CHAPTER 22 |NVESTMENT PROPERTY Cash surrender value TECHNICAL KNOWLEDGE To understand the nature and purpose of investment property. To distinguish investment property and owner-occupied ‘property. To understand the requirements for the recognition of. investment property. To know the initial and subsequent measurement of investment property.Definition fined aa property (land or build) , operty i definee : ; Invasion ding ’» both) held by an owner or by the ifm part of « sntale or for capital appre 1 leane to earn re rn cai under a finanee or both In other words, only land and building can qualify G A inveatment property An equipment oF any movable property cannot qualify j inveatment property An investment property is not held: a. For uae in the production or supply of goods OF Services op for administrative purposes, b. For sale in the ordinary course of business. The property held by an owner for use in the production or supply of goods or servi or for administrative purposes jp known as owner-occupied property, Examples of investment property a. Land held for long-term eapital appreciation b. Land held for a currently undetermined use For example, if an entity has not determined that it will use the land either as owner-occupied property or for short-term sale in the ordinary course of business, the ; i d to be held for capital appreciationnot considered j rems ed investm ‘ent propert; Y Owner-occupied Prope: Pon ae administrative purposes eee. held for use in the 80ods or services or for 5 ‘ f. property held for future use as owner-occupied property property. property held for future develo, ag owner-occupied property pment and subsequent use i: Property occupied by em employees pay rent at conta whether or not the Owner-occupied property awaiting disposal t paper Bere for sale in the ordinary course of business or jn the process of construction or development for such sale. Property being constructed or d 4 Parties. leveloped on behalf of third h. Property that is leased to another entity under a finance lease. Investment property held by lessee IFRS 16, the new standard on leases, requires a lessee to recognize a right of use asset and a lease liability. The "right of use" asset is initially recognized at cost which includes the following: : a. .The present value of the lease payment b. Lease payment made to the lessor at or before commencement date less any lease incentive a lessee applies the roperty, the lessee 1e right of use assetPartly investment and partly owner-occupied ay include a portion that is held t ion and another portion that is hela purposes fy Certain properties me rentals or for apprecia' manufacturing Or administrative i leased out separately, an en rtions could be sold 0 ly as investment pro " DEST unt the portions separate d property If these po) shall acco’ and owner-occupie uld not be sold separately, the property j y if only an insignificant portion is held ty trative purposes: If the portions co! investment propert u manufacturing or adminis’ When ancilliary services are provided by the entity to the occupants of the property and these servi are a relative), insignificant. component of the arrangement, the property ih treated as investment property. ‘An example would be where the owner of an office building curity and maintenance services to the lessees. The provides se pment property. building being leased out as offices is in’ However, if the services igni, , if tl 8 provided are a more significa component of the arrangement, the property is Habis owner-occupied property. po eae if an entity owns and manages a hotel, services led to guests are a signifi 5 1 pea eee gnificant component of the Therefore, the owner pore | -managed hotel is t: owner-occupied property, rather than maitment oe Property le \ affiliateition of iny pcos” Invest R RE Property Investment property shall be re : ’ » Necog only When SORMMed a8 AN aaset when and It is probable that the f associated with the iny Heal entity a economic ; conomic benefits that are estinent property will flow to the The cost of the investment propert forty reliably. can be measured jnitial Measurement of investment property An investment property shall be measured initially at its cost “4 clio Sts 8! > inc Transaction costs shall be included in the initial measurement The i 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. Costs excluded from cost of investment property Start up costs, unless necessary to bring the property to the condition necéssary for its intended use b. Operating losses incurred before the investment property achieves the planned level of occupancy asted material, Jabor or other resources g or developing the property ¢, Abnormal amounts of w incurred in constructin: bse " investment property _ Subsequent measurement of inv E ne following models as the t policy to all of theFair yalue of investment property i that would be receiveg alue of an asset 18 the price toa Eye in an orderly transaction between market. Patticipany at the measurement date ‘The price in the principal market used to measure fair valig shall not be adjusted for transaction cost. sli