CABRIA CPA REVIEW CENTER
INVESTMENT PROPERTY Tel. Nos. (043) 980-6659
ERNIE M. LAT II
LECTURE
Definition of investment property Partial own use. If the owner uses part of the property
Investment property is property (land or a building or part for its own use, and part to earn rentals or for capital
of a building or both) held (by the owner or by the lessee appreciation, and the portions can be sold or leased out
under a finance lease) to earn rentals or for capital separately, they are accounted for separately. Therefore the
appreciation or both. part that is rented out is investment property. If the portions
cannot be sold or leased out separately, the property is
Examples of investment property: investment property only if the owner-occupied portion is
insignificant.
land held for long-term capital appreciation
land held for a currently undetermined future use Ancillary services. If the entity provides ancillary services
building leased out under an operating lease to the occupants of a property held by the entity, the
vacant building held to be leased out under an appropriateness of classification as investment property is
operating lease determined by the significance of the services provided. If
property that is being constructed or developed for those services are a relatively insignificant component of the
future use as investment property arrangement as a whole (for instance, the building owner
supplies security and maintenance services to the lessees),
The following are not investment property and, therefore, then the entity may treat the property as investment
are outside the scope of IAS 40 property. Where the services provided are more significant
property held for use in the production or supply of (such as in the case of an owner-managed hotel), the
goods or services or for administrative purposes property should be classified as owner-occupied.
property held for sale in the ordinary course of
business or in the process of construction of Intracompany rentals. Property rented to a parent,
development for such sale subsidiary, or fellow subsidiary is not investment property in
property being constructed or developed on behalf consolidated financial statements that include both the
of third parties (IAS 11 Construction Contracts) lessor and the lessee, because the property is owner-
owner-occupied property (IAS 16 Property, Plant occupied from the perspective of the group. However, such
and Equipment), including property held for future property could qualify as investment property in the
use as owner-occupied property, property held for separate financial statements of the lessor, if the definition
future development and subsequent use as owner- of investment property is otherwise met.
occupied property, property occupied by employees
and owner-occupied property awaiting disposal Recognition
property leased to another entity under a finance
lease Investment property should be recognized as an asset when
it is probable that the future economic benefits that are
Other classification issues associated with the property will flow to the entity, and the
Property held under an operating lease. A property interest cost of the property can be reliably measured. [IAS 40.16]
that is held by a lessee under an operating lease may be Initial measurement
classified and accounted for as investment property
provided that: Investment property is initially measured at cost, including
the rest of the definition of investment property is transaction costs. Such cost should not include start-up
met costs, abnormal waste, or initial operating losses incurred
the operating lease is accounted for as if it were a before the investment property achieves the planned level
finance lease in accordance with IAS 17 Leases of occupancy. [IAS 40.20 and 40.23]
the lessee uses the fair value model set out in this
Standard for the asset recognized Measurement subsequent to initial recognition
An entity may make the foregoing classification on a IAS 40 permits entities to choose between:
property-by-property basis. a fair value model, and
a cost model.
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One method must be adopted for all of an entity's depreciation and less accumulated impairment losses. [IAS
investment property. Change is permitted only if this results 40.56]
in a more appropriate presentation. IAS 40 notes that this
is highly unlikely for a change from a fair value model to a Transfers to or from investment property
cost model. classification
Transfers to, or from, investment property should only be
Fair value model made when there is a change in use, evidenced by one or
more of the following: [IAS 40.57 (note that this list was
Investment property is remeasured at fair value, which is changed from an exhaustive list to an non-exhaustive list of
the price that would be received to sell an asset or paid to examples by Transfers of Investment Property in December
transfer a liability in an orderly transaction between market 2016 effective 1 January 2018) ]
participants at the measurement date. [IAS 40.5] Gains or
losses arising from changes in the fair value of investment commencement of owner-occupation (transfer from
property must be included in net profit or loss for the period investment property to owner-occupied property)
in which it arises. [IAS 40.35] commencement of development with a view to sale
(transfer from investment property to inventories)
Fair value should reflect the actual market state and end of owner-occupation (transfer from owner-
circumstances as of the balance sheet date. [IAS 40.38] The occupied property to investment property)
best evidence of fair value is normally given by current commencement of an operating lease to another
prices on an active market for similar property in the same party (transfer from inventories to investment
location and condition and subject to similar lease and other property)
contracts. [IAS 40.45] In the absence of such information, end of construction or development (transfer from
the entity may consider current prices for properties of a property in the course of construction/development
different nature or subject to different conditions, recent to investment property
prices on less active markets with adjustments to reflect
changes in economic conditions, and discounted cash flow When an entity decides to sell an investment property
projections based on reliable estimates of future cash flows. without development, the property is not reclassified as
[IAS 40.46] inventory but is dealt with as investment property until it is
derecognized. [IAS 40.58]
There is a rebuttable presumption that the entity will be able The following rules apply for accounting for transfers
to determine the fair value of an investment property between categories:
reliably on a continuing basis. However: for a transfer from investment property carried at
If an entity determines that the fair value of an fair value to owner-occupied property or
investment property under construction is not inventories, the fair value at the change of use is
reliably determinable but expects the fair value of the 'cost' of the property under its new classification
the property to be reliably determinable when [IAS 40.60]
construction is complete, it measures that for a transfer from owner-occupied property to
investment property under construction at cost until investment property carried at fair value, IAS 16
either its fair value becomes reliably determinable should be applied up to the date of reclassification.
