University of Southern Philippines Foundation

College of Accountancy

Intermediate Accounting 1

Module.09_Financial Reporting for Investment Property

Introduction

Nature of investment property

Investment property is property (land or a building—or part of a building—or both) held (by the owner or by the lessee under a
finance lease) to earn rentals or for capital appreciation or both, rather than for:
(a) use in the production or supply of goods or services or for administrative purposes; or
(b) sale in the ordinary course of business.

Owner-occupied property is property held (by the owner or by the lessee under a finance lease) for use in the production or supply of
goods or services or for administrative purposes.

Examples of investment property:

 Land held for long-term capital appreciation
 Land held for undetermined future use
 Building leased out under an operating lease
 Vacant building held to be leased out under an operating lease
 Property that is being constructed or developed for use as an investment property
 Existing investment property that is being redeveloped for continuing use as investment property

The following are not investment property and, therefore, are outside the scope of PAS 40:
 property held for use in the production or supply of goods or services or for administrative purposes;
 property held for sale in the ordinary course of business or in the process of construction of development for such sale (PAS 2 -
Inventories);
 property being constructed or developed on behalf of third parties (PAS - 11 Construction Contracts);
 owner-occupied property (PAS - 16 Property, Plant and Equipment), including 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 and owner-occupied property awaiting disposal; and
 property leased to another entity under a finance lease.

Other Classification Issues

Property held under an operating lease

A property interest that is held by a lessee under an operating lease may be classified and accounted for as investment property
provided that:
 the rest of the definition of investment property is met;
 the operating lease is accounted for as if it were a finance lease in accordance with PAS 17 Leases; and
 the lessee uses the fair value model set out in this Standard for the asset recognized.

An entity may make the foregoing classification on a property-by-property basis.

Partial own use

If the owner uses part of the property for its own use, and part to earn rentals or for capital appreciation, and the portions can be sold
or leased out separately, they are accounted for separately. Therefore the part that is rented out is investment property. If the portions
cannot be sold or leased out separately, the property is investment property only if the owner-occupied portion is insignificant.

Ancillary services

If the enterprise provides ancillary services to the occupants of a property held by the enterprise, the appropriateness of classification
as investment property is determined by the significance of the services provided. If those services are a relatively insignificant
component of the arrangement as a whole (for instance, the building owner supplies security and maintenance services to the lessees),
then the enterprise may treat the property as investment property. Where the services provided are more significant (such as in the case
of an owner-managed hotel), the property should be classified as owner-occupied.
Intracompany rentals

Property rented to a parent, subsidiary, or fellow subsidiary is not investment property in consolidated financial statements that include
both the lessor and the lessee, because the property is owner-occupied from the perspective of the group. However, such property
could qualify as investment property in the separate financial statements of the lessor, if the definition of investment property is
otherwise met.

Recognition

Investment property should be recognized as an asset when it is probable that the future economic benefits that are associated with the
property will flow to the enterprise, and the cost of the property can be reliably measured.

Initial measurement

Investment property is initially measured at cost, including transaction costs (e.g. professional fees for legal services and property
transfer taxes). Such cost should not include start-up costs, abnormal waste, or initial operating losses incurred before the investment
property achieves the planned level of occupancy.

Cost is the amount of cash or cash equivalents paid or the fair value of other consideration given to acquire an asset at the time of its
acquisition or construction or, where applicable, the amount attributed to that asset when initially recognized in accordance with the
specific requirements of other PFRS, eg PFRS 2 Share-based Payment.

Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length
transaction.

Measurement subsequent to initial recognition

PAS 40 permits enterprises to choose between:

 a fair value model; and
 a cost model.

One method must be adopted for all of an entity's investment property. Change is permitted only if this results in a more appropriate
presentation. PAS 40 notes that this is highly unlikely for a change from a fair value model to a cost model.

Fair value model

 Investment property is remeasured at fair value. Gains or losses arising from changes in the fair value of investment property
must be included in net profit or loss for the period in which it arises.

 Fair value should reflect the actual market state and circumstances as of the balance sheet date.

 The best evidence of fair value is normally given by current prices on an active market for similar property in the same location
and condition and subject to similar lease and other contracts.

