Chopter 10 PAS 40 Investment property 10 pas 40-1NvEstue PROPERTY * Objectives, Scope and Definition - Q&A #1-5 © Recognition - Q&A #6-12 ‘© Measurement ~ Q&A #13-28 © Derecognition and Presentation ~ Q&A #29-32 © Disclosures ~ Q&A #33-35, © PERS for SMEs OBJECTIVES, SCOPE AND DEFINITION ae is the objective of PAS 407 The objective of this Standard is to prescribe the accounting treatment for investment property and related disclosure requirements. 2. What topics that are beyond the scope of PAS 40? PAS 40 shall be applied in the recognition, measurement and disclosure of investment property except for: a. Biological asset related to agricultural activity b. Mineral rights and mineral reserves such as oil, natural gas and similar non- regenerative resources. 3. What is investment property? Investment property is property (land or building ~ or part of a building or both) held (by the owner or by the lessee as aright of use asset) to earn rentals or for capital appreciation or both, rather than for: a. Use in production or supply of goods or services or for administrative purposes (owner occupied) or b. Sale in the ordinary course of business (inventory) it are examples of investment property? 1. Land held for long term capital appreciation b. Land held for currently undetermined use . Abuilding owned by the entity (or a right of use asset relating to a building held by an entity) and leased out under one or more operating lease 4. Abuilding that is vacant but is held to be leased out under one or more operating ease . Property that is being constructed or developed for future use as investment property. 5. What are examples of properties that is beyond the scope of PAS 40? 4. Property intended for sale in the ordinary course of business or in the process of construction or development for such sale b. Owner occupied properties including property held for future use as owner occupied. 190 sl As ia oe ollee Chapter 10~ PAS 40 Investment propertY finance lease. €. Property thats leased to another entity under 2 financ RECOGNITION jen to recognize investment property? iy whent wee {An investment property shall be recognized as an asset when, lake ble aie a. Itis probable thatthe future economic benefit that are as50C! ent property will low to the entity and b. The cost of the investment property can be mi yeasured reliably. stment property costs (initially ang I circumstances where it would be ‘efits would be less than probable, These recognition criteria are applied to all inves subsequently) when the costs are incurred. In unusual concluded that the owner's receipt of the economic ben the cost will be expensed. 7. What will be treatment ofa certain property if portion Is used to earn rental and the other Portion is held for use in the production of supply of goods or services? IF the portions could be sold/lease out separately those portions used to earn rental will be classified as investment property and other half will be owner occupied. If the portions could not be separated, the entity should take into account the intention of the significant portion of the property and classify the whole property accordingly. If significant portion is for rental then it will be investment property, otherwise it will be owner occupied. ‘8. What is owner occupied property? Itis a property held (by owner or by the lessee as a right of use) for use in the production ‘or supply of goods or services or for administrative purposes. 9. If the entity provides ancillary service to the occupants of a property, what will be the treatment of the property? If the ancillary service is only insignificant to the arrangement as a whole (example providing security and maintenance services to the lessee occupying the property), the property will be treated as invest ment property. If the ancillary service is significant (example an entity manages and own the hotel services provided to the guests are significant to the arrangement as a whol 5 will be treated as owner occupied. ole), the property Judgement is needed to determine i the property qualifies as investment property. 191% heBter 10- PAS 40 nvestment property the treatr 0, What will bet ment for proper etn? erties leased to, and occupied by, its parents or another In the consolidated financi; a iis Viewed from the pores tement the property willbe classified as owner occupied grtement based on the perspective of et SToUP However, on the separate financial SER the entity who owns it it wll be reported as part of aoe ey ly roperty to, or from, investment property? c Change In use, A change in use occurs when the property meets, or ceases eet, the definit bedi eeti on of Investment property and there is evidence ofthe change in use. In isolation, management intention does not provide evidence of a change in use. 12, What are examples of evidence of a change in use? a, Investment Property ~ Owner occupied. Commencement of owner-occupation, or of development with a view to owner occupation, Invest ment Property — Inventory, Commencement of development with a view to sale (Owner occupied — investment property. End of owner-occupation 4d. Inventories — Investment Property. Inception of an operating lease to another party. MEASUREMENT Bivhat is the initial measurement of investment property? Investment property is measured initially at cost. Transaction cost shall be included in the initial measurement. 