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UNIVERSITÀ DEGLI STUDI DI BERGAMO
International accounting910005
Prof. Gervasio Daniele
IAS 40 – Investment Property
Introduction to IAS/IFRS – a.a. 2015/2016
Overview of session
2. Definitions
3. Recognition
4. Measurement
5. Disposal
6. Disclosures
1. Objective
Identifies what an investment property is,
how it differs from property, plant and equipment
(owner-occupied property); and what recognition,
measurement and disclosure standards apply to
investment properties
IAS 40
Objective
is property (land or a building – or part of a building – or both) held to earn rentals or for capital appreciation or both, rather than for:
- use in the production or supply of goods or services or for administrative purposes; or
- sale in the ordinary course of business.
Investment property
Definitions
Some properties comprise a portion that is held to earn rentals or for capital appreciation and another portion that is held for use in the production or
supply of goods or services or for administrative purposes.
� If these portions could be sold separately (or leased out separately under a finance lease), an entity accounts for the portions separately.
� If the portions could not be sold separately, the property is investment property only if an insignificant portion is held for use in the production
or supply of goods or services or for administrative purposes.
Definitions
An investment property generates cash flows largely independently of the other assets held by an entity
Are these Investment properties?
• Land held for LT capital appreciation rather than ST sale in the ordinary course of business YES
• Land held for a currently, undetermined future use
YES
• Property intended for sale in the ordinary course of business or in the process of construction or development for such sale
NO(IAS 2 Inventories)
Definitions
Are these Investment properties?
• Building owned by the entity (or held by the entity under a finance lease) and leased out under one or more operating leases
YES
• Owner occupied propertyNO
(IAS 16 Property, Plant and Equipment)
• Property being constructed or developed for future use as investment property YES
Definitions
Are these Investment properties?
Definitions
• Property being constructed or developed on behalf of third parties
• Building that is vacant but is held to be leased out under one or more operating leases
NO• Property leased to another entity under a finance lease
YES
NO(IAS 11 Construction
Contracts)
Example
Example of the classification of property
A company owns a large building that operates as hotel
If the owner signed a rental agreement with an independent third party to use the
building as a hotel, the building would not be occupied by the owner.
The owner would receive rental income from the tenant and would benefit from
the capital growth in the value of the building.
The owner might supply insignificant services to the tenant (for example security
service). In this case, the building should be classified as an investment property.
Example
Example of the classification of property
On the other hand, if the owner uses the building to operate a hotel, where the
hotel business forms part of the main business activity of the owner, then the
building should be classified as property, plant and equipment, and depreciated
over its estimated useful life.
If the owner uses life of the 100 rooms as a private residence and rents out the 95
other rooms to a tenant to run as a hotel, 95 per cent of the building should be
accounted for as an investment property, provided that it is possible to apportion
costs appropriately.
Alternatively, if the owner-occupied portion is considered to be insignificant, the
entire hotel could be classified as investment property.
Recognition
Investment property should be recognised as an asset when:
• it is probable that the future economic benefits that are attributable to the investment property will flow to the entity; and
• the cost of the investment property can be measured reliably.
Recognition
Acquisition date:
The acquisition date (the transaction date) is the date on wich the risk and rewards of ownership of the property are transferred from the seller to the buyer.
It is the date on which the past event aspect of the asset definition is satisfied, and in almost all cases is the date on which the buyer will recognise the asset.
Measurement
An investment property should be measured initially at its cost,
including transaction costs
Initial measurement
The cost of a purchased investment property comprises its purchase price and any
directly attributable expenditure. Directly attributable expenditure includes, for
example, professional fees for legal services, property transfer taxes and other
transaction costs.
Measurement
The cost of an investment property is not increased by:
- start-up costs
- operating losses incurred before the investment property achieves the
planned level of occupancy
- abnormal amounts of wasted material, labour or other resources
incurred in constructing or developing the property
Dr: Investment property / Cr: Bank/liability
Journal entry at acquisition date:
Measurement
Subsequent expenditure:
Expenditure incurred after the initial recognition date is referred to as subsequent expenditure.
Entities can incur subsequent expenditure on an investment property either to repair the property or to improve the future uses and economic benefits that will be derived from the property.
This expenditure should be added to the carrying amount of the investment property when the definition and recognition criteria of an asset are met, and, more specifically, when the cost can be measured and it is probable that the expenditure will result in the inflow of future economic benefits.
Normal repairs and maintenance of the building (such as painting or damp treatments) should be expensed when incurred.
Measurement
Fair value model (FVM)
Subsequent measurement
Cost model (CM)
Must apply one model to all of its investment property
Measurement
The fair value of a property is usually the market value of the property.
The fair value of investment property shall reflect market conditions at the end of the reporting period.
The best way to determine the fair value of a property would be to refer to the current market value in an active market for a similar property, in the same location and condition and subject to the same lease and other
contracts.
The market value is normally the best price reasonably obtainable by the seller and the most advantageous price reasonably obtainable by the
buyer, both being independent.
Fair value model
Measurement
Changes in fair value are recognized in profit or loss in period of change
Fair value adjustments
Fair value model takes gains and losses to income (i.e. SCI)
Dr: Investment property / Cr: Gain on fair value adjustments (P&L)
Journal entries to record subsequent fair value adjustments:
Or, in the case of a loss:
Dr: Loss on fair value adjustments (P&L) / Cr: Investment property
Fair value model: example (1)
Investment property is acquired September 25, 2010, at a cost of €300.000,00
Fair values:December 31, 2010 - €290.000,00December 31, 2011 - €298.000,00December 31, 2012 - €305.000,00
31/12/2010 Loss in value / Investment property €10.000,00
31/12/2011 Investment property / Gain in value € 8.000,00
31/12/2012 Investment property / Gain in value € 7.000,00
Fair value model: example (2)
An investment property was acquired with an original cost price of
500.000€ on 1 April 2005.
