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Investment Property
Agend
a
1. Applicable Standard and Scope
2. Property Classified as Investment Property
3. Recognition
4. Measurement at Recognition
5. Measurement after Recognition
6. Transfers
7. Derecognition
8. Disclosure
2. Classified as Investment
Property
Investment property is defined as:
property (land or a buildingor part of a buildingor both) held (by
the owner or by the lessee under a finance lease) to earn rentals or
for capital appreciation or both, rather than for:
1. use in the production or supply of goods or services or for
administrative purposes; or
2. sale in the ordinary course of business.
2. Classified as Investment
Property
In order to classify a property as investment
property, an entity has to ensure that the property
can fulfil both:
1. The mode of usage (either to earn rental and/or for
capital appreciation), and
2. The mode of ownership (either owned or held under a
finance lease).
Mode
Modeof
ofUsage
Usage
Mode
Modeof
ofOwnership
Ownership
2. Classified as Investment
Property
IAS 40 has contrasted an investment property with
an owner-occupied property.
An owner-occupied property is not an investment
property, but should be a property under IAS 16,
Property, Plant and Equipment (see Chapter 3).
Owner-occupied property is defined as:
Mode
Modeof
ofUsage
Usage
2. Classified as Investment
Property
Comparing with
the definition of investment property that has the term
to earn rental,
the definition of property, plant and equipment also
has a similar term held for rental to others.
Mode
Modeof
ofUsage
Usage
Cash Flow
2008 Nelson Lam and Peter Lau
Extent of Ancillary
Services
Intermediate Financial Reporting: An IFRS Perspective (Chapter 5) - 8
2. Classified as Investment
Property
1. The generation of cash flows
Mode
Modeof
ofUsage
Usage
Investment
Investment
Property
Property
Owner-occupied
Owner-occupied
property
property
Cash Flow
2008 Nelson Lam and Peter Lau
2. Classified as Investment
Property
2. Extent of Ancillary Services
Mode
Modeof
ofUsage
Usage
Investment
Investment
Property
Property
No significant ancillary
services provided
Passive investor
Investment property
Use IAS 40
Cash Flow
2008 Nelson Lam and Peter Lau
How to determine
those in between
these 2 ends?
Judgement used and
applied consistently
Owner-occupied
Owner-occupied
property
property
Significant ancillary
services provided
Significant exposure to
variation in the cash
flows
Owner-occupied
Use IAS 16
Extent of Ancillary
Services
Intermediate Financial Reporting: An IFRS Perspective (Chapter 5) - 10
2. Classified as Investment
Property
To meet the definition of investment property, a
property must be
owned by an entity or
held by an entity under a finance lease
Mode
Modeof
ofOwnership
Ownership
2. Classified as Investment
Property
IAS 40 amended in December 2003 to allow that a
property interest that is held by a lessee under an
operating lease may be classified and accounted for
as investment property if, and only if:
Mode
Modeof
ofOwnership
Ownership
Could
Could not
not be
be
sold
sold separately
separately
3. Recognition
Recognition criteria
Initial
Initial Cost
Cost
Subsequent
Subsequent
Expenditure
Expenditure
3. Recognition
Recognition criteria
(capitalisation) for
Old IAS 16
Subsequent
Subsequent
Expenditure
Expenditure
Initial
Initial Cost
Cost
Probable
Probable that
that future
future
economic
economic benefits
benefits in
in
the
excess
the asset
asset will
will flow
flow to
to
excess of
of the
the originally
originally
the
assessed
the enterprise
enterprise
assessed standard
standard of
of
performance
Cost
performance of
of the
the
Cost measured
measured reliably
reliably
existing
existing asset
asset will
will flow
flow
to
to the
the entity
entity
Same
criteria
Probable
Probable that
that future
future economic
economic benefit
benefit of
of the
the asset
asset
will
will flow
flow to
to the
the entity
entity
Cost
Cost measured
measured reliably
reliably
Same
Samecriteria
criteriaapplied
appliedto
toboth
bothcosts
costs
Clearer
Clearerapproach
approachon
onso-called
so-called
Component
ComponentAccounting
Accounting
4. Measurement at
Recognition
An entity is required to initially recognise and measure
an investment property at its cost, including transaction
costs.