or construction is completed. Any difference arising between the carrying amount
If an entity determines that the fair value of an under IAS 16 at that date and the fair value is dealt
investment property (other than an investment with as a revaluation under IAS 16 [IAS 40.61]
property under construction) is not reliably for a transfer from inventories to investment
determinable on a continuing basis, the entity shall property at fair value, any difference between the
measure that investment property using the cost fair value at the date of transfer and it previous
model in IAS 16. The residual value of the carrying amount should be recognized in profit or
investment property shall be assumed to be zero. loss [IAS 40.63]
The entity shall apply IAS 16 until disposal of the when an entity completes
investment property. construction/development of an investment
property that will be carried at fair value, any
Where a property has previously been measured at fair difference between the fair value at the date of
value, it should continue to be measured at fair value until transfer and the previous carrying amount should
disposal, even if comparable market transactions become be recognized in profit or loss. [IAS 40.65]
less frequent or market prices become less readily available.
When an entity uses the cost model for investment
Cost model property, transfers between categories do not change the
carrying amount of the property transferred, and they do
After initial recognition, investment property is accounted not change the cost of the property for measurement or
for in accordance with the cost model as set out in IAS 16 disclosure purposes.
Property, Plant and Equipment – cost less accumulated
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Disposal cost model, certain additional disclosures are
required [IAS 40.78]
An investment property should be derecognized on disposal
or when the investment property is permanently withdrawn Additional Disclosures for the Cost Model [IAS
from use and no future economic benefits are expected 40.79]
from its disposal. The gain or loss on disposal should be the depreciation methods used
calculated as the difference between the net disposal the useful lives or the depreciation rates used
proceeds and the carrying amount of the asset and should the gross carrying amount and the accumulated
be recognized as income or expense in the income depreciation (aggregated with accumulated
statement. [IAS 40.66 and 40.69] Compensation from third impairment losses) at the beginning and end of the
parties is recognized when it becomes receivable. [IAS period
40.72] a reconciliation of the carrying amount of
investment property at the beginning and end of
Disclosure the period, showing additions, disposals,
Both Fair Value Model and Cost Model [IAS 40.75 depreciation, impairment recognised or reversed,
whether the fair value or the cost model is used foreign exchange differences, transfers to and from
if the fair value model is used, whether property inventories and owner-occupied property, and
interests held under operating leases are classified other changes
and accounted for as investment property the fair value of investment property. If the fair
if classification is difficult, the criteria to distinguish value of an item of investment property cannot be
investment property from owner-occupied property measured reliably, additional disclosures are
and from property held for sale required, including, if possible, the range of
the extent to which the fair value of investment estimates within which fair value is highly likely to
property is based on a valuation by a qualified lie
independent valuer; if there has been no such
valuation, that fact must be disclosed REVIEW QUESTIONS
the amounts recognised in profit or loss for:
o rental income from investment property 1. An investment property should initially be measured
o direct operating expenses (including at ___
repairs and maintenance) arising from a. Market value
investment property that generated rental b. Fair value
income during the period c. Net realizable value
o direct operating expenses (including d. Cost
repairs and maintenance) arising from
investment property that did not generate 2. Mega Corp owns a field near an industrial estate.
rental income during the period The company has not decided what to do with this
o the cumulative change in fair value land. Is it an investment property under IAS 40?
recognised in profit or loss on a sale from a a. Yes
pool of assets in which the cost model is b. No
used into a pool in which the fair value
model is used 3. Which of the following is not an example of
restrictions on the realisability of investment investment property?
property or the remittance of income and proceeds a. Land held for undetermined future use
of disposal b. Property leased to another entity under a
contractual obligations to purchase, construct, or finance lease
develop investment property or for repairs, c. Property leased to another entity under an
maintenance or enhancements operating lease
d. Property being constructed for future use as an
Additional Disclosures for the Fair Value Model [IAS investment property
40.76]
a reconciliation between the carrying amounts of 4. A parent leases an office building to a subsidiary. In
investment property at the beginning and end of which financial statements will the property appear
the period, showing additions, disposals, fair value as investment property?
adjustments, net foreign exchange differences, a. Parent company
transfers to and from inventories and owner- b. Subsidiary
occupied property, and other changes [IAS 40.76] c. Consolidated financial statements
significant adjustments to an outside valuation (if d. None of these
any) [IAS 40.77]
if an entity that otherwise uses the fair value model
measures an item of investment property using the
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5. Property being constructed on behalf of third
parties is an investment property under IAS 40 – 12. If property held under an operating lease is
Investment Property until the contract is complete. classified as investment property:
a. True a. All property held under operating leases are
b. False classified as investment properties
b. Depreciation will no longer be charged
6. Under IAS 40 – Investment Property, where should c. All investment properties will be accounted for
a gain or loss on disposal be recognised? using the fair value model
a. Income Statement d. None of these
b. Statement of Changes in Equity
c. Statement of Financial Position 13. Which of the following are examples of investment
d. None of these properties:
I. Land held for long-term capital appreciation
7. If an entity wishes to change from a cost model to II. Land held for an undetermined future use
fair value model under IAS 40 – Investment but not currently in use
Property, when may it do so? III. A building owned by the undertaking (or
a. When the board of directors approves a change held by the undertaking under a finance
b. When a change will result in a more appropriate lease) and leased out, via one, or more,
presentation operating leases.
