LEARNING UNIT 2 – IAS40 INVESTMENT PROPERTY

Disclaimer

The information contained in the summary is to highlight important aspects in applying the

principles of the applicable statements. The summary is in no way an indication that only the

matters mentioned are important to pass. Students must refer to their study guides and

textbooks for an understanding of the learning unit.

The summary below is primarily a revision tool to assist students in preparation of the exam.

Recognition and measurement

Recognition:

It is probable that future economic benefits will flow to the entity; and

The cost of the investment property can be measured reliably

Definition and recognition criteria must be

met.

Initial Measurement:

Measured @ cost price including transaction costs and directly attributable costs.

Including: any directly attributable expenditure such as legal services, property transfer taxes and other transaction costs.

Excluding: start-up costs, initial operating losses, wasted material, or unproductive labour costs.

Subsequent Measurement::

Choose:

*except for IAS 40.34: Properties held under an operating lease and classified as

IP must use FV model. (leases not part of FAC3702)

Subsequent costs

Capitalise any subsequent costs only if recognition criteria are met.

Transfers

4 scenarios – see below

Disposals / Additions

Same rules as for PPE (learning unit 1)

Impairments

See learning unit 3 on impairments.

COST MODEL (IAS 16 PPE)

FAIR VALUE

MODEL (IAS 40

IP)

Measurement models

Transfers

*Please refer to the detailed transfer diagrams in your study guide.

Transfer of owner occupied property (PPE) to

Investment property (IP) @ FV

Apply IAS 16 up to date of change in use (date of transfer).

Any difference between the CA and the FV is treated as a REVALUATION according to IAS 16.

Property will be depreciated up to the date of transfer, and any impairment losses will be recognised to this date.

CA @ date of transfer > FV @ that date - recognise the decrease in profit /(loss),

unless it is reversal of a prior revaluation

CA @ date of transfer < FV @ that date – If a reversal of previous Impairment

loss then recognise in profit /(loss) Any remaining portion of the increase is

treated as a revaluation surplus (Credit to OCI)

If cost model is applied

transfers do not change the carrying amount of the property transferred or the cost of that property for measurement and disclosure purposes.

Transfer of IP @ FV to PPE or inventory

The property’s deemed cost for subsequent accounting in accordance with IAS 16 shall be its FV at date of change in use.

Transfer from inventory to IP @ FV

Any difference between the FV of property at that date and its previous CA is recognised in profit or loss.

Cost model:

Measure all IP at cost price – accumulated depreciation and impairment losses (as for PPE).

If held for sale then measure in terms of IFRS 5 (chap 5).

Fair Value model:

Measure all IP at fair value.

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.

The fair value of IP reflects market conditions at the END of the reporting period.

Fair value is time specific at a given date.

Once classified as IP property is no longer depreciated, if using the fair value model.

Changes in fair value are recognised in profit or loss i.e. through the statement of comprehensive income.

Disclosure

Statement of comprehensive Income profit / (loss)

Rental income from IP direct operating expenses from IP that generated rental income during the period direct operating expenses from IP that did not generate rental income during the

period Fair value adjustment

Statement of Financial Position

INVESTMENT PROPERTY NOTE

Investment property

Land &

Buildings Total

Carrying amount at beginning of year (land xx + building xx) xxxx xxxx

Additions: - acquisitions xxxx xxxx

-       subsequent expenditure capitalised xxxx xxxx

Transfer to/from

Fair value adjustment xxxx xxxx

Carrying amount at end of year xxxx xxxx

Examination tips:

When the required information states that you need to disclose Investment Property, immediately

when you receive your paper write down the format of the IP note as above.

The fair value for Land and buildings were determined on XXXX, by an independent

sworn appraiser.

This amount should be the same as the amount

recorded in the PPE or Inventory note.

IAS 40 requires you to disclose the land and buildings as a total, but

you need to show the marker how you calculated the total to be able

to obtain your marks.

Disclose if there were any additions,

transfers or FV adjustments.

This is easy marks, you need to get this in the exam. This is just disclosure.

The FV Adjustment is the difference between the cost price

of PY FV amount in the CA at beginning of year.