This requirement together with the definition of the cost
is similar to that of property, plant and equipment (see
Chapter 3).
The initial cost of a property interest held under a lease
and classified as an investment property
shall be as prescribed for a finance lease in IAS 17
i.e. the asset shall be recognised at the lower of
the fair value of the property and
the present value of the minimum lease payments.
5. Measurement after
Recognition
Introduce Cost Model and choose either
and
Fair
Fair Value
Value Model
Model
Cost
Cost Model
Model
IAS 40 implicitly implies that the choice can only be elected on the
first-time adoption of IAS 40
The model chosen should be applied to all investment properties,
except for
No choice,
only fair value model
Choose a model for
all such properties
No choice,
only cost model
5. Measurement after
Recognition
5. Measurement after
Recognition
Fair value model (e.g. IAS 40)
Example
Example
Refers
Refers to
to fair
fair value
value
Refers
Refers to
to fair
fair value
value
Change
Change in
in fair
fair value
value recognised
recognised in
in
profit
profit or
or loss
loss for
for the
the period
period in
in which
which
itit arises
arises
Change
Change in
in fair
fair value
value recognised
recognised
directly
directly in
in equity
equity (or
(or other
other
comprehensive
comprehensive income)
income)
No
No depreciation
depreciation or
or amortisation
amortisation is
is
required
required
Depreciation
Depreciation or
or amortisation
amortisation is
is
required
required
Reflect
Reflect market
market conditions
conditions at
at the
the end
end
of
of reporting
reporting period
period (i.e.
(i.e. revalued
revalued at
at
each
each balance
balance sheet
sheet date)
date)
Not
Not clearly
clearly defined,
defined, only
only require
require
sufficient
sufficient regular
regular that
that no
no material
material
different
different from
from fair
fair value
value
N/A
N/A
Deficit
Deficit about
about fair
fair value
value below
below
depreciated
depreciated or
or amortised
amortised cost
cost is
is
recognised
recognised in
in profit
profit or
or loss
loss
6.
Transfers
Introduce transfer section
Transfers to, or from, investment property shall be made when, and only
when, there is a change in use, evidenced by:
Change in use
a) Commencement of owneroccupation
b) Commencement of development
with a view to sale
Change in use
b) Commencement of an operating
lease to another party
c) End of construction or development
Inventories
Inventories
Investment
Investment
Property
Property
a) End of owner-occupation
Measurement
Measurementat
attransfer?
transfer?
Owner-Occupied
Owner-Occupied
Property
Property
Owner-Occupied
Owner-Occupied
Property
Property
Inventories
Inventories
Investment
Investment
Property
Property
End
End of
of
construction
construction
Depend on the model the entity is using
Intermediate Financial Reporting: An IFRS Perspective (Chapter 5) - 29
5. Transfer
Cost
Cost Model
Model
When an entity uses
transfers DO NOT change the carrying amount of the property
transferred and
they DO NOT change the cost of that property for measurement or
disclosure purposes.
Measurement
Measurementat
attransfer?
transfer?
2008 Nelson Lam and Peter Lau
5. Transfer
For a transfer from investment property (i.e. the following cases) carried
at fair value
Fair
Fair Value
Value Model
Model
Change in use
a) Commencement of owneroccupation
b) Commencement of development
with a view to sale
Owner-Occupied
Owner-Occupied
Property
Property
Inventories
Inventories
Investment
Investment
Property
Property
6. Transfers
For a transfer to investment property (i.e. the following cases) and that
investment property will be carried at fair value
Fair
Fair Value
Value Model
Model
Change in use
a) End of owner-occupation
b) Commencement of an operating
lease to another party
c) End of construction or
development
Owner-Occupied
Owner-Occupied
Property
Property
Inventories
Inventories
Investment
Investment
Property
Property
End
End of
of
construction
construction
Measurement
Measurementat
attransfer?
transfer?
2008 Nelson Lam and Peter Lau
6. Transfers
For a transfer to investment property (i.e. the following cases) and that
investment property will be carried at fair value
Fair
Fair Value
Value Model
Model
Owner-Occupied
Owner-Occupied
Property
Property
Investment
Investment
Property
Property
Measurement
Measurementat
attransfer?
transfer?
