INVESTMENT PROPERTY

IAS 40 Investment Property (land and building) applies to the accounting for property (land and/or
buildings) held to earn rentals or for capital appreciation (or both).

Examples of investment property: [IAS 40.8]

• land held for long-term capital appreciation

• land held for a currently undetermined future use
• building leased out under an operating lease
• vacant building held to be leased out under an operating lease
• property that is being constructed or developed for future use as investment property

The following are not investment property and, therefore, are outside the scope of IAS 40: [IAS 40.5 and
40.9]

• property held for use in the production or supply of goods or services or for administrative
purposes property held for sale in the ordinary course of business or in the process of
construction of development for such sale (IAS 2 Inventories)
• property being constructed or developed on behalf of third parties (IAS 11 Construction
Contracts) owner-occupied property (IAS 16 Property, Plant and Equipment), including property
held for future use as owner-occupied property
• property held for future development and subsequent use as owner-occupied property
• property occupied by employees
• owner-occupied property awaiting disposal property leased to another entity under a finance
lease

Other classification issues

Property held under an operating lease. A property interest that is held by a lessee under an operating
lease may be classified and accounted for as investment property provided that: [IAS 40.6] the rest of
the definition of investment property is met the operating lease is accounted for as if it were a finance
lease in accordance with IAS 17 Leases the lessee uses the fair value model set out in this Standard for
the asset recognized

An entity may make the foregoing classification on a property-by-property basis.

Partial own use. If the owner uses part of the property for its own use, and part to earn rentals or for
capital appreciation, and the portions can be sold or leased out separately, they are accounted for
separately. Therefore, the part that is rented out is investment property. If the portions cannot be sold or
leased out separately, the property is investment property only if the owner-occupied portion is
insignificant. [IAS 40.10]

Ancillary services. If the entity provides ancillary services to the occupants of a property held by the
entity, the appropriateness of classification as investment property is determined by the significance of
the services provided. If those services are a relatively insignificant component of the arrangement as a
whole (for instance, the building owner supplies security and maintenance services to the lessees), then
the entity may treat the property as investment property. Where the services provided are more
significant (such as in the case of an owner-managed hotel), the property should be classified as owner-
occupied. [IAS 40.13]

Intracompany rentals. Property rented to a parent, subsidiary, or fellow subsidiary is not investment
property in consolidated financial statements that include both the lessor and the lessee, because the
property is owner-occupied from the perspective of the group. However, such property could qualify as
investment property in the separate financial statements of the lessor, if the definition of investment
property is otherwise met. [IAS 40.15]

Initial Recognition: Investment property is recognized as an asset when it is probable that future
economic benefits will flow to the entity and the cost can be reliably measured.

Measurement: Initially measured at cost, including purchase price, transaction costs, and any directly
attributable expenditure (e.g., legal fees, property transfer taxes).

Subsequent Measurement

Fair Value Model:

Measurement: Property is remeasured at fair value at each reporting date. Changes in fair value are
recognized in the profit or loss.

No Depreciation: Under this model, the investment property is not depreciated.

Cost Model:

Measurement: Property is carried at cost less accumulated depreciation and any accumulated
impairment losses.

Depreciation: Depreciation is charged over the property's useful life. Impairment losses are recognized if
the carrying amount exceeds recoverable amount.

Transfers

Transfers to/from Investment Property: Transfers occur when there is a change in the use of the property
(e.g., from owner-occupied property to investment property). Transfers are recorded at fair value.

Disclosure

Fair Value: If fair value model is used, disclose the fair value of the property.

Cost Model: If cost model is used, disclose the cost, depreciation method, useful life, and carrying
amount.
FUNDS AND OTHER INVESTMENTS

Fund investments refer to investments in entities or vehicles that pool together resources from multiple
investors to achieve a common investment objective. These can include mutual funds, hedge funds, and
other collective investment schemes.

Key Points:

Mutual Funds: Investment funds that pool money from multiple investors to invest in a diversified
portfolio of assets.