 In the absence of such information, the entity may consider current prices for properties of a different nature or subject to
different conditions, recent prices on less active markets with adjustments to reflect changes in economic conditions, and
discounted cash flow projections based on reliable estimates of future cash flows.

 There is a rebuttable presumption that the enterprise will be able to determine the fair value of an investment property reliably on
a continuing basis. However, if, in exceptional circumstances, an entity follows the fair value model but at acquisition concludes
that a property's fair value is not expected to be reliably measurable on a continuing basis, the property is accounted for in
accordance with the benchmark treatment under PAS 16, Property, Plant and Equipment (cost less accumulated depreciation less
accumulated impairment losses).

 Where a property has previously been measured at fair value, it should continue to be measured at fair value until disposal, even if
comparable market transactions become less frequent or market prices become less readily available.

Cost Model

After initial recognition, investment property is accounted for in accordance with the cost model as set out in PAS 16, Property, Plant
and Equipment – cost less accumulated depreciation and less accumulated impairment losses.

Transfers to or from Investment Property Classification

Transfers to, or from, investment property should only be made when there is a change in 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 inventories);
 end of owner-occupation (transfer from owner-occupied property to investment property);
  commencement of an operating lease to another party (transfer from inventories to investment property); or

When an entity decides to sell an investment property without development, the property is not reclassified as investment property but
is dealt with as investment property until it is disposed of.

The following rules apply for accounting for transfers between categories:
 for a transfer from investment property carried at fair value to owner-occupied property or inventories, the fair value at the change
of use is the 'cost' of the property under its new classification;
 for a transfer from owner-occupied property to investment property carried at fair value, PAS 16 should be applied up to the date
of reclassification. Any difference arising between the carrying amount under PAS 16 at that date and the fair value is dealt with
as a revaluation under PAS 16; and
 for a transfer from inventories to investment property at fair value, any difference between the fair value at the date of transfer and
it previous carrying amount should be recognized in net profit or loss for the period.

When an entity uses the cost model for investment property, transfers between categories do not change the carrying amount of the
property transferred, and they do not change the cost of the property for measurement or disclosure purposes.

Disposal

An investment property should be derecognized on disposal or when the investment property is permanently withdrawn from use and
no future economic benefits are expected from its disposal. The gain or loss on disposal should be calculated as the difference
between the net disposal proceeds and the carrying amount of the asset and should be recognized as income or expense in the income
statement. Compensation from third parties is recognized when it becomes receivable.

Disclosure

Both Fair Value Model and Cost Model

 whether the fair value or the cost model is used

 if the fair value model is used, whether property interests held under operating leases are classified and
accounted for as investment property
 if classification is difficult, the criteria to distinguish investment property from owner-occupied property and from property held
for sale
 the extent to which the fair value of investment property is based on a valuation by a qualified independent valuer; if there has
been no such valuation, that fact must be disclosed
 the amounts recognized in profit or loss for:
o rental income from investment property
o direct operating expenses (including repairs and maintenance) arising from investment property that generated rental
income during the period
o direct operating expenses (including repairs and maintenance) arising from investment property that did not generate
rental income during the period
o the cumulative change in fair value recognized in profit or loss on a sale from a pool of assets in which the cost
model is used into a pool in which the fair value model is used
 restrictions on the realizability of investment property or the remittance of income and proceeds of disposal
 contractual obligations to purchase, construct, or develop investment property or for repairs, maintenance or enhancements

Additional Disclosures for the Fair Value Model [IAS 40.76]

 a reconciliation between the carrying amounts of investment property at the beginning and end of the period, showing
additions, disposals, fair value adjustments, net foreign exchange differences, transfers to and from inventories and owner-
occupied property, and other changes
 significant adjustments to an outside valuation (if any)
 if an entity that otherwise uses the fair value model measures an item of investment property using the cost model, certain
additional disclosures are required