14, What is cost and what are specific examples of cost of investment property? “est is the amount of cash and cash equivalent or the fair value of other consideration ven 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 to the standard. «2. Cost of purchased investment property - Comprises of purchase price and any directly attributable expenditures (professional fees for legal services, property transfer taxes and other transaction costs). b. cost of investment property under deferred payments - If the payment is deferred, the cost is the cash price equivalent. The difference between the cash price equivalent and the total payments is interest expense recognized over the credit period. Cost of investment property acquired through ‘exchange - The cost is equivalent to the fair value unless (a) the ‘exchange lacks commercial substance or (b) the fair value of neither the asset received or given up Is reliably measurable. if the such is the case feoet) the investment property willbe measured atthe carving amount ofthe asset given up. 192TT TIS property Chapter 10~ PAS 40 Investment POPs 15. What are costs that Is not of investment property? to the condition necessary fori a. Startup costs (unless necessary in bringing ee management). i — copa cf operative — ie spieves the planned level of perating losses before the investme occupancy ces in constructin ¢. Abnormal amounts of wasted materials, labor other resources B or developing the property. perty ac amount of invest ment property? ‘cost of labor and consumables ang ded as “repairs and maintenance” 16. 1s the cost of day to day servicing part of the carrying No, The cost of day to day servicing are primarily th may include the cost of minor parts thus these are rega! and recognized it in the profit or loss. .n replaced, are the costs of these sstment property? the original walls by interior the carrying amount of the ecognized in accordance to Dic sn ic ects emt eri replaced parts included in the carrying amount of the inve Yes, if it will meet the recognition criteria (example replacing | walls). The cost of the replacement part will be added to tl investment property and the cost of the replaced parts will be der the provisions of this standard. 18. What is carrying amount? Carrying amount is the amount at which an asset is recognized in the statement of financial position. 19, How to subsequently measure an investment property? The entity will choose as its accounting policy either fair value model or cost model and shall apply it to all of its investment property. Under fair value model, the investment property is carried at fair value while under cost model, the investment property is carried at cost less accumulated depreciation and any accumulated impairment losses. 20. What is fair value? Fair value is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date (See IFRS 13 Fair Value Measurement) 21, What are the circumstances wherein the entity cannot use the fair value model? if there isa clear evidence that the far value ofthe investment property initially acquired is not reliably measurable in continuing basis, the investment property is measured using the cost model. This arises when the market for comparable properties is inactive and alternative reliable measurement of fair value is not available. If an entity determines that the fair value of an investment property under construction is not reliably measurable but expects the fair value to be reliably measurable upon completion of construction, it wil value the investment property at cost until either the fa Br beats ease rena oman see see ecu tet 193Chapter 10~ PAS 40 Investment property 22. Where to disclose the gain or loss arising from the changes in the fair value measurement every year? In the profit or loss for the period in which it arises. 23, How will the lessee measure the investment property if it uses the falr value model? The lessee will measure the investment property at the fair value of the right of use asset (refer to PFRSI6 for right of use) and not the underlying property. The fair value reflects, among other things, rental income from current leases and other assumptions that market participants would use in pricing investment property under current market conditions. However, leases is governed by PERS 16 and it requires the lessee to initially measure the Property as right of use at cost. Additionally, in this standard (PAS 40), if the lessee opt to Use the fair value to subsequently measure the investment property as right of use, the value should be remeasured. Remeasuring the right of use from PFRS 16 at cost to PAS4O at fair value should not give rise to any initial gain or loss, unless fair value is measured at different times. This could occur when an election to apply the fair value model is made after initial recognition, wvestment property under the fair value model? An entity must carefully consider the following items to avoid double counting of assets or liabilities that are recognized as separate assets or liabilities: a. Equipment such as lifts or air-conditioning is ofteh an integral part of the building thus included as fair value of the investment property rather than part of property, plant and equipment account. b. Ifan office is on a furnished basis the fair value of the property includes the fair value of the furniture also as income derived from these items also. It should not be separate asset The fair value excludes prepaid or accrued operating lease income, because the entity recognizes it as a separate liability or asset. 