Hedge Funds: Investment funds that employ various strategies to achieve high returns, often including
leverage and short-selling.

Pension Funds: Funds that invest contributions from employers and employees to provide retirement
benefits.

Other investments encompass various types of assets not classified under traditional categories such as
cash, receivables, or inventory. These may include investments in stocks, bonds, real estate, and other
financial instruments.

Key Points:

Equity Investments: Investments in shares of stock of other companies.

Debt Investments: Investments in bonds or other debt securities.

Real Estate Investments: Investments in property or real estate-related securities.

Initial Measurement

Initial measurement refers to the recording of investments at their cost when first acquired.

Cost Basis: Investments are recorded at their purchase price, which includes the cost of acquiring the
investment plus any transaction costs.

Fair Value Considerations: If the investment is acquired through a transaction involving related parties or
under unusual conditions, fair value measurement might be used.

Subsequent Measurement

Subsequent measurement involves valuing the investment after initial recognition, based on its current
value or fair value.

▪ Fair Value: Investments are often measured at fair value in subsequent periods. Fair value is
determined based on market prices or valuation techniques.
▪ Amortized Cost: For certain debt investments, subsequent measurement may be based on
amortized cost, which is the initial cost adjusted for principal repayments and amortization of
any premium or discount.
Measurement Methods:

o Fair Value Through Profit or Loss (FVTPL): Investments are measured at fair value with changes in
fair value recognized in profit or loss.
o Fair Value Through Other Comprehensive Income (FVOCI): Investments are measured at fair
value with changes recognized in other comprehensive income.
o Amortized Cost: Debt instruments measured at amortized cost, with changes recognized in profit
or loss over time.

Impairment and Write-downs

Investments may need to be written down if their recoverable amount is less than their carrying value.

Impairment Testing: Regular testing of investments for impairment is required, especially if there
are indications of a decline in value.
Write-downs: If an investment's fair value is below its carrying amount and it is deemed to be
other-than-temporary, a write-down may be required.

Disclosure Requirements

Proper disclosure is necessary for transparency and accurate financial reporting.

✓ Fair Value Disclosures: Information about the fair value measurements and the methods used.
✓ Risk Disclosures: Details on risks associated with the investments, such as credit risk, market risk,
and liquidity risk.
✓ Investment Types: Breakdown of different types of investments held by the entity and their
respective carrying amounts.

PROPERTY PLANT AND EQUIPMENT

Property, Plant, and Equipment (PPE) are long-term assets used in the production or supply of goods and
services, or for administrative purposes. (Bldg. and equipment)
Recognition
PPE is recognized as an asset when:
• Future Economic Benefits: It is probable that future economic benefits associated with the asset
will flow to the entity.
• Reliable Measurement: The cost of the asset can be measured reliably.

Measurement at Recognition
✓ Initial Cost: PPE is initially measured at cost, which includes:
✓ Purchase Price: Including import duties and non-refundable taxes, after deducting trade
discounts and rebates.
✓ Directly Attributable Costs: Costs directly attributable to bringing the asset to the location and
condition necessary for it to operate (e.g., delivery costs, installation).
✓ Dismantling and Restoration Costs: The estimated cost of dismantling and removing the asset
and restoring the site, if applicable.

Subsequent Measurement
 ▪ Cost Model:
Measurement: After initial recognition, PPE is carried at cost less accumulated depreciation and
impairment losses.
Depreciation: Allocated systematically over the asset's useful life.
▪ Revaluation Model:
Measurement: PPE is carried at a revalued amount, being its fair value at the date of revaluation less
subsequent depreciation and impairment losses.
Revaluation Surplus: If an asset’s carrying amount increases as a result of revaluation, the increase is
credited to equity under "revaluation surplus." Decreases are recognized in profit or loss unless they
reverse a previous surplus.

Acquisition on a cash basis. The cost of an item of property, plant and equipment is the cash price
equivalent at the recognition date. The cost of asset acquired on a cash basis simply includes the cash
paid plus directly attributable costs such as freight, installation cost and other cost necessary in bringing
the asset b the location and for the intended use. Moreover, when several assets are acquired at a
“basket price" or 'lump sum price", it is necessary to apportion the single price to the assets acquired on
the basis of relative fair value.