The fair value of the property is determined at 650.000€ at 31
December 2005, the subsequent reporting date of the owner.
What are journal entries to record subsequent fair value
adjustments?
Fair value model: example (2)
At each subsequent date, you should determine the fair value of the property
and adjust the carrying amount accordingly.
This should be done either by increasing or decreasing the profit for the year by
the amount of the gain or loss resulting from restating the property at its fair
value
Investment property / Gain on fair value adjustments (P&L) 150.000€
Fair value model: example (3)
On 1 January 20X1 an entity purchases a building with a cost of €250.000,00
The entity paid :- 8.000€ professional fees for legal services, - 2.000€ property transfer taxes- 1.000€ other costs
The fair value of the building, at 31 December 20X1, is € 265.000,00 and at 31 December 20X2 is € 250.000,00
Show how the property would be presented in the financial statements as at 31st December 2012 if the entity adopts the Fair value model
Fair value model: example
Building € 250.000,00
professional fees for legal services € 8.000,00
property transfer taxes€ 2.000,00
Total € 260.000,00
The cost of a purchased investment property comprises its purchase price and any directly attributable expenditure
Asset Cash 260.000 260.000
Fair value model: example
31/12/20X1:
Asset Gain in value 5.000 5.000
31/12/20X2:
Loss in value Asset 15.000 15.000
265.000 – 260.000
250.000 – 265.000
Measurement
Applies cost model described in IAS 16
Assets reported at cost less accumulated depreciation and
accumulated impairment losses
Cost model
Cost model – Example (1)
A company owns a property that is classified as an investment property.
The property was acquired for 6.000.000€, 1.000.000€ of which related to the lad and 5.000.000€ to the building.
The building is expected to have an estimated useful life of 25 years and a residual value of 1.000.000€.
The land will not be depreciated, and will be carried at its cost of 1.000.000€.
The depreciable amount of the building is 4.000.000€ and it should be depreciated over the estimated useful life of 25 years. Annual depreciation would therefore amount to 160.000€
At each subsequent reporting date, the property should be considered for any possible impairment, or any change in depreciation method, residual value or estimated useful life.
Cost model – Example (2)
ABC, a manufacturing company, purchases a property for £1m on 1st January 2012 for its investment potential.
The land element of the cost is believed to be £400,000 and the buildings element is expected to have a useful life of 50 years.
At 31st December 2012, local property indices suggest that the fair value of the property has risen to £1.1m.
Show how the property would be presented in the financial statements as at 31st December 2012 if ABC adopts a:
- Cost-based policy
- Fair value policy
Example - solution
Cost-basedDepreciation in the year is £600,000 = £12,000
50SCI = depreciation charge of £12,000; andSFP = property shown at NBV of £1,000,000 - £12,000 = £988,000.
Fair ValueSFP = property shown at fair value of £1.1m; and SCI = gain of £0.1m representing the fair value adjustment.
Cost model – Example (3)
Kerr Limited holds a building for its investment potential. This building originally cost £250,000.
The fair value at 31 December 2011 was £500,000. At 31 December 2012 the fair value has risen to £600,000.
The property was purchased on 1 January 2008 . Assume a useful economic life of 25 years.
How should this change in fair value be accounted? Value using both methods. Ignore taxation.
Example - solution
Fair Value:
• Carry at fair value (2011 = £500k; 2012 = £600k)
• Gain of £100k to SCI
Cost:
• Carry at depreciated historic cost
• The property is five years old therefore NBV at the end of 2012 is £200k
Disposals
An investment property shall be derecognised(eliminated from the statement
of financial position) on disposal or when the investment property is
permanently withdrawn from use and no future economic benefits are expected
from its disposal.
Gains or losses arising from the retirement or disposal of investment property
shall be determined as the difference between the net disposal proceeds and the
carrying amount of the asset and shall be recognised in profit or loss in the
period of the retirement or disposal.
Disclosure
An entity shall disclose
1. whether it applies the fair value model or the cost model.
2. if it applies the fair value model, whether, and in what circumstances, property interests
held
under operating leases are classified and accounted for as investment property.
3. when classification is difficult , the criteria it uses to distinguish investment property
from owner-occupied property and from property held for sale in the ordinary course of
business
Disclosure
An entity shall disclose
4. the methods and significant assumptions applied in determining the fair value of investment property, including a statement whether the determination of fair value was supported by market evidence or was more heavily based on other factors (which the entity shall disclose) because of the nature of the property and lack of comparable market data. and relevant professional qualification and has recent experience in the location and category of the investment property being valued. If there has been no such valuation, that fact shall be disclosed.
5. the extent to which the fair value of investment property (as measured or disclosed in the financial statements) is based on a valuation by an independent valuer who holds a recognised and relevant professional qualification and has recent experience in the location and category of the investment property being valued. If there has been no such valuation, that fact shall be disclosed.
Disclosure
An entity shall disclose
6. 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; and - 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 of investment
property from a pool of assets in which the cost model is used into a pool in which thefair value model is used.
7. he existence and amounts of restrictions on the realisability of investment property or the remittance of income and proceeds of disposal.
8. contractual obligations to purchase, construct or develop investment property or for repairs, maintenance or enhancements.
Disclosure