INVESTMENT PROPERTY (PAS 40) http://facebook.com/roniverse
ISSUES IN ACCOUNTING FOR INVESTMENT PROPERTY : 1. Objective and scope of PAS 40 2. Accounting for partly owner-occupied and partly investment property 3. Accounting for intra-company rentals 4. Recognition and measurement of investment property 5. Accounting for transfer from/to investment property 6. Accounting for disposal of investment property 7. Disclosures
OBJECTIVE AND SCOPE OF PAS 40 :
*Insignificant component - meaning the owner-occupied owner-occupied portion of the property property provides only ancillary services services that are insignificant component of the arrangement taken as a whole whole (for instance, the building owner owner supplies security and maintenance services to the lessees). owner-occupied portion of the property property **Significant component - meaning the owner-occupied provides only ancillary services services that are significant component of the arrangement arrangement taken as a whole (such as in the case of an owner-managed hotel).
ACCOUNTING FOR INTRA-COMPANY RENTALS :
The objective of this sta ndard is to prescribe the a ccounting treatment for investment property and related di sclosure requirements. Investment property is a property ( land and/or building) held to earn rentals or for capital appreciation, appreciation, or both.
It includes: 1. Land held for long-term capital appreciation; 2. Land held for a c urrently undetermined use; use ; 3. Building owned by the entity and rented out under operating lease to another entity; 4. Building leased by the entity under finance lease and rented out under operating lease to another entity. A property leased by the entity under operating lease can be acc ounted for as an investment property provided: a. The property meets the definition of i nvestment property; b. The operating lease is accounted for as it were a finance lease; and c. The lessee uses the fair value model in measuring the property interest; 5. Vacant building that is to be leased out under operating lease to another entity in the future; 6. Land and building that is under development or construction for future use as investment property; It excludes (therefore, PAS 40 does not apply for): 1. Property held for use in the production or supply of goods or services or owner-occupied property property for administrative purposes (PAS 16: Property, Plant and Equipment Equipment ); ); 2. Property held for future future use as owner-occupied property property (PAS 16: Property, Plant and Equipment ); ); 3. Property held for future development and subsequent use as owner occupied property property (PAS 16: Property, 16: Property, Plant and Equipment ); ); 4. Property occupied by employees, employees, whether or not the employee pay rent at market rate (PAS 16: Property, 16: Property, Plant and Equipment ); ); 5. Owner-occupied property property held for sale (PFRS 11: Non-current Assets Held for Sale and Discontinued Operations Operations ); 6. Property held for sale in t he ordinary course of business or in the process of construction of development for such sale (PAS 2: Inventories) Inventories) 7. Property being constructed or developed on behalf of third parties (PAS 11: Construction Contracts) Contracts ) 8. Property owned by the entity and leased out under finance lease to another company.
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 owner-occupied from the perspective of t he group. However, such property could qualify as investment property in the sepa rate financial statements of the lessor, if the definiti on of investment property is otherwise met. In consolidated FS , owner-occupied property In separate FS ,
can be an investment property
RECOGNITION AND MEASUREMENT OF INVESTMENT PROPERTY :
Investment property should be recognized as an asset when: 1. It is probable that the future economic benefits that are associated with the property will flow to the entity, and 2. The cost of the property can be measured reliably. Initial measurement*:
a. Acqui Acquired red thro through ugh cash cash Cash Cash price price b. Credit/Installment
Based on priority: priority: a.) Cash price, or b.) PV of future future cash payments payments
c. Sel Selff-co cons nstr truct ucted ed
At costs costs incu incurr rred ed plus plus any any bor borro rowi wing ng cost costss up up to to the the date when the construction or development is complete.
d. Issua ssuanc ncee of of sha sharres
Base Based d on on PF PFRS 2: a.) FV of property received b.) FV of shares shares issued c.) Par value of shares issued
e. Issuance of bonds payable
Based on PAS 39: a.) FV of bonds payable b.) FV of asset asset received c.) Face value of Bonds payable
f. Exchange of Assets
If with commercial substance: a.) FV of asset given plus cash paid or less cash received; b.) FV of asset asset received plus cash paid or less cash received
Take note of the following: Property owned or leased?
Purpose
Investment Property?