Please note: There is NO

DEPRECIATION for IP carried at

the FV Model

Please note that we use the word carrying

amount and not cost price. This is the

disclosure according to IAS40

COST MODEL (IAS 16 PPE) FAIR VALUE MODEL (IAS 40 IP)

Disclosure according to

IAS16 PPE

Deferred tax

COST MODEL FAIR VALUE MODEL

Land No deferred tax –

IAS 12.15 (b) (ii)

66.6% x 28% on the fair value adjustment – IAS

12

Administration

building(acquired

before

1 April 2007)

No deferred tax – IAS 12.15

(c) (ii)

66.6% x 28% on the fair value adjustment – IAS

12 [if the presumption is applied]

Manufacturing

building or

commercial building

(acquired on/after

1 April 2007)

Deferred tax provided for on

the temporary difference

between the tax base and

the carrying amount of asset

@ 28%.

66.6% x 28% on the fair value adjustment IAS

12 [if the presumption is applied]

28% on the difference between the base cost

and the tax base (recoupment of tax

allowances)

NON-DEPRECIABLE ASSET

Only land is non-depreciable

Realise only with the sale of the land

Provide for deferred tax at 18.6% (66.6% X 28%)

on the fair value adjustment above the base cost

DEFERRED TAX NOTE

Investment property: Land

Fair value adjustments ( XXX x 28% x 66,6%) xxx

Investment property: Building

Accelerated tax allowances [(Historical Cost - Tax base) x 28%] xxx

Fair value adjustments ( XXX x 28% x 66,6%) xxx

Deferred tax asset/Liability xxx

Always remember to indicate if this is a deferred tax asset or liability. This is

points in the exam that you need to get.

The disclosure of the deferred tax note is on the statement of

financial position approach.

DEPRECIABLE ASSET

(No depreciation is written off according

to IAS 40, but an asset with a

limited expected useful life is

still seen as a depreciable asset)

Example : an investment property

according to the fair value model

Example : an investment property according to

the fair value fair value model

Business model is to consume the

economic benefits over time (thus through

use)

Presumption that recovery of the amount will

normally be through sale

Presumption is rebutted

Provide for deferred tax at 28% on the fair

value adjustment above base cost

Provide for deferred tax at 66.6% x 28% on the

fair value adjustment

above the base cost and at 28% on the

recoupment of previous tax

allowances (base cost – tax base)

Capital Gains tax (CGT) – general rules

CGT is applicable to assets acquired after 1 October 2001.

Proceeds

Proceeds above cost is taxed at

66.6% x 28% (CGT rate)

Base cost

Proceeds below cost = recoupment

of tax allowance at 28%

Tax base

Non - depreciable assets

Eg land

Scenario: Assume land was purchased at a cost of R100 000.

Cost model

No tax implications - IAS 12.15 Exempt

CA TB TD DT

dr/(cr)

Cost 100 000 100 000 0 Exempt

Fair value model

Tax implications of a fair value adjustment are as follows:

Above cost

difference CA above cost is taxed at 66.6% x

28% (CGT rate)

Base cost = Tax base

difference

no tax implications = IAS 12.15 Exempt

Below cost

Scenario: Assume land was purchased at a cost of R100 000. The FV of the land was R120 000.

R120 000

R20 000 CA above cost is taxed at

66.6% x 28% (CGT rate)

R100 000

R 0

no tax implications = IAS 12.15 Exempt

R0

CA RS TB TD DT

dr/(cr)

Cost 100 000 Exempt

Fair value 20 000 20 000 0

120 000 20 000 100 000 20 000 (3 730)

20 000 x 66.6% x 28% = 3 730

FAC 3702 / Learning unit 2

Deferred tax principles

Depreciable assets and SARS grants an allowance

Eg Manufacturing buildings

The tax implications are dependent on the recovery of the carrying amount of the asset. An entity may recover the carrying amount through use or through sale.

PRESUMPTION -Recovery through sale

Cost model

Fair value model

Deferred tax at 28%

Deferred tax at 28% on allowance BUT at 66.6% x 28% on the FV adjustment above cost

Scenario: Year 1: Assume a machine was purchased at a cost of R100 000. The machine is depreciated over 20 years. Beginning of year 2 FV= R125 000. Tax allowance = 10% not apportioned

CA RS TB TD DT

CA TB TD DT

dr/(cr)

dr/(cr)

Cost 100 000 0 100 000

Cost 100 000 100 000 Dep/T all (5 000) 0 (10 000)

Dep/T all 0 (10 000)

95 000 0 90 000 5 000 (1 400)

100 000 90 000 10 000 (2 800) 28%

Dep/T all (5 000) 0 (10 000)

Fv adj 25 000 0 28%x66.6%

95 000 0 80 000 10 000 (2 800)

125 000 90 000 35 000 (7 462)

Dep/T all 0 (10 000) 28%

125 000 80 000 45 000 (10 262)

