INVESTMENT PROPERTY

NOEMI JANE O. DINSAY, CPA, LPT

IAS 40 provides for the following defnitons:

Carrying Amount. It is the amount at which an asset is recognized in the

statement of fnancial positon.

Cost. Is the amount of cash or cash equivalents paid or the fair value or other
consideraton given to acquire an asset at the tme of its acquisiton or
constructon.

Fair value. Is the price that would be received to sell an asset or paid to transfer
for a liability in an orderly transacton between market partcipants at the
measurement date.

Investment property. Is property (land or building – or part of a building or both)

held (by the owner or by the lessee as a right of use asset) to earn rentals or for
capital appreciaton or both.

Owner-occupied property. Is property held (by the owner or by the lessee as a

right of use asset) for use in the producton or supply of goods or services or for
administratve purposes.
1. Internatonal Accountng Standards 40 Investment Property 40 (IAS 40)
replaces IAS 40 Investment Property issued 2000. This standard shall be referred
to in the recogniton, measurement and disclosures of investment property.

2. Investment Property. Investment propertes per IAS 40 (IAS, 2003) refers to

land or buildings held primarily to earn rentals or for capital appreciaton, are not
used for producton or administratve purposes of the business, are not held for
resale in the ordinary course of business. It generates cash fows that are largely
independent of the other assets of the entty.

2.1 Examples as enumerated in the standard paragraph 8 included the following:

a. Land held for long-term capital appreciaton;

b. Land held for currently undetermined use;
c. Building owned by the reportng entty, or (a right of use asset relatng to a
building held by the entty) and leased out under one or more operatng leases;
d. Building that is vacant but is held to be leased out under one or more
operatng leases; and
e. Property that is being constructed or developed for future use as investment
property.
Accordingly, the standard provides that an entty that owns a property leased to a
parent or subsidiary reports the property as investment property in its individual
fnancial statements.

However, in the consolidated fnancial statements the said property shall be

reported as an owner-occupied property.

On the other hand, an entty that owns a property which is used for earning
rentals or capital appreciaton and also some portons for administratve purpose,
the same property shall be reported separately if it can be rented or sold
separately. (IAS 40, par.10)

If it cannot be rented or sold separately, it is reported as investment property,

only if the proporton used for administratve purpose is insignifcant.

If there is more than an insignifcant porton that is used as owner-occupied, then

the entre property is reported and accounted for under IAS 16 on property, plant
and equipment.
3. Recogniton: IAS 40 paragraph 16 on Recogniton states that “An owned
investment property shall be recognized as an asset when, and only when:

a. It is probable that the future economic benefts that are associated with the
investment property will fow to the entty; and
b. The cost of the investment property can be measured reliably.”

4. Inital Measurement: IAS 40 par. 20 states that an investment property shall

be measured initally at cost.

Cost includes the purchase price, transacton costs and any directly atributable
expenditure such as professional fees, property transfer taxes, and other
transacton costs.

The cost of a self-constructed investment property is the cost at the date when
the constructon or development is complete.
The standard in paragraph 24 further provides that if payment is deferred, the
cost is the cash price equivalent with the diference as interest expense over the
credit period.

In case of an exchange, paragraph 27 sets out the determinaton of the cost of

the investment which is measured at the fair value unless the exchange
transacton lacks commercial substance.

If it lacks commercial substance or the fair value of neither the asset given up or
asset received is reliably measurable, this case, the investment in property is
measured at the carrying amount of the asset given up.

IFRS 16 applies the cost measurement for an investment property held by a

lessee as a right-of-use asset.
Costs excluded from cost of investment property as per IAS 40 par. 23 are as
follows:

a. Start-up costs unless necessary to bring the property to the conditon

necessary for its intended use,
b. operatng losses incurred before the investment property achieves the
planned level of occupancy,
c. Abnormal amounts of wasted material, labor or other resources incurred in
constructng or developing the property.

5. Subsequent measurement of investment property: An entty shall choose

either of the following models as their accountng policy and shall apply that
policy to all of the investment property:
Fair value model – IAS 40 paragraph 33 states that an entty choosing the
fair value mode shall measure all of its investment property at fair value
with any changes in fair value included in proft or loss of the current year
it has occur.

These changes in the fair value of investment property every end of the
year is debited as loss from change in fair value and is credited to gain
from change in fair value when the fair value of the investment property
increased.