Additional Disclosures for the Cost Model [IAS 40.79]

 the depreciation methods used

 the useful lives or the depreciation rates used
 the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning
and end of the period
 a reconciliation of the carrying amount of investment property at the beginning and end of the period, showing additions,
disposals, depreciation, impairment recognized or reversed, foreign exchange differences, transfers to and from inventories and
owner-occupied property, and other changes
 the fair value of investment property. If the fair value of an item of investment property cannot be measured reliably, additional
disclosures are required, including, if possible, the range of estimates within which fair value is highly likely to lie

- done -
 -- end of lecture notes --

Pre-Assessment Activity for Investment Property

1. Olay Company is considering the appropriate classification of the following items:

Land held for long-term capital appreciation P15,000,000

Land held for undecided future use 30,000,000
Building leased out under an operating lease 75,000,000
Building leased out under a finance lease 45,000,000
Vacant building held to be leased out under an operating lease 8,000,000
Property held for use in the production or supply of goods or services 6,000,000
Property held for administrative purposes 9,000,000
Property held for sale in the ordinary course of business 2,000,000
Property held in the process of construction or development for sale 3,000,000
Property being constructed or developed on behalf of third parties 12,000,000
Property held for future use as owner-occupied property 4,000,000
Property held for future development and subsequent use as owner-occupied property
4,400,000
Property occupied by employees 3,600,000
Owner-occupied property awaiting disposal 750,000
Property that is being constructed or developed for use as an investment property
12,000,000
Existing investment property that is being redeveloped for continuing use as investment
property 24,000,000
Building held for administrative purposes and leased out under operating lease (60% is for
administrative purposes) 15,000,000
Building leased out under an operating lease (the entity supplies security and maintenance
services to the lessees) 30,000,000

How much is the total amount that would normally be reported as investment property?

Land held for long-term capital appreciation 15,000,000

Land held for undecided future use 30,000,000
Building leased out under an operating lease 75,000,000
Vacant building held to be leased out under an operating lease 8,000,000
Property that is being constructed or developed for use as an investment property 12,000,000
Existing investment property that is being redeveloped for continuing use as investment property 24,000,000
Building held for administrative purposes and leased out under operating lease (60% is for
administrative purposes) (15M*.40) 6,000,000
Building leased out under an operating lease (the entity supplies security and maintenance services to
30,000,000
the lessees)
Total Investment Property 200,000,000

2. Slater, Inc. and its subsidiaries have provided you, their PFRS specialist, with a list of the properties they own:
 Land held by Slater, Inc. for undetermined future use, P5,000,000.
 A vacant building owned by Slater, Inc. and to be leased out under an operating lease, P20,000,000.
 Property held by a subsidiary of Slater, Inc., a real estate firm, in the ordinary course of its business, P30,000,000.
 Property held by Slater, Inc. for use in production, P1,000,000.
 A hotel owned by Sugo, Inc., a subsidiary of Slater, Inc., and for which Sugo, Inc. provides security services for its guests’
belongings, P50,000,000.
 A building owned by Slater, Inc. being leased out to Status, Inc, a subsidiary of Slater, Inc., P20,000,000.

How much will be reported as investment properties in Slater, Inc. and its subsidiaries consolidated financial statements?

Land held by Slater, Inc. for undetermined future use 5,000,000

20,000,
A vacant building owned by Slater, Inc. and to be leased out under an operating lease 000
A hotel owned by Sugo, Inc., a subsidiary of Slater, Inc., and for which Sugo, Inc. provides security 50,000,
services for its guests’ belongings 000
Total Investment Property 75,000,000

3. The Budget Company's accounting policy with respect to investment properties is to measure them at fair value at the end of each
reporting period. One of its investment properties was measured at P800,000 on 31 December 2019.

The property had been acquired on 1 January 2019 for a t otal of P760,000, made up of P690,000 paid to the vendor, P30,000 paid to
the local authority as a property transfer tax and P40,000 paid to professional advisers.
 In accordance with PAS40 Investment property, the amount of the gain to be recognized in profit or loss in the year ended 31
December 2019 in respect of the investment property is

Cost of Property 760,000

FV of Property 800,000
FV - increase 40,000

Investment Property 40,000

FV adjustement gain 40,000

4. The Ponds Company acquired a building on 1 January 2019 for P900,000. At that date the building had a useful life of 30 years. At
31 December 2019 the fair value of the building was P960,000. The building was classified as an investment property and accounted
for under the cost model.