conditioning is often an ji ipment such as lift or air-condit in oe Bre building and is generally included in the fair an i of the investment property. on a furnished basis, the fair value ofthe des the fair value of the furniture because Jates to the furnished office, If an office is leased office generally inclu the rental income re ‘The fair value of investment property excludes prepaid op accrued operating lease income. Inability to determine fair value reliably In exceptional cases, when an entity first acquires an investment property, or when an existing property becomes investment property because there has been a change of use, there may be clear evidence that the fair value of the investment property cannot be determined reliably on a continuing basis. Under such exceptional cases, PAS 40, paragraph 53, mandates that the entity shall measure such investment property using the cost method until the disposal of the investment property.jiustration tity ventured into o An entity @ into construction in South Asia which is rated aa tho eet epevnig te Ania | shopping mall of d of direct ‘ the board cctora decided that { i ; nate shopping mall to a local investor, the Nee eae Gee. rah roperty for purposes of earning rentals b; Patch tien in the shopping mall to tenants, y letting out space struct Lne i The con! n c at of the shopping mall was completed and the property was placed in service on January 1, 2019 The cost of the construction of th i Erp eo0,000 ¢ shopping mall was The useful life of the shopping mall is 10 years and t! value is P10,000,000. # pod pe renauat ‘An independent valuation expert provided the following fair value at each subsequent year-end: 120,000,000 125,000,000 115,000,000 " December 31, 2019 December 31, 2020 December 31, 2021 Unquestionably, the mega shopping mall shall be recognized as an investment property. er the cost model or the fair value erty because the fair ined reliably.Cost model If the entity decides to measure the investment property. the cost model, the asset shall be carried at cost Je, accumulated depreciation and any accumulated impaj ep loss. Ment Fluctuations in the fair value of the investment property Fes year to year are not recognized. 4 Instead, the annual depreciation of the investment property | the charge against profit or loss for the year. 4 Journal entries 1. To record the acquisition of the investment property: Investment property 100,000,000 " Cash 100,000 000 2. To record the subsequent annual depreciation: Depreciation 9,000,000 ‘Accumulated depreciation 000 pa Acquisition cost Residual value Depreciable amount Annual depreciation (90,000,000/10 years)pair yalue model tity decides to i : jf the en measure the inyestm r the fair value model, the changes in fair cae ee ae year are recognized in profit or loss, a No depreciation 1s recorded for the investment property. The net gains and losses from fair value adjustments shall be disclosed. Journal entries 2019 ‘ . 1 Investment prope: ve Cash a 700,000.990 100,000,000 Dec. 81 Investment property 20,000,000 Gain from change in fair value 20,000,000 Fair vaiue— December 31, 2019 120,000,000 Acquisition cost, 100,000,000 Increase in fair value in 2019 20,000,000 2020 Dec. 31 Investment property 5,000,000 Gain from change in fair value 5,000,000 Fair value— December 31, 2020 125,000,000 Carrying amount — December 31, 2019 120,000,000 Increase in fair value in 2020 2021 change infairvalue 10,000,000 Ses one ee 2 i 10,000,000 115,000,000 0¢Transfers of investment property investment property shall made hoy Transfers to and from a invrrange of use evidenced by: and only when there is Commencement of owner ocoupation or development yw view to owner-ocoupation transfer from invewtm property t pwner-oceupied property ont development with a view to i 1. b. Commencement of nt property inventory. transfer from investine! ation — transfor from owner. ‘Occupied Bnd of owner occuP’ ent property: property to investi rating lease to another entity = tranafer d. Inception of an ope! i to investment property, from owner-occupied property Measurement of transfers 1. When the entity uses the cost model, transfers betw investment property, owner-occupied property pout inventory shall be made at carrying amount, sy 2. A transfer from investment property carried at fair val “a Sea property or inventory shall be Pee r at fair value which becomes the subsequent accounting. ne deem a 3. If owner-occupied pro) i f perty is transferred i _ propery thet Hs to be carried at fair a in ee n the fair value and the carryi ‘ ying amou) nee shall be accounted for as Riaunaae ne ‘ and equipment. ueperecognition of investment property An inv a b. & estment property shall be derecognized On disposal When the investment property in permanently withdrawn from use When no future economic benefits are expected from the investment property. Disclosures related to investment property The general disc Josures are: Bese Whether the entity uses the cost model or fair value mode The amount of rental income with the related expense Restrictions on the investment property Contractual obligations to