PHILIPPINE INTERPRETATIONS COMMITTEE (PIC)

QUESTIONS AND ANSWERS (Q&A)

Q&A No. 2018-11

Issue
What is the correct classification of the land owned by real estate developer?

Classification of land by real estate developer

Background
A real estate developer develops residential and commercial units which are sold or leased out to
customers. These projects can be horizontal or vertical projects which are either: (a) units in a
high-rise building which can be for office or residential use; (b) serviced lot; or (c) serviced lot and
house. Projects can be in a single phase or in multiple phases and usually take more than one
year to complete (e.g. 3-5 years).
In the normal course of its business, the real estate developer purchases the following raw land:
 Land A - The entity has plans to construct and develop the parcel of land as a residential
subdivision for sale as approved by the entity’s Board of Directors. The preparation of the
master plan, detailing the plans as residential property, has commenced but the entity
intends to start the physical construction activities (e.g. excavation) two years from the
government approval of the master plan.
 Land B –The entity has plans to construct and develop the parcel of land as a residential
subdivision for sale as approved by the entity’s Board of Directors. The preparation of the
master plan, detailing the plans, has not commenced.
 Land C - The entity intends to develop the land into a commercial center for lease but
preparation of master plan has not commenced and the entity does not intend to
commence the physical construction activities within the year.
 Land D -The entity purchased the parcel of land to establish presence in the location but
does not have any concrete plans on how to develop the property.
Conclusion
a. Land A – Classified as inventory presented as current assets
b. Land B – Classified as inventory presented as current assets
c. Land C – Classified as investment property presented as non-current asset
d. Land D – Classified as investment property presented as non-current asset
Discussion
In accordance with paragraph 6 of PAS 2:

Inventories are assets:

a. held for sale in the ordinary course of business;

In accordance with paragraph 5 of PAS 40:

Investment property is property (land or a building—or part of a building—or both) held (by the owner
or by the lessee as a right-of-use asset) to earn rentals or for capital appreciation or both, rather than
for:

(a) use in the production or supply of goods or services or for administrative purposes; or
(b) sale in the ordinary course of business.

Paragraph 8 of PAS 40 further provides the following examples of investment property:

(a) land held for long-term capital appreciation rather than for short-term sale in the ordinary
course of business.
(b) land held for a currently undetermined future use. (If an entity has not determined that it will
use the land as owner-occupied property or for short-term sale in the ordinary course of
business, the land is regarded as held for capital appreciation.)
(c) a building owned by the entity (or held by the entity under a finance lease) and leased out
under one or more operating leases.
(d) a building that is vacant but is held to be leased out under one or more operating leases.
(e) property that is being constructed or developed for future use as investment property.

In accordance with paragraph 66 of PAS 1, an entity shall classify an asset as current when:
a. it expects to realize the asset, or intends to sell or consume it, in its normal operating cycle;
b. it holds the asset primarily for the purpose of trading;
c. it expects to realize the asset within twelve months after the reporting period; or
d. the asset is cash or a cash equivalent (as defined in PAS 7) unless the asset is restricted from
being exchanged or used to settle a liability for at least twelve months after the reporting period.
 An entity shall classify all other assets as non-current.
In addition, paragraph 68 of PAS 1 defines the operating cycle of an entity as the time between the
acquisition of assets for processing and their realization in cash or cash equivalents. When the
entity's normal operating cycle is not clearly identifiable, it is assumed to be twelve months. Current
assets include assets (such as inventories and trade receivables) that are sold, consumed or
realized as part of the normal operating cycle even when they are not expected to be realized within
twelve months after the reporting period. Current assets also include assets held primarily for the
purpose of trading (examples include some financial assets that meet the definition of held for
trading in PFRS 9) and the current portion of non-current financial assets.
Analysis of the classification of the parcel of lots purchased by the entity are as follows:
a. Land A meets the requirements for an asset to be classified as inventory and current asset. See
analysis below:
Current or Non-current Inventory or Investment Property
(a) it expects to realize Met. Land A was purchased Inventory, since it meets the criteria
the asset, or intends by the entity for the purpose of PAS 2, paragraph 6 (a), which is
to sell or consume it, of converting it into a land held for sale in the ordinary
in its normal operating residential subdivision for course of business as evidenced by
cycle; sale. As defined above, the BOD approval and preparation of
operating cycle of an entity master plan.
is the time between the
acquisition of assets for
processing and their
realization to cash or cash
equivalents. Given the
nature of business of real
estate development,
wherein projects usually
take more than one year to
construct/develop and
requires certain period for
selling and conversion to
cash, the normal operating
cycle is more than one year
form the time of purchase.
Given this, the raw land will
be classified as current
asset.
(b) it holds the asset Met. Real estate inventories
primarily for the are held by the entity for
purpose of trading; sale to customers.
(c) it expects to realize Not applicable. See
the asset within discussion in (a)
twelve months after
the reporting period;
or
 (d) the asset is cash or a Not applicable. The asset is
cash equivalent (as not cash or cash equivalent.
defined in PAS 7)
unless the asset is
restricted from being
exchanged or used to
settle a liability for at
least twelve months
after the reporting
period.

b. Land B meets the requirements for an asset to be classified as inventory and current asset. Even
though the preparation of the masterplan has not commenced, the intention of the entity to hold
the land for development for sale in the ordinary course of business is evident, given that the plan
was approved by its Board of Directors. It is classified as current because it meets the criteria of
PAS 1, Paragraph 66 (a) and (b) given the same rationale for Lot A.

c. Land C meets the requirements for an asset to be classified as investment property and non-
current asset. See analysis below:
Current or Non-current Inventory or Investment Property
i. it expects to realize Not Met. The parcel of lot is Investment property, since it meets
the asset, or intends not expected to be realized, the criteria of PAS 40 where the lot is
to sell or consume it, sold or consumed within the held to earn rentals and is not used
in its normal operating entity’s normal operating in the production or supply of goods
cycle; cycle. or services or for administrative
purposes; or for sale in the ordinary
ii. it holds the asset Not Met. Investment course of business.
primarily for the properties are not held for
purpose of trading; sale to third party.
iii. it expects to realize Not Met. See discussion in
the asset within (i)
twelve months after
the reporting period;
or
iv. the asset is cash or a Not applicable. The asset is
cash equivalent (as not cash or cash equivalent.
defined in PAS 7)
unless the asset is
restricted from being
exchanged or used to
settle a liability for at
least twelve months
after the reporting
period.
d. Land D meets the requirements for an asset to be classified as investment property and
classified as non-current asset. The same analysis as Land C above for the classification as
current or non-current. Land D is an investment property, since it meets the criteria of PAS 40
where it is held for capital appreciation and is not used in the production or supply of goods or
services or for administrative purposes; or for sale in the ordinary course of business. In
addition, PAS 40.8(b) cites that land held for a currently undetermined future use is an example
of an investment property.

Transition and Effective Date

The consensus in this Q&A is effective from the date of approval of the FRSC.

Date approved by PIC: January 31, 2018

PIC Members

Wilson P. Tan, Chairman

Emmanuel Y. Artiza Ma. Gracia F. Casals-Diaz

Chase M. Sarmiento Zaldy D. Aguirre

Wilfredo A. Baltazar Ferdinand George A. Florendo

Gloria T. Baysa Jose Emmanuel U. Hilado

Rosario S. Bernaldo Lyn I. Javier

Ma. Isabel E. Comedia Arnel Onesimo O. Uy

Jerome Antonio B. Constantino Lovely M. Del Amen

Date approved by FRSC: March 14, 2018