Owned
Long-term c ap api ta tal a pp ppreci at ati on on
Owned
Undetermined use
g. Donation
FV of asset received
Owned ned
To be leas leaseed out out to ano anothe ther enti entity ty under operating lease
h. Others
Same as PAS 16
Owned
To be leas leaseed out out to ano anothe ther enti entity ty under f inance inance lease
Leased under finance lease
To be leased out to another entity under operating lease
Leased under finance lease
To be leased out to another entity under f inance inance lease
Leased under Operating lease
Whatever
If with no commercial commercial substance: a.) CV of asset given
*Plus incidental costs directly attributable such as professional fees for legal services, and property transfer taxes, but excludes: a.) Start-up costs, unless necessary to bring the investment property to the intended use condition; b.) 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. Subsequent measurement:
PAS 40 permits entities to choose between: ACCOUNTING FOR PARTLY FOR PARTLY OWNER-OCCUPIED OWNER-OCCUPIED AND PARTLY AND PARTLY INVESTMENT PROPERTY :
a. Cost model - the investment property property is carried at Cost less Cost less any accumulated depreciation and any accumulated impairment losses. losses.
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, t hey are accounted for separately. Therefore, the part that is rented out is investment property. If If the portions cannot be sold or leased leased out separately, the property is investment property only if the owner-occupied portion is i nsignificant.
property is carried at fair value without b. Fair Value model - the investment property deducting cost to sell . Any changes in fair value is recognized in profit or loss of the period in which they arise.
If could be sold separatel y,
If could not be sold separately , and The owner-occupied is insignificant component* If could not be sold separately , and The owner-occupied is significant component**
One portion is investment property, another portion is owner-occupied property All portion is investment property All portion is owner-occupied property
One method must be adopted for all of an entity's investment property. Change is permitted only if this results in a more more appropriate presentation. PAS PAS 40 notes that this is highly unlikely for a change from a fair value model to a cost model. The best evidence of fair value. It is normally given by current prices on an active market for 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 di fferent 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.
Investment Property (PAS 40) Page 1
Investment property under construction. If an entity determines that the fair value of an investment property under construction is not reliably determinable but expects the fair value of the property to be reliably determinable when construction is complete, it measures that investment property under construction at cost until either its fair value becomes reliably determinable or construction is completed.
DISCLOSURES: •
Investment property other than under construction. If an entity determines that the fair value of an investment property (other than an investment property under construction) is not reliably determinable on a continuing basis, the entity shall measure that investment property using the cost model in IAS 16. The residual value of the investment property shall be assumed to be zero. The entity shall apply IAS 16 until disposal of the investment property.
ACCOUNTING FOR TRANSFER FROM/TO INVESTMENT PROPERTY:
Transfers to, or from, investment property should only be made when there is a change in use, evidenced by one or more of the following: 1. Commencement of owner-occupation (transfer from investment property to owner-occupied property); 2. Commencement of development with a view to sale (transfer from investment property to inventories); 3. End of owner-occupation (transfer from owner-occupied property to investment property) 4. Commencement of an operating lease t o another party (transfer from inventories to investment property) 5. End of construction or development (transfer from property in the course of construction/development to investment property. FROM
TO
INVESTMENT PROPERTY CARRIED AT
Owner-occupied Investment property and Property inventory
Cost Model
Owner-occupied Investment property Property
Fair Value Model
Carrying value of owneroccupied property and inventory.
Investment Property
Fair Value Model
•
Fair Value of owner-occupied property. Difference between CV and FV should be treated in the same way as a revaluation, impairment or gain on reversal of impairment in accordance with PAS 16 and PAS 36.
XX (XX) XX
Fair Value of inventory. Difference between CV and FV should be recognized immediately in profit or loss.
Fair Value XX Carrying Value (XX) Gain (loss) on reclassification to investment property XX Investment Property under construction
Investment Property
Fair Value Model
Fair Value of inventory. Difference between CV and FV should be recognized immediately in profit or loss.
Fair Value XX Carrying Value (XX) Gain (loss) on reclassification to investment property XX Investment Property
Investment Property
Owneroccupied property and Inventory
Cost Model
Owneroccupied property and Inventory
Fair Value Model
Carrying value of investment property.