purchase or construct inve! property tment When the fair value model is used, the disclosures are: a. tween carrying amount of Detailed reconciliation be ginning and end of the period investment property at the be 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 When the cost rder value Cash surren var eo ie oft cot nd NIH ita * The entity may beneficiary: wnt of the inet sent O INBUTANCe pry The accounting for the pay™ beneficiary 19 the entity | will depend on whether the the officer insured. If the beneficiary 18 the officer insured or any Dereon ¢ the entity like the wife of the officer, no arcounting Ah thy encountered because the payment of the premium emg charged to insurance expense irighy An accounting problem will arise when the beneficiary 4 entity itself. Ibis on thie assumption that the following ate bh, © is geare Oy, ' Under our law, 4 life insurance policy has a cash ou t value and loan value. render Cash surrender value is the amount which the ineur : will pay upon the surrender and cancelation of the life a | policy. Cash surrender value arises if the following requi are present: ' a. The policy is a life policy. There is no cash surrender value in fire, accident and other nonlife policies. b. Premiums for three full years must have been paid. c. The policy is surrendered at the @ i sel ag: Red Sa at the end of the third year a Thus, a cash surrender vali at the end of the third ae leaeliy commencee ia However, there are certain insurance firms which sell ie cash surrender value even #qheory on the cash surrender value Oot unl prota policy aries trom the fact shat the fixe al premium is much in exvosn 4 h during the earlier years of the ae in excess of the annual risk ‘The excess is necessary in order to balance the defici J e the deficiency of the game premium to meet the annual risk during the lator yours A the policy. Such exoves in the premium paid over the annual cost of insurano with accumulated interest, constitutes the cash surrender value Accounting procedures ‘The accounting procedures concerning the cash surrender value are as follows: a, Payment of the insurance premium Life insurance expense xx Caah “xz b, Adjustment of the unexpired premium at the end of the period: Prepaid life insurance “xX Life insurance expense xX c. Dividends received on the life policy are not income but a reduction of life insurance expense. Cash xx Life insurance expense 4. Initial recognition of the cash surrender value at the end of the third year: ; aEe. Recognition of cash surrender value subsequent to uy third year: Cash surrender value +2 Life insurance expense ag f, Receipt of the proceeds of the life policy: Cesh Xx Cash surrender value = Life insurance expense ps Gain on life insurance settlement " The amount to be credited to the cash surrender value shoulg be the adjusted balance at the time of death of the insured, The life insurance expense account is credited for the unexpired premium at the time of death. The gain on life insurance settlement is determined as follows: Face of policy zi Less: Cash surrender value Xx Unexpired premium 3x XX Gain on life irisurance settlement Il Illustration An entity insured the life of the president for P2,000,000 the entity being the beneficiary of an ordinary life policy. The annual premium is P30,000. : The policy was dated January 1, 2019 and carried the following cash surrender value: iss End of the policy year Cash surrender valueJournal entries 2019 Jan. 1 Life insurance expense entant oe 30,000 2020 Jan. 1 Life insyrance expense 30,000 Cash 30,000 2021 Jan. 1 Life insurance expense 30,000 Cash 30,000 Dec. 31 Cashsurrender value 30,000 Life insurance expense (1 / 3) 10,000 Retained earnings (prior two years) 20,000 To initially recognize the cash surrender value at the end of the 3rd policy year. 2022 Jan. 1 Life insurance expense “30,000 Cash 30,000 Dec. 31 Cash surrender value 12,000 Life insurance expense 12,000 To recognize the incre: fn eash surrender value a2023 30,000 1 Life insurance expense oe Cash 30,000 8,000 Cash surrender value ; ae? Life insurance expense 8,000 ‘To recognize the increase in cash surrender value yp to time of death. Balance, December 31, 2023 58,009 Balance, December 31, 2022 2.009 Increase in cash surrender value for 2028 16,000 Increase from January 1 to June 80, 2028 (1/2x 16,000) 8,000 July 31 Cash 2,000,000 Cash surrender value 50,000 Life insurance expense 15,000 Gain on life insurance settlement 4,935,000 Face of policy 9,000,000 Cash surrender value (50,000) Unexpired premium (30,000 x 6/12) Gain on life insurance settlementQUESTIONS 1, Define an investment Property. 2, Define an owner-occupied property. 3. Explain the treatment of investment property held by lessee. 4, What is the treatment of property that is partly investment and partly owner-occupied? 5, When is an investment property recognized? 6. Explain the initial and subsequent measurement of investment property. 7. Explain the cost model and fair’ value model of measuring investment property. 8, Explain the recognition of transfers to and from investment property. 9. Explain cash surrender value. 