4d, The fair value of investment property held by lessee as a right of use asset Is the expected cash flows and must add back any recognized lease lability (if a valuation obtained for a property is net of all payments already) = are the items to be carefully considered in determining the carrying amount of in 25.1 the investment property previously measured at fair value, is it allowed to change it to cost model upon entity's discretion? No. If an entity has previously been measured at fair value, it shall continue to measuire at fair value until disposal or if the property becomes owner occupied or becomes an inventory, even if the comparable market transactions become less frequent or market prices becomes less readily available.ER CE aa Chapter 10 Pas 40 Investment proPert” id? ist be measuret baler stetment property it will measure tin 26. If the entity chooses the cost model, how If the entity chooses cost model to measure th accordance to: ns ifthe inves 2. PPRS 5, Non-curent asset held for Sale and Discontinued OPer ato estment property meets its criteria Jnt of use asset and is not held for salejn b, PFRS 16, Leases, iit is held by a lessee 2s ara accordance to (a) ©. PAS 16, Property, Plant and Equipment, forall other cases 27.1f there isa change of use and the entity i using the cost model is there an adjustment t the carrying amount if the property is transferred between investment property, owner. ‘occupied or inventory? No. ‘The earying amount wil still be equivalent to the cost of that property fer measurement or disclosure purposes. 28. Ifthereisa change of use and the entity is using the fair value model, is there an adjustment to the carrying amount ifthe property is transferred between investment property, owner. occupied or inventory? Yes. The guidance ore as follows: a. For a transfer from Investment property carried at fair value to owner occupied property or inventory, the property's deemed cost for subsequent accounting shall be its fair value at the date of change in use. b. If an owner occupied property becomes an investment property (fair value), the difference between the carying amount and the fair value at the date of change in use will be treated the same way as revaluation in accordance to PAS 16. . If an inventory becomes an investment property (far value], the difference between the carrying amount and the fair value shall be recognized in profit or loss. The transfer is treated as lke a sale of inventories, 4, When an entity completes the construction/development of a self-constructed investment property that will be carried at fair value, any difference between the cost and the fair value shall be recognized in profit or loss. DERECOGNITION AND PRESENTATION 29, When to derecognized investment property? ‘An investment property shall be derecognized on disposal or when the investment i permanently withdrawn from use and no future economic benefits ate expected from its disposal low to compute the gain or loss on retirement or disposal of investment property? investment property? yee Itis the difference between the net disposal proceeds and the carrying smaunt of he asset and shall be recognized in profit or loss. 195Chapter 10 PAS 40 investment property 41. What willbe treatment of compensation fro ‘was impaired, lost or given up? The compensation will be recognized in receivable. m third parties for investment property that Profit or loss when the compensation becomes 432, Where to present the investment property in the fiiancial statement? Under PASI, Presentation of Financial Statements requires that, when matey aggregate carrying amount of the entity's investment property should be presente statement of financial position under non-current asset. DISCLOSURES 33, What are the general disclosure requirements for all Investment property? a, Whether the entity applies the fair value or the cost model b. If the classification is difficult, the need to disclose the criteria used to distinguish investment property from owner-occupied property and from held for sale in ordinary course of business, . The methods and any significant assumptions that were used in ascertaining the fair values of the investment properties. it should include whether the fair value was supported by market evidence or relied heavily on other factors due to the nature of the property and the absence of comparable market data . If it has been revalued by independent appraiser, having recognized and relevant qualifications, and who has recent experience with properties having similar characteristics of location and type, the extent to which the fair value of the investment property is based on valuation by such a qualified independent valuation specialist. If no such valuation, that fact should be disclosed as well. €. The following disclosures in the statement of comprehensive income are as follows: i. The amount of rental income derived from investment property. ji, 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 recognized in profit and loss on a sale of investment property from a pool of assets in which the cost model is used into a pool in which the fair value model is used. f. The existence and the amount of any restrictions whi realizability of investment property or the remittance o : & ieee rea ble ‘ons to purchase or bulld investment property or to make repairs, maintenance or improvements t ii, wv, ich may potentially affect the ff income and proceeds from hereto. 