Cost model – IAS 40 paragraph 56 states that an entty that chooses the
cost model shall measure investment property;
1. In accordance with IFRS 5 Non Current Asset held for sale and Discontnued
Operatons if it meets the criteria to be classifed as held for sale;

2 In accordance with IFRS 16 if it is held by a lessee as a right of use asset and is

not held for sale in accordance with IFRS 5;

3. In accordance with the requirements in IAS 16 for cost model in all other
cases.

IAS 16 paragraph 30 provides that cost model carries asset at cost less
accumulated depreciaton and accumulated impairment losses.

The discussion further provides that even if it carries investment property

through the cost model, fair value disclosure is stll required and is necessary.
Illustraton: Dao Ming Company engaged into constructon of a Super Mall for
the purpose of earning rentals from tenants. The constructon was completed on
January 1, 20A with total cost of 130,000,000. The property has a useful life of
10 years and residual value of 13,000,000.

An independent valuaton was provided regarding fair value of the property at

each year end.
Dec. 31, 20A 156,000,000
Dec. 31, 20B 162,500,000
Dec. 31, 20C 149,500,000

The self constructed property is recorded initally at the cost when the
constructon is completed which is 130,000,000.

Subsequently, it will be measured either by cost model or revaluaton model. The

following are the entries using the two methods for the three years.
Cost Model : Revaluaton model:

Depreciaton expense 11,700,000 Investment property 26,000,000

Acc. Depreciaton 11,700,000 Gain from change in FV 26,000,000

Depreciaton expense 11,700,000 Investment property 6,500,000

Acc. Depreciaton 11,700,000 Gain from change in FV 6,500,000

Depreciaton expense 11,700,000 Loss from change in FV 13,000,000

Acc. Depreciaton 11,700,000 Investment property 13 ,000,000

6. Transfers of Investment Property IAS 40 provides that “transfers of Investment

Property to and from shall be made when and only when there is a Change of use
evidenced by:

a. Commencement of owner occupaton

b. Commencement of development with a view to sale
c. End of owner-occupaton
d. Commencement of an operatng lease from owner-occupied property to
investment property.
Measurement of Transfers:
IAS 40 provides for the following guidelines in cases of transfers:

a. When fair value model is used, transfers from investment property to owner-
occupied or inventories, the deemed cost shall be made at fair value at the date
of change of use. (IAS 40, par. 60)

b. If owner-occupied property is to be transferred as investment property under

fair value model, the diference between the carrying amount and fair value shall
be treated as revaluaton in accordance with IAS 16. (IAS 40, par. 61)

c. An inventory transferred to investment property to be carried at fair value, any

diference between the fair value and the previous carrying amount shall be
included in proft or loss. (IAS 40, par 63)

d. An investment constructed is completed which is to be carried at fair value,

any diference between fair value and carrying amount shall be included in proft
or loss. (IAS 40, par. 65)
7. Derecogniton of Investment property: IAS 40 paragraph 66
provides the criteria on derecogniton of investment property. It
states that an investment property shall be derecognized on
disposal, when permanently withdrawn from use or the moment
it no longer provides future economic benefts expected from its
disposal.

It further provides that gain or loss from disposal of investment

property shall be determined as the diference between the net
disposal proceeds and carrying amount of the asset and shall be
recognized in the proft or loss.
Illustraton: Contnuing the frst illustraton, if the investment property was carried at cost model and is sold
for a selling price of 96,000,000 on Dec.31, 2019, what is the entry on the disposal of investment property?
Investment property 130,000,000 130,000,000-13,000,000/10*3
Depreciaton expense for 3 years 35,100,000
Carrying amount 94,900,000
Selling price 96,000,000
Gain on disposal 1,100,000 answer

Cash 96,000,000
Accumulated depreciaton 35,100,000
Investment property 130,000,000
Gain on disposal 1,100,000

Assume further the same problem informaton, except that the revaluaton model has been used by the
company, and the investment was sold for a selling price of 143,000,000, the answer to the queston
and the entry upon sale of the investment property on Dec. 31, 20C will be:

Selling price 143,000,000

Less: Fair value 12/31/19 149,500,000
Loss on sale of investment property 6,500,000 Answer

The 149,500,000 fair value is the carrying amount of the investment property on Dec. 31, 20C since the
model is revaluaton model.

Cash 143,000,000
Loss on sale of investment property 6,500,000
Investment property 149,500,000
8. Disclosure Requirements: The following should be disclosed
but not limited to:
a. Whether the fair value or cost model is used;
b. The extent whereby there is an independent valuaton or the
fact that there is none;
c. The amount recognized in proft or loss for rental income on
investment property, direct operatng expenses that generated
and that does not generate rental income during the period.
d. Obligatons to purchase, construct or develop investment
property or for repairs or maintenance that is contract-based;