Chapter 21: Investment Property Gucila, Mary Angelie B. BS-Management Accounting-1 Investment Property is defined as property (land or building or part of a building or both) held by an owner or by the lessee under a finance appreciation or both. Only land buildings can qualify as an investment property. • An equipment or any movable property cannot qualify as an investment property. Examples of Investment Property • • • • • Land held for long-term capital appreciation Land held for a currently undetermined issue Building owned by the reporting entity leased out under an operating lease Building that is vacant but is held to be leased out under an operating lease Property that is being constructed or developed for future use as investment property Partly investment and Partly owner-occupied • Investment Property • Owner-occupied Property When ancillary services are provided by the entity to the occupants of the property and these services are a relatively insignificant component of the arrangement. If the services provided are a more significant component of the arrangement. Property leased to an affiliate • From the perspective of individual entities, the property leased to another subsidiary is considered an investment property. • From the perspective of the group as a whole and for the purposes of consolidated financial statements, the property is considered as owner-occupied property. Recognition of Investment Property Investment property shall be recognized as an asset when: a. It is probable that the future economic benefits that are associated with the investment property will flow to the entity. b. The cost of the investment property can be measured reliably. Initial measurement of Investment Property An investment property shall be measured initially at its cost. The cost of a purchased investment property comprises the purchase price and any directly attributable expenditure ( professional fees for legal services, property transfer taxes and other transaction costs). Costs excluded from cost of Investment Property • Start up cost unless necessary for intended use. • Operating loss incurred before the investment property achieves the planned level of occupancy. • Abnormal amount of wasted material, labor or other resources while constructing or developing the property. Subsequent measurement of investment property • Fair value model – The investment property is carried at fair value. • Cost model – The investment property is carried at cost less any accumulated depreciation and any accumulated impairment loss. Inability to determine fair value reliably • There may be clear evidence that the fair value of the investment property cannot be determined reliably on a continuing basis. • PAS 40, paragraph 53. The entity shall measure such investment property using the cost method until the disposal of the investment property. • PAS 40, paragraph 54. An entity that uses fair value model shall continue measure other investment property at fair value. Illustration: An independent valuation expert provided the following fair value to each subsequent year-end: December 31, 2020 December 31, 2021 December 31, 2022 120, 000, 000 125, 000, 000 115, 000, 000 Unquestionably, the mega shopping mall shall be recognized as an investment property. Cost model Fluctuations in the fair value of the investment property from year to year are not recognized. Instead, the annual depreciation and any impairment of the investment property are charged against profit or loss for this year. 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 9, 000, 000 Acquisition cost Residual value Depreciable amount Annual depreciation (90, 000, 000/10 years) Any change in fair value is not recognized. 100, 000, 000 ( 10, 000, 000) 90, 000, 000 9, 000, 000 Fair Value Model If the entity decides to measure the investment property under the fair value model, the charges in fair value from year to year are recognized in profit or loss. (No depreciation is recorded for the investment property. Journal Entries 2020 Jan. 1 Investment property Cash Dec. 31 Investment property Gain from charger in fair value Fair Value- Dec. 31, 2021 Acquisition cost Increase in fair value in 2020 2021 Dec. 31 Investment Property Gain from charge in fair value Fair value- Dec. 31, 2021 Carrying amount- Dec.31, 2020 Increase in fair value in 2021 2022 Dec. 31 Loss from charge in fair value Investment Property Fair value- Dec. 31, 2022 Carrying amount- Dec. 31, 2021 Decrease in fair value in 2022 100, 000, 000 100, 000, 000 20, 000, 000 20, 000, 000 120, 000, 000 100, 000, 000 20, 000, 000 5, 000, 000 5, 000, 000 125, 000, 000 120, 000, 000 5, 000, 000 10, 000, 000 10, 000, 000 115, 000, 000 125, 000, 000 ( 10, 000, 000) Transfers of Investment Property • • • • Commencement of owner occupation Commencement of development with a view to sale End of owner occupation Commencement of an operating lease to another entity Measurement of Transfers • When the entity uses the cost model Carrying amount • A transfer from investment property carried at fair value • If owner-occupied property is transferred to investment property • If an inventory is transferred to investment shall be included in profit or loss. Fair Value Revaluation of remeasurement to fair value • When an investment property under construction is completed between fair value and carrying amount shall be included in profit or loss. difference Derecognition of investment property a. On disposal. b. When the investment property is permanently withdrawn from use. c. When no future economic benefits are expected from the investment property. Disposal of investment property Gain or loss, shall be determined as the difference between the net disposal proceeds and the carrying amount of the asset. Disclosures related to investment property 1. 2. 3. 4. Whether the entity uses the cost model or fair value model of measuring investment property. The amount of rental income of the period along with the related expense. Restrictions on the investment property either through rentals or sale proceeds. Contractual obligation to purchase or construct investment property. End. Thank You.
