PAS 40
INVESTME
NT
PROPERTY
FELECITAS C. TUAZON
Department of Accountancy - Accounting 5 CFAS
Source: Conceptual Framework and Accounting Standards
By Zeus Vernon B. Millan
CONCEPTUAL
FRAMEWORK &
ACCOUNTING
STANDARDS: PAS
40
GROUP 3:
CANIERO VALIENTE
LOMBRINO VILLEGAS
SOLMIRANO
SUAN
Department of Accountancy - Accounting 5 CFAS
Source: Conceptual Framework and Accounting Standards
By Zeus Vernon B. Millan
LEARNING OBJECTIVES
• Define an investment property.
• State the initial and subsequent measurements of investment
property.
• Apply the fair value model of accounting for investment
property.
Department of Accountancy - Accounting 5 CFAS
Source: Conceptual Framework and Accounting Standards
By Zeus Vernon B. Millan
INTRODUCTION
PAS 40 prescribes the accounting and disclosure requirements
for investment property.
Department of Accountancy - Accounting 5 CFAS
Source: Conceptual Framework and Accounting Standards
By Zeus Vernon B. Millan
INVESTMENT PROPERTY
Investment Property is land and/or building held to earn
rentals or for capital appreciation or both.
Investment property includes only land and building. It does
not include any other type of asset.
Investment property is held to earn rentals or for capital
appreciation or both. Meaning, it generates its own cash
flows independently from the other assets of an entity and is
not:
Department of Accountancy - Accounting 5 CFAS
Source: Conceptual Framework and Accounting Standards
By Zeus Vernon B. Millan
a. Owner-occupied property (i.e., held for use in the production
or supply of goods or services or for administrative purposes).
Owner-occupied property is classified as PPE;
b. Held for sale in the ordinary course of business (this is
classified as inventory); or
c. Classified as "held for sale" under PFRS 5 Non-current assets
Held for Sale and Discontinued Operations.
Department of Accountancy - Accounting 5 CFAS
Source: Conceptual Framework and Accounting Standards
By Zeus Vernon B. Millan
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.
c. A building owned by the entity (or a right-of-use asset relating
to a building held by the entity) 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. (PAS 40.8)
e. Property that is being constructed or developed for future use
as investment property.
Department of Accountancy - Accounting 5 CFAS
Source: Conceptual Framework and Accounting Standards
By Zeus Vernon B. Millan
The following are not investment property:
a. Property acquired exclusively for sale in the near future or for
development and resale.
b. Owner-occupied property, including:
i. Property held for future use as owner-occupied property;
ii. Property held for future development and subsequent use as
owner-occupied property;
iii. Property occupied by employees (whether or not the employees
pay rent at market rates); and
iv. Owner-occupied property awaiting disposal.
c. Property that is leased out to another entity under a finance lease.
(PAS 40.9)
Department of Accountancy - Accounting 5 CFAS
Source: Conceptual Framework and Accounting Standards
By Zeus Vernon B. Millan
ILLUSTRATION:
The following information pertains to Entity A:
Land held for long-term capital appreciation 1,000,000
700,000
Land held for a currently undetermined future use 600,000
Land held for future plant site 500,000
Land held for sale in the ordinary course of business 1,900,000
Building leased out under finance lease 800,000
Building leased out under operating lease
Right-of-use asset relating to a building held by the 1,200,000
entity and leased out under an operating lease 100,000
Equipment leased out under an operating lease
Department of Accountancy - Accounting 10 & 11 Intermediate
Accounting Part 2
▸ The total investment property is determined as follows:
Land held for long-term capital appreciation 1,000,000
Land held for a currently undetermined future use 700,000
Building leased out under operating lease 800,000
Right-of-use asset relating to a building held by the
entity and leased out under an operating lease 1,200,000
Total investment property 3,700,000
Department of Accountancy - Accounting 10 & 11 Intermediate
Accounting Part 2
Notes:
• The land held for future plant site and the equipment are classified as
PPE.
• The land held for sale in the ordinary course of business is classified
as inventory.
• The building leased out under finance lease is not an asset of Entity A-
it is the asset of the lessee.
Partly investment property and partly owner-occupied
A property may be partly held to earn rentals or for capital
appreciation and partly owner-occupied. A common example is a
building that is partly being rented out and partly being used as office
space.
