X5 for C1 million.
• On 31 March 20X5 it was unclear if the building’s fair value would be reliably
measurable on a continuing basis.
• By the 31 March 20X6, due to a boom in the property industry, the fair value of the
building was estimated to be C15 million.
• The property has an estimated useful life of 20 years.
• The company’s accounting policy is to measure investment property at fair value.
• Required:
• Calculate the carrying amount of the property at the year ended 31 March 20X5
and 20X6.
Suggested solution
• See GGAAP, p.g 528/9
Example 4: FV model
• C Ltd owns an investment property which is accounted for
i.t.o. the fair value model
• The following applies:
• Cost price 1/1/2015 R5 000 000
(Financed through 100% mortgage loan)
• Legal costs (paid cash) R 100 000
• Fair value 31/12/2015 R5 300 000
• Fair value 31/12/2016 R4 800 000
 Solution 4
R’000 R’000
1/1/15 Investment property (FP) dr 5 100
Bank (FP) cr 100
Mortgage loan (FP) cr 5 000

31/12/15 Investment property (FP) dr 200

____________________ cr 200

31/12/16 ______________________ dr 500

Investment property (FP) cr 500
Change in use
SUBSEQUENT TRANSFERS

Change in use – change in classification

Issue:
1. When should a change of use be recognised?
2. What value should the transfer be recognised?
Transfers in/out of Investment
Property
• There must be clear evidence that a transfer has taken place.
• Management’s intentions for a transfer is not clear evidence
of a change in use.
Investment property to Owner
occupied property/Inventory

• When does investment property cease to be classified as

investment property?
• When the IP becomes OOP → PPE
• When IP becomes available for sale in ordinary course of business
→ Inventory. (Construction or development with a view to
making IP saleable should have begun, if there is no evidence of
construction/development, continue to classify as IP)
Owner Occupied Property/Inventory to
Investment Property

• When does OOP/Inventory become classified as investment

property?
• When previous OOP ceases to be occupied by owners & becomes
rented out under an operating lease → Investment property
• When property held for resale in ordinary course of business
(inventory) is rented out under an operating lease→ Investment
property
Example 5 – change of use
• See example 6 GGAAP, p.g. 530 (22nd edition)
Measurement of
transfers due to a change
in use
RULE
Apply relevant IFRS up to date of
transfer, then the IFRS relating to
the reclassified asset
Change in use
Change in use (Cost Model)
Investment Property PPE (IAS 16)
IAS 40 Inventories (IAS 2),
(Cost model) Leases (IFRS 16)

Investment Property
IAS 40 (Cost model) PPE (IAS 16)
Measure using cost Inventories (IAS 2),
model ito IAS 16, IFRS 16 Leases (IFRS 16)
or IFRS 5

There will be no difference in value when above transfers take

place.
Change in use (Fair value Model)
PPE (IAS 16) IP (IAS 40)

• Fair value will be deemed the new cost

Steps:
• Depreciate and check for impairments up to date of change in
use then;
• Revalue the asset to fair value (even if asset was accounted for
using the cost model), revaluation gain or loss treated ito IAS
16.
Example 6(PPE TO INVESTMENT PROPERTY –(see
e.g. 7 GGAAP p.g. 532, 22nd edition))
Fantastic Limited had its head office located in De –Rust, South Africa.
During a landslide on 30 June 2018 a building nearby, which it owned
and was renting to Sadly was destroyed.
As Sadly limited was a valued tenant, Fantastic Limited decided to
move its own head office to another under-utilised building nearby
which was currently also used for administrative purposes and to
lease this original head office to Sadly Limited as a replacement. The
move effective from 30 June 2018.
Other information
-The head office was purchased on 1 January 2018 for N$500
000( Total useful life was 5 years)
- The fair value of the head office building was
- N$ 520 000 on 30 June 2018
- N$ 490 000 on 31 December 2018
Fantastic Limited uses:
-the cost model to measure its PPE and the fair value
method to measure its investment properties

Required
Show the Journals relating to fantastic’s head office for the
year ended 31 December 2018
Solution

Comment: Despite the property being measured using IAS 16’s

cost model, the property must be revalued to fair value in terms
of IAS 16’s revaluation model before being transferred to
investment property . This is because the entity uses fair value
model for its investment properties

1 January 2018 Dr Cr
PPE: Office building 500 000
Bank/ liability 500 000
Purchase of head office building( oop)
30 June 2018 Dr Cr
Depreciation (500000/5 x 6/12 50 000
Acc Dep: PPE ( Office building) 50 000
Depreciation to date of change in use

