Lecture 2 - Investment Property.pdf

8/14/2019 Lecture 2 - Investment Property.pdf

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Lecture 2

Investment Property

MFRS 140

By

Dr Mazni Abdullah, CA (M), CFiA (M), PhD (Stirling), MBA (Malaya), B Acc (Malaya)

Session 2012/2013


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MFRS 140

Defines Investment Property (Para 5): property (landor a building / both) held to earn rentals or capitalappreciation or both, rather than use in the businessor for sale in the ordinary course of business.

Includes:

Property held by the owner

Property held by the lessee under a Finance Lease

Excludes: Owner-occupied property

Property occupied by employees of the owner


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MFRS 140

Owner-occupied property property held (by the owner/bythe lessee under a finance lease) for use in the production /supply of goods or services / for administrative purposes.

Para 8- examples of Investment Property:

a) Land held for LT capital appreciation rather than for ST sale in theordinary course of business

b) Land held for a currently undetermined future use.

c) A building owned by the entity (or held by the entity under a financelease) and leased out under one or more operating leases

d) A building that is vacant but is held to be leased out under one ormore operating leases

e) Property that is being constructed/ developed for future use as IP.


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How to treat the property if one portion is held to earn

rentals and another portion is held for use in the

business?

MFRS 140 (Para 10):

a) If the portion could be sold separately, an entity

should account for the portion as investment

property and as PPE separately;

b) If the portions could not be sold separately, the

property qualifies as investment property only if an

insignificant portion of the property is held for use

in business.

Judgementis needed (Para 14)


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MFRS 140, Para 11

-

12

If an entity provides ancillary services to theoccupants of a property:

Insignificant services:E.g. the owner of the

building provides security

& maintenance services

to the lessees.

Investment Property

SIGNIFICANT SERVICES:

E.g. owner-managed hotel

provides services to guestsOwner-occupied property


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Illustrations:

a) MM Bhd owns a piece of land, in which 20% is used

for its operating activities, the balance is rented out.

b) MM Bhd used a building as a warehouse for its

inventory.

c) MM Bhd purchased a twenty storey building , andone floor is used for office administration and the

balance is rented out.

d) MM Bhd purchased a piece of land, where 20 % of it

is rented out and the balance is used as the site of

its transport facilities.

e) MM Bhd leased out the building to its subsidiary


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Recognition

MFRS 140 (Para 16): should be recognised as an

asset if and only if:

a) It is probable that future economic benefits

associated with the IP will flow to the entity; andb) The cost of the IP can be measured reliabily.


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Measurement

MFRS140 (Para 20): upon initial recognition, it

shall be measured at cost. Transaction costs

shall be included in the initial measurement.

Subsequent to initial recognition: An entity

should choose the Cost model or FV model as

its accounting policy; and apply the chosen

policy consistently (para 30).


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Initial Cost of Investment Property (IP)

1. Purchased IP: Purchase price + any directlyattributable expenditure

2. Self-constructed IP: cost of raw material, directlabour and factory overheads that can be allocated

to the asset. Borrowing Cost? MFRS123 (either

expense or capitalised as part of the assets cost)


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Cost Model

An entity should measure its IP in accordance withMFRS 116 Property, Plant and Equipment.

Assets should be carried at cost (or revalued amount)

Assets are subjected to depreciation Assets are subjected to impairment test


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Cost Model

Example:On 1 January 20x1, MM Bhd purchased a factory for

investment purposes. The cost of factory was RM 100 millionand is expected to have useful life of 50 years with no salvage

value.1 Jan 20x1

Dr Investment Property 100,000,000

Cr Bank 100,000,000

31 Dec 20x1Dr Depreciation expense 20,000,000

Cr Accumulated depreciation 20,000,000


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FV Model

MFRS 140 (Para 38): The IP is measured at itsFV, reflecting the market conditions at the

balance sheet date.

Para 35: A gain or loss arising from a change inthe FV should be recognised in profit or loss

for the period in which it arises.

Depreciation?

Impairment test?


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FV Model

Example:On 1 January 20x1, MM Bhd purchased a factory for

investment purposes. The cost of factory was RM 100 million

and is expected to have useful life of 50 years with no salvage

value. As at 31 Dec 20x1, the market value of building wasRM105 million, but as at 31 Dec 20x2, it dropped to RM 95

million.

1 Jan 20x1

Dr Investment Property 100,000,000Cr Bank 100,000,000


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FV Model

31 Dec 20x1Dr Investment Property 5,000,000

Cr FV gain on investment property 5,000,000

(to record fv gain for the year)

31 Dec 20x2

Dr FV loss of investment property 10,000,000

Cr Investment property 10,000,000

(to record fv loss for the year)


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Transfer

ASSETS INVESTMENT PROPERTY

MFRS140 (para 57): transfer to or from investmentproperty should be made when and only when there is achange in use, evidenced by:

a) Commencement of owner-occupation, for a transfer from IP to

OOP

b) Commencement of development with a view to sale, for atransfer from IP to inventories

c) Commencement of operating lease to another party, for atransfer from inventories to IP.

If the entity uses the COST MODEL, the transfers do not changethe carrying amount & the cost of that property formeasurement/disclosure purposes (Para 59).


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Transfer

(1) INVESTMENT PROPERTY (FV) PPE OR INVENTORIES

Para 60 : FV of property at the date of transfer is thedeemed cost for subsequent accounting under MFRS116or MFRS102

(2) PPE INVESTMENT PROPERTY (FV)

Para 61 : the difference between the carrying amount ofPPE and its FV at the date of transfer should be accountedfor as a revaluation surplus/deficit in accordance withMFRS116

(3) INVENTORIES INVESTMENT PROPERTY (FV) Para 63: the difference between the carrying amount of

inventories and its FV at the date of transfer should berecognised in the profit or loss.


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Derecognition

Para 66: an IP should be derecognised:

1. On disposal

2. When the property is permanently withdrawn

from use and no future economic benefits are

expected from its disposal.

Para 69 gain/loss arise from its disposalshould be recognised in profit/loss.


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Summarise what youve

learned from this lecture.

5 minutes!

Documents

Lecture 2 - Investment Property.pdf