c. When the value of the assets will improve with IV. A building that is vacant, but is held to be
a revised model leased out via one, or more, operating
d. When the market for these properties is leases
fluctuation V. Property held for sale in the ordinary course
of business
8. If an entity uses part of a building for their own use, VI. Property being built on behalf of third
and rents the remainder. How should this be parties
treated? VII. Owner-occupied property
a. All as investment property under IAS 40 – VIII. Property that is being built for use as
Investment Property investment property
b. Account for separately under ‘IAS - 16 Property, IX. Existing investment property that is being
Plant and Equipment’ and ‘IAS - 40 Investment redeveloped for continued use as
Property’ investment property
c. All under IAS 16 – Property, Plant and X. Property that is leased to another
Equipment undertaking, under a finance lease
d. None of these
a. I-IV only
9. Which of the following is not a transfer from or to b. I-VII and X only
investment property under IAS 40? c. I-IV and VIII-IX only
a. Commencement of owner occupation d. I – X all
b. Transfer from undetermined use to an
operating lease 14. If a property is partly an investment property, and
c. Commencement of development with a view to partly owner-occupied, the firm should account for
sale the property:
d. End of construction of development a. As owner-occupied property
b. Each portion should be accounted for
10. If an entity uses the cost model for investment separately
property, it must also disclose the fair value of the c. As investment property
investment property. d. None of these
a. True
b. False 15. If a firm provides significant ancillary services to
tenants in its property:
11. Investment property can be held by: a. It may have to be classified as investment
a. The owner property, rather than as owner occupied
b. A lessor, under a finance lease b. It may have to be classified as owner occupied,
c. A lessee, under a finance lease rather than as investment property
c. The service fees should be capitalized
a. A only d. None of these
b. A and B
c. A and C 16. If payment for an investment property is deferred
d. A, B and C beyond normal credit terms, any additional
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payment above the cash cost of the asset will be c. P4,000,000
accounted for as: d. P5,000,000
a. R & M
b. Cost of fixed asset 20. The Emem Company acquired a building January 1,
c. Borrowing cost 2016 for P18,000,000. At that date, the building
d. None of the above has a useful life of 40 years. The fair value of the
building was P20,000,000 at December 31, 2016.
17. An undertaking can choose either the cost model or The building was appropriately classified as
the revaluation model, as its accounting policy for investment property and accounted for using the
investment property. It must apply the chosen cost model.
model to:
a. All investment property What amounts shall the be presented on the
b. All fixed assets statement of financial position at December 31,
c. Major assets 2016 and recognized in profit or loss for the year
d. All of the above then ended respectively?
a. P20,000,000 and P0
18. Mega Company and its subsidiaries have provided b. P18,000,000 and P0
you with a list of property items then own: c. P20,000,000 and gain of P2,000,000
i. Land held by Mega for undetermined use d. P17,550,000 and expense of P450,000
future use – P10 million
ii. A vacant building owned by Mega and to be
leased out under an operating lease – P20 21. The Beyonce Company acquired a building on
million January 1, 2016 for P18,000,000. At that date, the
iii. Property held by a subsidiary of Mega, a building had a useful life of 40 years. The fair value
real estate firm in the ordinary course of of the building was P20,000,000 at December 31,
business - P50 million 2016. The building was appropriately classified as
iv. Property held by Mega for use in production investment property and accounted for using the
– P12 million fair value model.
v. A hotel owned by Mega’s subsidiary; the
subsidiary also provides security services to What amounts shall be presented in the statement
its guests – P60 million of financial position at December 31, 2016 and
vi. A building owned by Mega being lease out recognized in profit or loss for the year then ended
to Vega, one of Mega’s subsidiaries under respectively?
operating leases – P25 million a. P20,000,000 and P0
What amount shall be shown as investment b. P18,000,000 and P0
property in the consolidated statement of financial c. P20,000,000 and gain of P2,000,000
position of Mega and its subsidiaries? d. P17,550,000 and expense of P450,000
a. P20 million
b. P30 million
c. P85 million
d. P90 million -End-
19. Sachi Company had a property with a carrying
amount of P15,000,000 held for sale in the ordinary
course of business. On August 1, 2016, Sachi
commence an operating lease with Sanjo Company;
hence, the property was reclassified from inventory
to investment property.
The fair value of this property on August 1, 2016
was P20,000,000 with cost to sell estimated at
P1,000,000.
If the investment property will be carried at fair
value, what is the amount revaluation to be
recognized in profit or loss in Sachi’s 2016
statement of comprehensive income as a result of
this reclassification?
a. P0
b. P1,000,000
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