ADDITIONAL DISCLOSURE FOR COST MODEL: 1. The depreciation methods or rate used and the useful life; 2. The gross carrying amount and the ac cumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period; 3. Reconciliation of the carrying amount of i nvestment property at the beginning and end of the period, showing additions, disposals, depreciati on, impairment recognised or reversed, foreign exchange differences, transfers to and from inventories and owner-occupied property, and other changes; 4. 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.
EXERCISES: 1. Ace Company acquired an investment property with an i nstallment price of P2,400,000. The acquisition of the property requires downpayment of 20% and a non-interest bearing note payable at the end of each year for 5 years. The prevailing market rate of interest for similar instrument is 12%. Ace incurred transaction costs amounting to P50,000 for the property. What is the acquisition cost of the investment property?
a. P 1,862,400
b. P 1,914,320
c. P 2,400,000
d. P 2,450,000
2. On January 2, 2009, Grand made a test of impairment on one of it s buildings carried as plant asset. The test on impai rment revealed a recoverable value of P5,500,000 on that building. The carrying amount of this building as of J anuary 2, 2009 was P8,000,000 with a remaining useful life of 10 years. On January 2, 2011, Grand decided to convert this buildi ng into an investment property that is to be carried at fair value. The cost of converting the building is insignificant but as a result of the change in the usage, the fair value of the building was reliably measured at P7,000,000. What amount of realized revenue should Grant recognize in its profit or loss statement on the date of transfer?
a. P 0
b. P 600,000
c. P 2,000,000
d. P 2,600,000
3. Using data in no. 2, what amount of unrealized gain should Grant recognize in its shareholders' equity on the dat e of transfer? Fair Value of investment property at date of change in use. Changes from previous fair value shall be included in the profit or loss .
FV-date of change in use XX FV-last reporting period (XX) Gain (loss) in fair value XX
ACCOUNTING FOR DISPOSAL OF INVESTMENT PROPERTY:
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 di sposal proceeds and the carrying amount of the asset and should be recognized in the income statement of the period. Compensation from third parties is recognized when it becomes receivable. Net Proceeds from sale Less: Carrying value of investment property Gain (loss) on sale
ADDITIONAL DISCLOSURE FOR FAIR VALUE MODEL: 1. Whether property interests held under operating leases are classified and accounted for as investment property; 2. The methods and significant assumpt ions applied in determining the fair value of investment property. The extent to which the fair value of i nvestment property is based on a valuation by a qualified independent valuer; if there has been no such valuation, that fact must be disclosed; 3. 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 4. 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 i nventories and owner-occupied property, and other changes 5. Whether significant fixtures, such as li ft and office furniture, within an investment property, have been separately recognized.
INITIAL MEASUREMENT
Fair Value Carrying Value RS (or impairment loss) Inventory
•
GENERAL DISCLOSURES: 1. Whether the fair value or the cost model is used; 2. The amounts recognised in profit or loss for: a. rental income from investment property; and b. direct operating expenses (including repairs and maintenance) arising from investment property that generated rental i ncome during the period; 3. Restrictions on the realizability of investment property or the remittance of income and proceeds of disposal; 4. Contractual obligations to purchase, construct, or develop investment property or for repairs, maintenance or enhancements; 5. If classification is difficult, the criteria to distinguish investment property from owner-occupied property and from property held for sale;
XX (XX)
a. P 0
b. P 600,000
c. P 2,000,000
d. P 2,600,000
4. Carol's investment property has a historica l cost of P2,400,000. On December 31, 2011, the fair value of thi s investment property is P2,800,000. If carol uses the fair value model to account for the difference, Carol should: a. recognize P400,000 unrealized gain in shareholders' equity b. recognize P400,000 unrealized gain in the profit or loss c. recognize a revaluation surplus of P400,000 d. not recognize the P400,000 increase 5. On January 2, 2009, Might converted its occupied property to investment property that is to be carried at fair value. The carrying amount of the property in its books is P4,000,000. Assuming the fair value on the date of transfer is P3,800,000, Might should recognize: a. impairment loss of P200,000 in profit and loss statement b. P200,000 deferred loss as an asset c. P200,000 unrealized loss in shareholders' equity d. P4,000,000 cost of investment property
ANSWER KEY:
1. B
XX
Investment Property (PAS 40) Page 2
2. C
3. B
4. B
5. A
