Intermediate Accounting 1 - MODULE 5

Content Standards: A comprehensive discussion about the nature of the bond, and it’s initial and subsequent
measurement.
Declarative Knowledge:
▪ Definition of Investment Property
▪ Definition of Owner-occupied Property
▪ Partly Investment and partly owner-occupied
▪ Property Leased to Affiliate
▪ Recognition and Measurement of Investment Property
▪ Fair Value of Investment Property
▪ Transfer of Investment Property between Categories
▪ Disclosures related to Investment Property
▪ Cash Surrender Value of Life Insurance

Functional Knowledge:
▪ Determining the nature and purpose of investment property and it’s distinction from the owner-occupied
property.
▪ Elaborating the requirements for the recognition of investment property.
▪ Identifying the intial and subsequent measurement of investment property.
▪ Explaining the recognition of tranfers between investment property and owner-occupied property.
▪ Defining the meaning and recognition of cash surrender value.

Intended Learning Outcome:

▪ Perceive the nature and purpose of investment property and it’s distrinction from the owner-occupied
property.
▪ Analyze the requirements for the recognition of investment property.
▪ Comprehend the intial and subsequent measurement of investment property.
▪ Understand the recognition of tranfers between investment property and owner-occupied property.
▪ Interpret the meaning and recognition of cash surrender value.

Suggested Teaching/ Learning Activities:

▪ Chapter assessment theory questions and problem solving.
Chapter 22: 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. [IAS 40.5]
The property held by an owner or by the lessee under a finance lease for use in the production or supply of
goods or services, or for administrative purposes is known as owner-occupied property. The cash flow
generated are attributable not merely to the property but also to other assets used in production or supply
process.
Examples of investment property: [IAS 40.8]
▪ land held for long-term capital appreciation
▪ land held for a currently 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 future use as investment property
The following are not investment property and, therefore, are outside the scope of IAS 40: [IAS 40.5 and 40.9]
▪ 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 (IAS 2 Inventories)
▪ property being constructed or developed on behalf of third parties (IAS 11 Construction Contracts)
▪ owner-occupied property (IAS 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
▪ owner-occupied property awaiting disposal property leased to another entity under a finance lease
In May 2008, as part of its Annual improvements project, the IASB expanded the scope of IAS 40 to include
property under construction or development for future use as an investment property. Such property
previously fell within the scope of IAS 16.
*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: [IAS 40.6]
▪ 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 IAS 17 Leases
▪ the lessee uses the fair value model set out in this Standard for the asset recognised
An entity may make the foregoing classification on a property-by-property basis.
However, once this alternative is selected for one such property interest, all property classified as investment
property is to be accounted for consistently on a fair value basis.
Where a property held under a lease is classified as an investment property, the initial cost is the lower amount
between the fair value and the present value of the minimum lease payments.
Partly Investment and Partly Owner-Occupied
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. [IAS
40.10]

Ancillary services. If the entity provides ancillary services to the occupants of a property held by the entity, 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 entity 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. [IAS 40.13]

Property leased to an affiliate/ Intracompany rentals

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. [IAS 40.15]

Recognition
Investment property should be recognised as an asset when:
▪ it is probable that the future economic benefits that are associated with the property will flow to the
entity
▪ the cost of the property can be reliably measured. [IAS 40.16]

Initial measurement
Investment property is initially measured at cost, including transaction costs.
*The cost of the purchased investment property comprises its purchase price and ANY DIRECTLY
ATTRIBUTABLE expenditure.
*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. [IAS 40.20 and 40.23]
Measurement subsequent to initial recognition
IAS 40 permits entities to choose between: [IAS 40.30]
▪ Fair value model, and a cost model. However, when a property interest held by a lessee under an
operating lease is classified as an investment property, the fair value model is applied.
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. IAS 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, which is 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 (arm’s length transaction). [IAS 40.5] 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. [IAS
40.35]

▪ Fair value should reflect the actual market state and circumstances as of the balance sheet date. [IAS
40.38]

▪ 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. [IAS 40.45]
In the absence of such information, an entity shall consider the following information:
a. The entity may consider current prices for properties of a different nature or subject to different
conditions.
b. Recent prices on less active markets with adjustments to reflect changes in economic conditions.
c. Discounted cash flow projections based on reliable estimates of future cash flows. [IAS 40.46]

Inability to determine Fair Value reliably

There is a rebuttable presumption that the entity will be able to determine the fair value of an investment
property reliably on a continuing basis. However: [IAS 40.53]
▪ 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.
▪ 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.
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. [IAS 40.55]
Cost model
After initial recognition, investment property is accounted for in accordance with the cost model as set out in
IAS 16 Property, Plant and Equipment – cost less accumulated depreciation and less accumulated
impairment losses. [IAS 40.56]
Fluctuations in the Fair Value of the investment property from year to year are not recognized. Instead, the
annual depreciation of the investment property is the charge against profit or loss for the year, unless there is an
impairment of the asset.
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 one
or more of the following: [IAS 40.57 (note that this list was changed from an exhaustive list to an non-
exhaustive list of examples by Transfers of Investment Property in December 2016 effective 1 January 2018) ]
▪ 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)
end of construction or development (transfer from property in the course of construction/development to
investment property
When an entity decides to sell an investment property without development, the property is not reclassified as
inventory but is dealt with as investment property until it is derecognised. [IAS 40.58]
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 [IAS 40.60]
▪ for a transfer from owner-occupied property to investment property carried at fair value, IAS 16 should
be applied up to the date of reclassification. Any difference arising between the carrying amount under
IAS 16 at that date and the fair value is dealt with as a revaluation under IAS 16 [IAS 40.61]
▪ 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 recognised in profit or loss [IAS 40.63]
▪ when an entity completes construction/development of an investment property that will be carried at fair
value, any difference between the fair value at the date of transfer and the previous carrying amount
should be recognised in profit or loss. [IAS 40.65]
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 of an Investment Property
An investment property should be derecognised on
▪ disposal
▪ when the investment property is permanently withdrawn from use
▪ 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 recognised as income or expense in the income statement. [IAS
40.66 and 40.69] Compensation from third parties is recognised when it becomes receivable. [IAS 40.72]
Disclosures related to Investment Property
1. Both Fair Value Model and Cost Model [IAS 40.75]
▪ 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 recognised in profit or loss for.
▪ rental income from investment property direct operating expenses (including repairs and
maintenance) arising from investment property that generated rental income during the period
direct operating expenses (including repairs and maintenance) arising from investment property
that did not generate rental income during the period the cumulative change in fair value
recognised 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 realisability 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.

2. 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
[IAS 40.76]
▪ significant adjustments to an outside valuation (if any) [IAS 40.77]
▪ 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 [IAS 40.78]

3. 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 recognised 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
Assignment: Please answer the following questions.
I. Theories
1. What is the meaning of Cash Surrender Value?
2. How is Cash Surrender Value classified in the Statement of Financial Position?
3. What are the requisites in order that an insurance policy will have a Cash Surrender Value?

II. Please answer the following problems. Solutions must be in good form.
a. Problem 22-9
b. Problem 22-10
c. Problem 22-13
d. Problem 22-14
e. Problem 22-15

Prepared By: Ms. Charmaine Buan, CPA

References:
1. Financial Accounting Volume 1, 2011 ed. – Conrado T. Valix, Jose F. Peralta and Christian Aris M.
Valix
2. https://www.iasplus.com/en/standards/ias/ias40