Acquisition on account When an asset is acquired on account subject to discount, the cost of the asset
is equal to the invoice minus the discount, regardless of whether the discount is taken or not. If the
discount is not taken, the same is charged to purchase discount lost account which is shown as other
expense. Cash discounts are generally considered as "reduction of cost” and not as income

Acquisition on installment basis When payment for item of plant and equipment is deferred normal
credit terms, the cost is the cash price equivalent.. The excess of the installment price over the cash price
is treated as an interest to be amortized over the credit period.

1. Purchase
Direct Purchase: Acquiring PPE by paying cash or through credit terms from suppliers or manufacturers.
Accounting Treatment:
The asset is recorded at its purchase cost, which includes the purchase price and any additional costs
necessary to bring the asset to its intended use (e.g., installation, transportation, and testing).

2. Lease
Operating Lease: A lease agreement where the lessor retains ownership and the lessee pays for the use
of the asset over a specified period.
Finance Lease (Capital Lease): A lease agreement that transfers substantially all risks and rewards of
ownership to the lessee, often leading to the lessee recording the asset and liability on their balance
sheet.
Accounting Treatment:
Operating Lease: Lease payments are expensed as incurred.
Finance Lease: The asset and corresponding lease liability are recorded on the balance sheet. The asset
is depreciated, and interest expense is recognized on the lease liability.

3. Construction
Self-Construction: The entity constructs the asset using its own resources or through subcontracting
construction work.
Accounting Treatment:
Costs directly attributable to the construction of the asset (materials, labor, overhead) are capitalized as
part of the asset's cost. Interest costs incurred during the construction period can also be capitalized
under certain conditions.

4. Exchange
Asset Exchange: Acquiring PPE by exchanging an existing asset for a new asset, sometimes with
additional cash paid or received.
Accounting Treatment:
The new asset is recorded at fair value. Any difference between the fair value of the asset exchanged and
the carrying amount of the old asset is recognized as a gain or loss in the financial statements.

5. Donation or Contribution
Gift or Contribution: Receiving PPE as a donation from another entity or individual.
Accounting Treatment:
The asset is recorded at its fair value at the date of receipt. The corresponding credit entry is typically
recognized as a contribution or donation revenue.

6. Government Grants
Subsidies or Grants: Acquiring PPE through government grants or subsidies intended for purchasing or
constructing PPE.
Accounting Treatment:
The asset is recorded at its cost, with the grant recognized as deferred income or a reduction in the cost
of the asset. The grant is typically recognized as income over the useful life of the asset.

7. Acquisition through Business Combination

Mergers and Acquisitions: Acquiring PPE as part of a business combination, where the assets and
liabilities of the acquired company are transferred to the acquiring company.
Accounting Treatment:
The assets are recorded at their fair value at the acquisition date, and any excess of the purchase price
over the fair value of identifiable net assets is recognized as goodwill.

8. Reclassification
Reclassification from Inventory: When an asset previously classified as inventory is reclassified as PPE
upon its use in production or administration.
Accounting Treatment:
The asset is reclassified at its cost, which is typically the cost of the asset when it was classified as
inventory.

Depreciation
▪ Depreciation Method: Reflects the pattern in which the asset’s future economic benefits are
expected to be consumed.
▪ Useful Life and Residual Value: Reviewed annually, and changes are treated as changes in
accounting estimates.
▪ Impairment: If the carrying amount exceeds the recoverable amount, an impairment loss is
recognized.
o When to Derecognize: An asset is derecognized upon disposal or when no future economic
benefits are expected from its use or disposal.
o Gain/Loss on Disposal: Calculated as the difference between the net disposal proceeds and the
carrying amount of the asset, recognized in profit or loss.
o PPE Disclosures: Include measurement bases, depreciation methods, useful lives, gross carrying
amount, accumulated depreciation, and any revaluation details if applicable.