According to PAS40 Investment property, what amounts should be carried in the statement of financial position (SFP) and recognized
in profit or loss (P/L)?

Cost of Building 900,000

Depreciation (900T/30) - P/L 30,000
CA of Building -SFP 870,000

5. The Pool Company purchased an investment property on 1 January 2016 for a cost of P220,000. The property had a useful life of 40
years and at 31 December 2018 had a fair value of P300,000. On 1 January 2019 the property was sold for net proceeds of P290,000.
Pool uses the cost model to account for investment properties.

What is the gain or loss to be recognized in profit or loss for the year ended 31 December 2019 regarding the disposal of the
property?

Proceeds 290,000 Proceeds 290,000

CA (220T*37/40) 203,500 CA 300,000
Gain on Sale - Cost model 86,500 Loss on sale - FV model (10,000)

6. Seven, Inc. owns a building purchased on January 1, 2015 for P50 million. The building was used as the company’s head office.
The building has an estimated useful life of 25 years. In 2019, the company transferred its head office and decided to lease out
the old building. Tenants began occupying the old building by the end of 2019. On December 31, 2019, the company reclassified
the building as investment property to be carried at fair value. The fair value on the date of reclassification was P42 million.

How much should be recognized in the 2019 profit or loss as a result of the transfer from owner-occupied to investment property?

FV - end of 2019 42,000,000

CA (50M*20/25) 40,000,000
Revaluation Surplus 2,000,000

Accumulated Depreciation 10,000,000

Building 8,000,000
Revaluation Surplus 2,000,000

Investment Property 42,000,000

Building 42,000,000

Reclassification
Investment Property 50,000,000
Building 50,000,000

Use the following information for the next two questions.

Pure Corporation owns the following properties at 1 January 2019:

Property A

An office building used by Pure for administrative purposes with a depreciated historical cost of P2 million. At 1 January 2019 it had a
remaining life 20 years. After a reorganization on 1 July 2019, the property was leased to a third party and reclassified as an
investment property applying Pure’s policy of the fair value mode. An independent valuer assessed the property to have a fair value of
P2.3 milllion at 1 July 2019, which had risen to P2.34 million at 31 December 2019.

Property B

Another office building sub-leased to a subsidiary of Wish. At 1 January 2019, it had a fair value of P1.5 million which had risen to
P1.65 million at 31 December 2019. At 1 January 2019 it had a remaining life of 15 years.

Determine the amounts that should be recognized by the entity in its separate financial statements in respect of these properties for the
year ended December 31, 2019 for the following:

7. Net amount in profit or loss

8. Net amount in other Comprehensive Income

Property A

Cost of Building 2,000,000

Depreciation (2M*.5/20) 50,000
CA of Building 7.1.19 1,950,000

FV 7.1.19 2,300,000
CA of Building 7.1.19 1,950,000
Revaluation Surplus 350,000

Depreciation (P/L) 50,000

Accumulated Depreciation 50,000

Investment Property 2,300,000

Accumulated Depreciation 50,000
Building 2,000,000
Revaluation Surplus (OCI) 350,000

FV of Building 12.31.19 2,350,000

CA of Investment Property 7.1.19 2,300,000
FV - increase 50,000

Investment Property 50,000

FV adjustment gain (P/L) 50,000

Property B

FV of IP 12.31.2019 1,650,000
FV of IP 1.1.2019 1,500,000
FV adjustment gain 150,000

Investment Property 150,000

FV adjustment gain (P/L) 150,000

Profit or loss

Property A - FV adjustment 40,000

Property B - FV adjustment 150,000
Depreciation (50,000)
Net amount in P/L 140,000

Other Comprehensive Income

Property A - Revaluation Surplus 350000
 -- end of Pre-Assessment Activity --
Assessment

1. Online quiz through Canvas.

Optional Activities/Resources

1. Intermediate Accounting 1B 2019 Edition by Zeus Vernon B. Millan

2. https://www.iasplus.com/en/standards/ias/ias2

SMC 😊