Department of Accountancy - Accounting 10 & 11 Intermediate
Accounting Part 2
Such properties are accounted for as follows:
➤ If the portions could be sold separately (or leased out
separately under a finance lease), they are accounted for
separately. The portion being rented out under operating lease is
classified as investment property while the owner occupied
portion is classified as PPE.
➤ If the portions could not be sold separately, the entire property
is classified as investment property if the owner occupied portion
is insignificant. If the owner-occupied portion is significant, the
entire property is classified as PPE
Department of Accountancy - Accounting 10 & 11 Intermediate
Accounting Part 2
Ancillary services to occupants
When ancillary services are provided to the occupants of a
property held, the property is classified as investment property if
the services are insignificant to the arrangement as a whole. An
example is when the owner of an office building provides security
and maintenance services to the building tenants.
If the services provided are significant, the entire property is
classified as PPE. An example is services provided to hotel guests
in an osener-managed hotel. An owner-managed hotel is classified
as PPE rather than investment property
Department of Accountancy - Accounting 10 & 11 Intermediate
Accounting Part 2
Investment property in consolidated financial statements
A property that is leased by a member of a group to another
member (parent or subsidiary) does not qualify as investment
property in the consolidated financial statements because, from
the group's perspective, the property is owner-occupied.
However, the property is classified as investment property in the
lessor/owner's individual financial statements.
Recognition
An investment property is recognized when it meets the definition
of an investment property as well as the asset recognition criteria
of "probable future economic benefits" and "reliable measurement
of cost."
Department of Accountancy - Accounting 10 & 11 Intermediate
Accounting Part 2
Initial measurement
An investment property is initially measured at cost. The
measurement of cost depends on the mode of acquisition.
Acquisition by Purchase
The cost of a purchased investment property comprises the
purchase price and any directly attributable costs incurred in
bringing the asset to its intended condition, e.g, professional fees
for legal services, property transfer taxes and other transaction
costs.
If the payment is deferred, the cost is the cash price equivalent.
The difference between this amount and the total payments is
recognized as interest expense over the credit period. unless it
qualifies for capitalization under PAS 23.
Department of Accountancy - Accounting 10 & 11 Intermediate
Accounting Part 2
The cost of an investment property excludes the following:
a) Start-up costs, unless they are necessary to bring the propemy
to the condition necessary for it to be capable of operating in
the manner intended by management;
b) Operating losses incurred before the investment propeny
achieves the planned level of occupancy; or
c) Abnormal amounts of wasted materials, labor or other
resources incurred in constructing or developing the property
(PAS 40.23)
Exchanges of assets
The measurement of an investment property acquired in exchange
for another non-monetary asset depends on whether the
exchange transaction has commercial substance or not.
Department of Accountancy - Accounting 10 & 11 Intermediate
Accounting Part 2
a. With Commercial Substance - an exchange has a commercial
substance if the entity's subsequent cash flows are expected to
change as a result of the exchange. The asset received is measured
using the following order of priority.
1. Fair value of the asset Given up;
2. Fair value of the asset Received; or
3. Carrying amount of the asset Given up.
b. Lacks Commercial Substance - The asset received is measured at
the Carrying amount of the asset Given up
No gain or loss arises if the asset received is measured at the
carrying amount of the asset given up.
Department of Accountancy - Accounting 10 & 11 Intermediate
Accounting Part 2
Subsequent measurement
After initial recognition, an entity chooses either the cost model
or the fair value model as its accounting policy and applies that
policy to all of its investment property.
Only one model shall be used. Using both models selectively for
items of investment property is prohibited, except in the
following cases:
1. When the fair value model is used but the fair value of one
investment property cannot be reliably determined on initial
recognition, that investment property will be measured under the
cost model; the rest are measured under the fair value model. For
purposes of depreciation, the residual value of the said property
is assumed to be zero.
Department of Accountancy - Accounting 10 & 11 Intermediate
Accounting Part 2
2. Separate choices of accounting policy may be made for (a)
investment property that backs liabilities that pay return linked
directly to the fair value of, or returns from, specified assets
including that investment property and (b) all other investment
property.
PAS 40 requires an entity to determine the fair value of its
investment property, regardless of the accounting policy used.