196“chopter 10 Pas 40 Investment frapery is red using the fa roperty is measu! i ints if the investment P! that uses the fair val irements, the entity le re require amounts of the investment property, hat are the disclosure requireme! value? In addition to the general disclosu ‘model should presenta reconciliation of the caring amNOTT A coying: from the beginning tothe end of the reporting period SHOWN Fs ccuistions, those 2. Additions, dsclosing separately those additions resulting Se resulting from business combinations, and those expenditures subsequent to the property's initial b. Assets classified as held for sale, or included in 2 sale, in accordance with PFRS 5 and other disposals . Net gains or losses from fair value adjustments. 4, The net exchange differences, if any, arising from the statements ofa foreign entity €. Transfers to and from inventories and owner occupied property . Any other movements. jecognition.. ‘disposal group classified as held for translation of the financial 35, Wifat are the disclosure requirements f the investment property is measured using the cost model? In additional to the general disclosure requirements, the entity that uses the cost model should disclose: a. The depreciatio“ method used b. 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. d. Areconciliation of the carrying amount of investment property at the beginning and the end of the period showing the following details: i. Additions resulting from acquisitions, those resulting from business combinations and those deriving from capitalized expenditures subsequent to the property's initial recognition. li, Disposals, depreciation, impairment losses recognized and reversed, the net exchange differences, if any, arising from the translation of the financial statements of a foreign entity, transfers to and from inventories and owner occupied properties, and any other movements.CChopter 10 PAS 40 Investment property PFRS for SMEs FULL PERS PFRS FOR SME's As to the classification of | Classified as investment | No specific classification tract of land held for| property Under the standard, | undetermined use to subsequent |The entity has the choice |The choice is based on measurement between two models ether | circumstance rather than Cost model or Fair Value | by the entity. model. if fair value can be measured reliably without undue cost then Fair Value otherwise, it is accounted for separately using cost- depreciation-impairment model. SUMMARY KEY POINTS ‘Investment property is limited only to land and building for capital appreciation or held for rental under operating lease. ‘+ Investment property shall be recognized if there is a probable future economic benefit and the cost can be measured reliably. * Change of use is when an Investment property can be reclassified to owner occupied or inventory or vice versa «Investment property is initially measured at cost. Transaction costs are included in the initial measurement ‘© Investment property is subsequently measured either using cost or fair value model ‘© Investment property shall be derecognized upon disposal or when the investment is permanently withdrawn form use and no future economic benefits are expected from its disposal. 198,some TANTS vopert ‘Chapter 10 ~PAS 40 investment property Exercise 10-1, Identification iple or terms Read the statement carefully and identify the proper principle ke Riese eta tents rece ee ee ee ae and must reclassify it to other asset account. 2. The initial measurement of investment property. i vestment property, the 3. IT the entity chooses to use the fair value model in measuring “Wr TN tA gain oF loss from changes in the fair value will be presentet cial statement? 4. What is the accounting standard to be followe the investment property measured at cost wil for sale. , i 5. The account title used for the cost of day to day servicl 6. The-dtference between the cash rice equivalent andthe total deferred payment when ‘quiring an investment property. 7. The account ttle used for property held for use in the production or supply of goods or services or for administrative purposes. 8. The account title used for property owned by the entity and lease out under an operating lease with significant ancillary services provided to the guests. 9. itis the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. 10. The account title used for land held for capital appreciation, é with regards the measurement of cost, i I be reclassified to non-current asset held Exercise 10-2. Multiple Choice. Choose the best answer 1. Which of the following is (are) correct ifthe enterprise provides ancillary services to the occupants of a property held by the enterprise? 2. The appropriateness of classification as investment property is determined by the significance of the services provided. bf the services provided are relatively insignificant component of the arrangement as a whole (for instance, the building owner supplies security and maintenance services to the lesses), then the enterprise treat the property as investment property c. Where the services provided are more significant (such as the case of an owner- managed hotel), the property should be classified as owner occupied |G, Allof the above 2. Which of the following is correct in determining the carrying amount of an investment property? a. If an office is leased on furnished basis, the fair value of the i : of th imeiit property will include the furniture ie investment proper 199hepter 10 PAS 40 investment property b. lifts and air-condit toni Mae 78 's Included as part of the investment property rather Both A and B are correct 4, Both A and B are incorrect hich of the f oH a Commence cats ear of evidence ofa change ln vse? @ development with rat rom investment property to inventeran, a view to sale, for a transfer fro 'Bi Inception of a finance lease to anoth ra Ree er party, for a transfer from inventories to © Both Aand B are examples of change in use 4. Both A and B are not examples of change in use 4, 1% statement: The fair value of investment property includes prepaid or accrued operating lease income, because the entity recognizes it as part of its liabilities or assets, 2% statement: A change in use occurs when the property meets, or ceases to meet, the definition of investment property and there is evidence of the change in use. 2. Only the 1* statement is incorrect b. Only the 2™ statements incorrect ©. Both statements are incorrect d. Both statements are correct 5. The entity's main intention for investment property is to ‘a. Use in the production or supply of goods or services b. Use for administrative purposes c. Tosell in the ordinary course of business Gd) To earn rental or for capital appreciation 6. If the investment property is acquired through exchange and such transaction lacks ‘commercial substance, the investment property will be measured at “a. Carrying amount of the asset given up b. Fair value of the asset given up c. Fair value of the asset received d. Carrying amount of the asset received 7. Fora transfer from investment property carried at fair value to owner occupied property, the property's deemed cost for subsequent reporting will be the a. Carrying amount of the asset at yearend “1b, Fair value of the asset at the date of change in use carrying amount of the asset atthe date of chang 4. Fair value of the asset at year end 200rar RET 10, 1 12 13. chapter 10~ PAS 40 investment property ment property thé guidance 4, the cost model for investt If subsequently, the entity uses ty will be be followed in measuring the investment prope! a, Based on PFRSS b, Based on PERS 16 ©. Based on PAS 16 1d. Either A,B or C depending the property's classification. Yi P Which of the following is not an investment property’ ; - ase 2. Property that is leased to another entity under an operaXng TaN b. Property that is being constructed for future use a5 Investment P |G Property that is leased to another entity under a finance d. Land held for a currently undetermined future use. 1” statement: The cost of the day to day servicing of an investment property will be added to the carrying amount of such property. 2" statement: Transaction should be expense in the Property. a. Only the 2 statement is incorrect b. Only the 2” statement is correct. G Both statements are incorrect 4. Both statements are correct tial measurement of investment The depreciation method used is a. Ageneral disclosure requirement forall investment property. b. An additional disclosure requirement if an investment property uses fair value model c. An additional disclosure requirement if an investment property uses revaluation model. 4, An additional losure requirement ifan investment property uses cost model 1" statement: A gain or loss arising from a change in the fair value of investment property shall be recognized in profit or loss for the period in which it arises 2" statement: When a lessee uses the fair value model to measure an investment property that is held as a right of use asset, it shall measure the underlying property at fair value Only the 1" statement is correct b. Only the 2 statement is correct ¢, Both statements are correct d, Both statements are incorrect 1" statement: The disposal of an investment property may be achieved by sale or entering into an operating lease 201N Chopter 10~PAs 4 investment property 2 statement: Compensatio impaled lst or given up stale already received. a. Both statements are correct, 'b. Both statements are incorrect. ¢. Only the 1" statement. is correct 4. Only the 2™ statements correct ‘ ird parties for investment property that was "¢ recognized in profit or loss when the compensation is, 14, Subsequently, investment property will be meastired at a. Cost model or revaluation made! Fair value model or revaluation model “Cost model or fair value model 4. Carrying amount or Net realizable value 15, 1* statement: Investment property generates cash flows largely independent ofthe other assets by an entity, 2" statement: Ifthe ancillary services is significant to the arrangement as a whole, such property is classified as investment property. Only the 1* statement is incorrect Only the 1* statement is correct Both statements are incorrect 4. Both statements are correct Exercise 10-3 Identification. Identify whether it is an Investment Property, Inventory, Owner Occupied or None Land held for capital appreciation. Land held for undecided future use. Building lease as operating lease and lease out under operating lease. Building lease under operating lease out as finance lease. Land lease as finance lease and lease out as operating lease Land lease as finance lease and lease out as finance lease. Property held for use in the production or supply of goods or services. Property held for administrative purposes. Property held for sale in the ordinary course of business. 10. Property held in process of construction or development forsale. 11. Property held for future use as owner occupied 12 Property held for future development and subsequent use as owner occupied. 13. Property occupied by employees: 14, Machinery purchased with the inter 15. Building that is being constructed or intion to eased it out to other companies. developed for use as an investment property. 202