PPE : Office building 70 000

Revaluation surplus (OCI)
(520 000- (500 000- 50 000) 70 000
30 June 2018
IP: office building 520 000
PPE: Office building 520 000
Transfer head office building from PPE to IP

31 December 2018
Fair value adjustment on IP (SPL) 30 000
IP: Head office 30 000
Re-measurement of IP to fair- value at year end
Change in use (Fair value Model Cont’d)

Inventories (IAS 2) IP (IAS 40)

• Measure ito IAS 2 up to date of transfer

• Transfer the Inventory at its carrying amount to IP
• Remeasure the IP to fair value
• Difference between the value of Inventories and IP recognised
in profit or loss section in the SPLOCI.
 Example 8 : Change from inventory to Investment property (GGAAP
p.g. 533, 22nd edition)

Chess limited purchases a building on 1 January 2018 for N$ 250 000

that it intended to sell in the ordinary course of business.
Player limited asked Chess Limited to lease the building to them for a
period of time
• An operating lease agreement was then entered into and became
effective from 1 March 2018
• On 1st March 2018, the building’s fair value was N$ 300 000 and net
realisable value was N$290 000
On 31 December 2018, the building’s fair value had grown to N$
340 000
Chess Limited uses the fair value model for its investment properties
Required:
Provide the journals for Chess Limited’s year ended 31 December 2018.
(ignore tax)
Solution

1 January 2018
Inventory: Building 250 000
Bank/Liability 250000
Building purchased with the intention of selling

1 March 2018
IP: Building : 250 000
Inventory 250 000
Building previously inventory transferred to IP
IP : Building
(300 000- 250000) 50 000
Fair value adjustment of IP( P/L) 50000
Re-measurement of IP to fair value at date of transfer

31 December 2018
IP: Building : (340 000-300 000) 40 000
Fair value adjustment of IP (P/L) 40 000
Investment property re-measured to FV at year end
Change of use IP to PPE (FV
model)
Go through example 9: Change from IP to PPE

Page 534 GGAAP, 22nd edition

 Derecognition
Derecognise investment property:
o on disposal or
o When property permanently withdrawn from use and no future
economic benefits are expected from its disposal

o No profit or loss on disposal of IP, as IP must first be remeasured

to fair value on date of sale before derecognition occurs
(impaired to nil).
 Disposal of investment
property

20.7 Dr Cr
31 Oct Bank (SFP) xxx
Investment property (SFP) xxx
Derecognition of investment property disposed

49
 Presentation - SFP
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.7
Note 20.7 20.6
R R
ASSETS
Non-current assets
Property, plant and equipment xxx xxx
Investment property 14 xxx xxx
Intangible assets xxx xxx
Investment in subsidiary xxx xxx
Financial investments xxx xxx
Total non-current assets xxx xxx

50
 Presentation - SPL
STATEMENT OF PROFIT OR LOSS FOR THE REPORTING PERIOD
ENDED 31 DECEMBER 20.7
Note 20.7 20.6
R R
Revenue xxx xxx
Cost of sales (xxx) (xxx)
Gross profit xxx xxx Rent income &
Other income xxx xxx Profits on FV
Income from subsidiary xxx xxx adj
Income from financial investments xxx xxx
Distribution costs
Administrative expenses (xxx) (xxx)
Other expenses Losses on FV
Finance costs (xxx) (xxx) adj
Profit before tax xxx xxx

51
 Disclosure
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31
DECEMBER 20.7

3 ACCOUNTING POLICY

3.2 Investment property

Investment property is property held to earn rentals and/or for capital appreciation (including property under
construction for such purposes).

Investment property is initially measured at its cost, including transaction costs. Subsequent to initial
recognition, investment property is measured at fair value.

Profit and losses arising from changes in the fair value of investment property are included in profit or loss in
the period in which they arise.

52
 Disclosure
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31
DECEMBER 20.7
14 Investment property
R
At fair value
Balance at the beginning of the year xxx
Additions at cost xxx
Investment property under construction at cost xxx
Disposals at fair value (xxx)
Profit/(loss) on fair value adjustment xxx
Balance at the end of the year xxx

Investment property, with office buildings on it, is situated at erf 1911, Auckland Park and were
acquired on 2 Jan 20.7 for Rxx. The property is rented out, in accordance with an operating lease
agreement.

A bond is registered over the property, with a carrying amount of Rxx, which serves as security for
the mortgage bond of Rxx.

The fair value of investment property is determined by an independent expert, who possess the
appropriate qualification and experience. The fair value reflects the actual market conditions and
circumstances as at the reporting date.

53