10. What are the requisites in order that an insurance policy will have a cash surrender value?PROBLEMS Problem 22-1 (IFRS) Classic Company and its subsidiaries own the following properties that are accounted for in accordance with international accounting standards: Land held by the parent for undetermined use Avacant building owned by the parent and to be leased out under an operating lease Property held by a subsidiary, a real estate firm, in the ordinary course of business Property held by the parent for use in production Building owned by a subsidiary and for which the subsidiary provides security and maintenance services to the lessees Land leased by the parent to a subsidiary under an operating lease Property under construction for use as investment Property Land held for future factory site Machinery leased out by the parent to an unrelated Party under an operating lease 5,000,009 3,000,009 2,000,009, 4,000,009 1,500,000 2,500,000 6,000,000 3,500,000 1,000,000F problem 22-2 (IFRS) Galore Company ventured into construction of 4 condominium in Makati which is rated as the largest state-of-the-art structure, The board of directors decided that instead of selling the condominium, the entity would hold this property for purposes of earning rentals by letting out space to business executives in the area. The construction of the condominium’ was completed and the property was placed in service on January 1, 2019. The cost of the construction was P50,000,000. The useful life of the condominium is 25 years and the residual value is P5,000,000. An-indepeijdent valuation expert provided the following fair yalue at each subsequent year-end: December 31, 2019 55,000,000 December 31, 2020 53,000,000 December 31, 2021 60,000,000 Required: Prepare journal entries for 2019, 2020 and 2021: a, The investment property is accounted for under the cost model. under the fairProblem 22-8 0 FRS) Hobust Company purchased an inves’ if 4,000,000. 1, 2018 at a cont of ‘The property had a useful life of 20 years and on —a 2019 had a fair value of P4, 00,000. 9 the property was sold for net pi tment property on Jan, wary On December 31, 201 of P4,500,000. model to account for the investment ‘The entity used the cost property What is the gain to be recognized, for 2019 regarding the disposal of the investment property? a, 900,000 b. 600,000 c. 800,000 d. 700,000 Problem 22-4 (IFRS) Nonchalant Compan. i [ Ci y owned three investm i with the following details: on Initial Fair value i Fair val cost December 31, 2019 Decontee sal Property 2700000 2200 000 4,000 roperty 2 3,450,000 3,000,000 2a Property 3,300,000 3,900,000 3,600,000- problem 22-5 (IFRS) nuous Company acquired a building on January 1, 2019 d ry 1, 2016 for P9,000,000. At that date the building had a useful life of 30 years . On December 31, 2019 the fair value of the building was 9,600,000 and on December 31, 2020, the fair value is 9,800,000. The building was classified as an investment property and accounted for under the cost model What amounts should be carried in the statement of financial position and recognized in profit or loss for 2020? Carrying amount Profit or loss a. 8,400,000 800,000 expense b. 9,000,000 No gain, no loss G 9,800,000 200,000 gain d. 8,700,000 300,000 expense Problem 22-6 (IFRS) Considerate Company has a single investment property which had an original cost of P5,800,000 on January 1, 2017. On December 31, 2019 the fair value was P6,000,000 and on December 31, 2020 the fair value was P5,900,000.aoe 7 Problem 22-7 (IFRS) om : ‘a accounting policy with respec, Paradise CompAty ie fair value model at the end of a investment Mod. One investment property had a fair yaji) rr tpg,000,000 on December 31, 2019 been acquired on January 1, 2019 for q TE a uup of P6,900,000 paid to the a t $300 500 paid to the local authority as a property trangfet | tax and P400,000 paid to life of the property is 40 years. What is the gain to be recognized for 2019 in respect of the investment property? a. 400,000 b. 700,000 c. 800,000 d. 590,000 professional advisers. The usefq Problem 22-8 (IFRS) On January 1, 2019, Scholastic Company acquired a building — to be held as investment property in a remote location for P5,000,000. After initial recognition, the entity measured the investment property using the cost model because the fair value cannot be measured reliably. On December 31, 2019, management assessed the useful life of the building at 20 years from the date of acquisition and presumed the residual value to be nil because the fair value cannot be determined reliably. At year-end, the entity declined an unsolicited offer to purchase the building for P6,500,000. This is a one-time offe that is unlikely to be repeated in the foreseeable future. Be seproblem 22-9 (FRS) on January 1, 2019, Wee Company acquired property consisting of ten identical freehold detached houses each with separate legal title including the land on which it is puilt for P200,000,000, 20% of which is attributable to the jand. The units have a useful life of 50 years. qhe following costs are also incurred on such date: Nonrefundable transfer taxes not included in the purchase price 20,000,000 Legal cost directly attributable to the acquisition 1,000,000 Reimbursement to the previous owner for prepaying nonrefundable property taxes for the six-month period ending June 30, 2019 100,000 Advertising campaign 500,000 Opening function to celebrate new rental business 200,000 On June 30, 2019, the entity paid local property taxes of p200,000 for the year ending June 30, 2020. i Throughout 2019, the entity incurred repairs and maintenance of P120,000. The entity used one of the ten units to accommodate the administration and maintenance staff. The other nine units are rented out to independent parties under an‘ operating lease.measurement of the inve, Mey, What is the initial property? 