2008 Nelson Lam and Peter Lau
Investment
Investment
Property
Property
6. Transfers
Example
Example
GV has adopted IAS 40 and stated its investment
properties at fair value even the properties are held
under operating leases.
On 1 Mar. 2008, freehold property B stated at
revalued amount of $1 million (originally used as its
own office) has been leased out to derive rental
income.
Revaluation surplus recognised for B was $300,000
while Bs fair value at that date should be
$1,200,000.
What is the accounting implication on the decision?
6. Transfers
Example
Example
Property
PropertyBBwould
wouldbe
bereclassified
reclassifiedas
asinvestment
investmentproperty.
property.
In
Inaccordance
accordancewith
withIAS
IAS40,
40,GV
GVshould
shouldapply
applyIAS
IAS16
16on
onBBup
upto
tothe
thedate
date
of
ofchange
changeininuse
useand
andtreat
treatany
anydifference
differenceat
atthat
thatdate
datebetween
betweenits
its
carrying
carryingamount
amountunder
underIAS
IAS16,
16,and
andits
itsfair
fairvalue
valueininthe
thesame
sameway
wayas
asaa
revaluation
revaluationunder
underIAS
IAS16.
16.
Thus,
Thus,aarevaluation
revaluationsurplus
surplusofof$200,000
$200,000would
wouldbe
befurther
furtherrecognised.
recognised.
Total
Totalrevaluation
revaluationreserves
reserveswould
wouldbecome
become$500,000
$500,000($200,000
($200,000++$300,000)
$300,000)
The
Therevaluation
revaluationreserves
reservesof
of$500,000
$500,000would
wouldbe
befrozen
frozenand
andaccounted
accountedfor
for
ininaccordance
accordancewith
withIAS
IAS16
16subsequently.
subsequently.
Dr
Dr
Cr
Cr
Property,
Property,plant
plantand
andequipment
equipment
Revaluation
Revaluationreserves
reserves
$200,000
$200,000
$200,000
$200,000
To
Torecognise
recognisethe
theadditional
additionalrevaluation
revaluationsurplus.
surplus.
Dr
$1,200,000
Dr Investment
Investmentproperty
property
$1,200,000
Cr
$1,200,000
Cr Property,
Property,plant
plantand
andequipment
equipment
$1,200,000
To
Toreclassify
reclassifythe
theproperty
propertyfrom
fromPPE
PPEtotoinvestment
investmentproperty.
property.
2008 Nelson Lam and Peter Lau
8. Disclosure
a) Disclosure for both Fair Value Model and Cost Model
whether the fair value model or the cost model is adopted
if fair value model is applied, whether property interests held under
operating leases are accounted for as investment property
if classification is difficult, the criteria to distinguish investment property
from owner-occupied property and from property held for sale in the
ordinary course of business
the methods and significant assumptions applied in determining the fair
value of investment property
whether (and the extent to which) the fair value of investment property is
based on a valuation by a qualified independent valuer
the amounts recognised in profit or loss, say for rental income from
investment property, and direct operating expenses (including repairs and
maintenance) arising from investment property
the existence and amount of restrictions on the realisability of investment
property or the remittance of income and proceeds of disposal
contractual obligations to purchase, construct, or develop investment
property or for repairs, maintenance or enhancements
2008 Nelson Lam and Peter Lau
8. Disclosure
b) Additional Disclosure for Fair Value Model
A reconciliation between the carrying amounts of investment property at
the beginning and end of the period similar to that of property, plant and
equipment
When a valuation obtained for investment property is adjusted
significantly for the purpose of the financial statements, the entity shall
disclose a reconciliation between the valuation obtained and the adjusted
valuation included in the financial statements
In the exceptional cases when there is inability to determine fair value
reliably and cost model is applied to a particular investment property,
additional disclosures are required
8. Disclosure
c) Additional Disclosure for Cost Model
the depreciation methods used;
the useful lives or the depreciation rates used;
the gross carrying amount and the accumulated depreciation (aggregated
with accumulated impairment losses) at the beginning and end of the period;
a reconciliation of the carrying amount of investment property at the
beginning and end of the period, similar to that of property, plant and
equipment
the fair value of investment property
In the exceptional cases when there is inability to determine fair value
reliably, additional disclosures are required
Chapter
5
Investment Property