FAC 3702 / Learning unit 2

Fair value model

Tax implications of a fair value adjustment are as follows:

Fair value = R125 000

difference R25 000 at 66.6% x 28% (CGT rate)

= R4 662

Base cost = R100 000

difference

R20 000 x 28% = R5 600

Tax base = R80 000

DEFERRED TAX NOTE Investment property: Accelerated tax allowances [(Historical Cost - Tax base) x 28%] 5 600

Fair value adjustments ( XXX x 28% x 66,6%)

4 662

Deferred tax Liability

10 262

FAC 3702 / Learning unit 2

Recovery through use – PRESUMPTION REBUTTED

Cost model

Fair value model

Deferred tax at 28%

Deferred tax at 28% on allowance AND on the FV adjustment above cost

CA RS TB TD DT

CA TB TD DT

dr/(cr)

dr/(cr)

Cost 100 000 0 100 000

Cost 100 000 100 000 Dep/T all (5 000) 0 (10 000)

Dep/T all 0 (10 000) 28%

95 000 0 90 000 5 000 (1 400)

100 000 90 000 10 000 (2 800) Dep/T all (5 000) 0 (10 000)

FV adj 25 000 0 28%

90 000 0 80 000 10 000 (2 800)

125 000 90 000 30 000 (8 400)

Dep/T all 0 (10 000) 28%

125 000 80 000 40 000 (11 200)

FAC 3702 / Learning unit 2

Depreciable assets and SARS does not grant an allowance

Eg Office/Admin building

The tax implications are dependant on the recovery of the carrying amount of the asset. An entity may recover the carrying amount through use or through sale.

PRESUMPTION Recovery through sale

Cost model

Fair value model

No deferred tax – IAS 12.15 Exempt

Deferred tax at 28% x 66.6% on the FV adjustment above cost

Year 1: ABC purchased an office block. Building cost = R1 020 000. Buildings are depreciated over 20 years. SARS does not allow a tax allowance on

the building.

Year 2: Assume the fair value adjustment for the year for the buildings it is R100 000.

CA RS TB TD DT

CA TB TD DT

dr/(cr)

dr/(cr)

Cost 1 020 000 0 1 020 000

Cost 1 020 000 1 020 000 Dep/T all (51 000) 0 0 exempt

Dep/T all 0 0

969 000 0 1 020 000 (51 000) 0

1 020 000 1 020 000 0 0 Dep/T all (51 000) 0 0

exempt

FV adj 100 000 0

918 000 0 1 020 000 (102 000) 0

1 120 000 1 020 000 100 000 (18 648)

Dep/T all 0 0

1 120 000 1 020 000 (100 000) (18 648)

28% x 66.6%

FAC 3702 / Learning unit 2

Recovery through use – PRESUMPTION REBUTTED

Cost model

Fair value model

No deferred tax – IAS 12.15 Exempt

Deferred tax at 28% on the FV adjustment above cost

CA RS TB TD DT

CA TB TD DT

dr/(cr)

dr/(cr)

Cost 1 020 000 0 1 020 000 exempt

Cost 1 020 000 1 020 000 Dep/T all (51 000) 0 0

Dep/T all 0 0

969 000 0 1 020 000 (51 000) 0

1 020 000 1 020 000 0 0 Dep/T all (51 000) 0 0

exempt

RS 100 000 0 28%

969 000 0 1 020 000 (102 000) 0

1 120 000 1 020 000 100 000 (28 000)

Dep/T all 0 0

1 120 000 1 020 000 (100 000) (28 000) 28%

FAC 3702 / Learning unit 2

Hints and tips

Exam technique

There is NO DEPRECIATION ON investment property held at FV MODEL

Remember to disclose the narrative information underneath your note:

The fair value for Land and buildings were deternubed on XXXX, by an independent sworn appraiser.

Remember to disclose the fair value adjustment in the:

- Investment property note and

- Statement of comprehensive income

Know the 4 types of transfers:

1 Investment property PPE

2 Investment property Inventory

3 PPE Investment property

4 Inventory Investment property

When calculating def tax on Investment Property @ FV Model:

Divide your calculation into:

- Normal = Accelerated Tax allowance

- FV Adjustment

Remember to indicate on your Def tax note, Def tax asset or Liability

Read the question carefully.

Draw a timeline of events and clearly mark the events occurring. This will assist you in determining

when and how the events occur and assist in presenting a logical solution.

Abnormal credit terms

If payment for an investment property is deferred, its cost is the cash price equivalent (ie the

present value of future cash flows). The difference between this amount and the total payments is

recognised as interest expense over the period of credit.