198,900,000 198,000,000 176,800,000 180,000,000 he initial measurement of the land 4, roperty, plant and equipment? be Boop 2, What is t accounted for as P: a. 4,400,000 b. 4,420,000 c. 4,000,000 d. 4,430,000 What is the initial measurement of the building to be accounted for as property, plant and equipment? a. 17,690,000 b. 17,600,000 c. 17,680,000 d. 16,000,000 4. What is the gain from the increase in fair value of investment property for the current year? 51,100,000 27,000,000 45,000,000 26,100,000 5. ua is the depreciation of the building for the Boopproblem 22-10 (IFRS) phino Company, a real estate entity, had a building with a carrying amount of P20,000,000 on acain bag 31, 2019. The building was used as offices of the entity's administrative etaff. On December 31, 2019, the entity intended to rent out the puilding to independent third parties. The staff will be moved to a new building purchased early in 2019. On December 31, 2019, the original buildi ; i of 35,000,000. ginal building had a fair value Qn December 31, 2019, the entity also had land that was held for sale in the ordinary course of business. The land had a carrying amount of P10,000,000 and fair value of P15,000,000 on December 31, 2019. On such date, the entity decided to hold the land for capital appreciation. The accounting policy is to carry, all investment property at fair value. 1. On December 31, 2019, what amount should be recognized in revaluation surplus as a result of transfer of the building to investment property? 20,000,000 35,000,000 15,000,000 ; 0 =2 t should be recognized of the land toProblem 22-11 (ACP) insured the life of the presid the beneficiary of an ond yz Garrulous Company P60,000. P2,000,000, the entity being life policy. The annual premium 18 The policy was dated January 1, 2019 and carrieg th following cash surrender value: e End of policy year Cash surrender value 2019 - 2020 = ' mat 60,000 i aon 84.000 | 2023 116,000 ; The entity followed the calendar year as the accounting period. The president died on June 30, 2023 and the policy wes collected on July 31, 2023. Required: Prepare journal entries from January 1, 2019 to July 31, 2023, . Problem 22-12 (IAA) Impartial Company took out a P5,000,000 i i i 3 m 2 on the life of the president on January 1, 2019) ae ve The accounting period is th a ie Th premium on the policy is aavoad: geeer ¥°8%, ee! Data regarding dividends and cash surrender value are:_ problem 22-13 (LAA) yysee Company reported the i By! son December 31, 2019: following accounts under current asset! Cash eurrender value | f 0,00 ipileAbd ab tatranaeseti 4 (50 900) 40,000 hividend receivable from insurance company i Scat faferapove BccOUNtS APC MN Only Cnaean ee statement of financial position which pertain to the insurance policy or the Joan. Upon investigation, the following data are gathered: The cash surrender value of P90,000 reported in the a. statement of financial position is for June 30, 2020. ‘The cash surrender value was P80,000 on June 30, 2019. b, On June 30, 2019, the entity, paid the annual premium of P30,000 minus the dividend declared of P2,000. The loan from the insurance company is a one-year note dated April 1, 2019. The 12% interest is payable on the date of maturity. d. The dividend declared was recorded by debiting dividend receivable and crediting dividend income.Problem 22-14 (AICPA Adapted) i dinary life insur: Marital Company has a P5,000,000 or ‘ esa on the president. The policy year and accounting year ogi n) The entity provided the following data for the year oe December 31, 2019: Cash surrender value, January 1 Ps Cash surrender value, December 31 21 Kannal advance premium paid—January 1 Oe 15,000 Dividend received — July 1 The entity is the beneficiary under the life insurance Policy ed died on January 2, 2020, after the Payment of 00,000 on January 1, 2020. nse for 2019? ‘The insur annual premium of P1 What is the life insurance expe a. 100,000 b. 86,000 c. 60,000 d. 75,000 Problem 22-15 (AICPA Adapted) Chain Company has a P5,000,000 life insurance policy on the president, of which Chain Company is the beneficiary. The entity provided the following information regarding the policy for the year ended December 31, 2019: Cash surrender value, January 1 Cash surrender value, December 31 Annual advance premium paid January 1 a P ar, dividends of P30,000 were apr! 435,000 540,000 200,000