Under the fair value model, fair value is used for measurement
purposes while under the cost model, fair value is used for
disclosure purposes. PAS 40 encourages, but does not require, the
use of an independent valuer in determining the fair value of an
investment property.
Department of Accountancy - Accounting 10 & 11 Intermediate
Accounting Part 2
An entity may subsequently change its accounting policy from the
cost model to the fair value model, subject to the provisions of
PAS 8. However, PAS 40 states that it is highly unlikely that a
change from the fair value model to the cost model will result in a
more relevant presentation.
Accordingly, if the fair value model is chosen, it shall be applied
until the investment property is derecognized or reclassified to
another asset classification, even if fair value becomes less readily
determinable.
Cost model
An entity that chooses the cost model shall measure the
investment property using the cost model under PAS 16 (PPE).
Department of Accountancy - Accounting 10 & 11 Intermediate
Accounting Part 2
The entity uses PFRS 5 Non-current Assets Held for Sale and
Discontinued Operations if it classifies an investment property as
"held for sale" or PFRS 16 Leases if the investment property is a
night-of-use asset resulting from a lease.
Fair value model
Under the fair value model, an investment property is
subsequently measured at its fair value at the end of each
reporting period.
➤ Fair value is "the price that would be received to sell an aset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date." (PAS 40.5)
Department of Accountancy - Accounting 10 & 11 Intermediate
Accounting Part 2
Gains or losses arising from changes in fair value are recognized in
profit or loss.
Assets measured under the fair value model are not depreciated.
If the investment property is a right-of-use asset, fair value is
measured for the right-of-use asset and not the underlying property.
An entity uses the principles in PFRS 13 Fair Value Measurement
when determining the fair value of an investment property. To avoid
double-counting, assets and liabilities that are integral parts of the
investment property are not recognized separately. For example,
elevator and air-conditioning are an integral part of a building and
are necessarily included in the building's fair value. Therefore, these
items are included in the measurement of the investment property
(i.e., the building as a whole) rather than as separate items of PPE.
Department of Accountancy - Accounting 10 & 11 Intermediate
Accounting Part 2
Illustration:
Entity A acquires a building at a purchase price of P10,000,000 and
spends an additional P3,000,000 in getting the building to the
condition for its intended use. The building is intended to be leased
out under various operating leases. Accordingly, it is classified as
investment property. The building becomes available for lease on
January 1, 20x1, at which date, Entity A estimates its useful life to be
20 years, with no residual value. On December 31, 20x1, the
investment property's fair value is P12,000,000.
Initial measurement
The building is initially measured at its cost of P13,000,000 (10M
purchase price + 3M direct costs). This is irrespective of the
accounting policy chosen for the subsequent measurement.
Department of Accountancy - Accounting 10 & 11 Intermediate
Accounting Part 2
Subsequent measurement - Dec. 31, 20x1 (Cost model) Under the
cost model, the investment property is carried at its cost lem
accumulated depreciation and accumulated impairment losses.
Statement of financial position:
Cost 13,000,000
Accumulated depreciation [(13M ÷ 20) x 1 уг.] (650,000)
Carrying amount - 12/31/x1 12,350,000
Statement of profit or loss:
Depreciation expense (13M ÷ 20). 650,000
Department of Accountancy - Accounting 10 & 11 Intermediate
Accounting Part 2
Subsequent measurement - Dec. 31, 20x1 (Fair value model)
Under the fair model, the investment property is carried at its fair
value at the end of each reporting period. Changes in fair value are
recognized in profit or loss. The investment property is not
depreciated.
Statement of financial position:
Carrying amount-12/31/x1 (fair value) 12,000,000
Statement of profit or loss:
Unrealized loss (a) 1,000,000
Department of Accountancy - Accounting 10 & 11 Intermediate
Accounting Part 2
(a)The unrealized loss from the fair value change is analyzed below:
Carrying amount 13,000,000
Fair value-12/31/x1 12,000,000
Decrease in value - unrealized loss 1,000,000
Summary:
COST MODEL FAIR VALUE MODEL
Statement of financial position: Statement of financial position
Initial measurement: P13,000,000 Initial measurement: P13,000,000
Subsequent measurement: Subsequent measurement
Carrying amount: P12,350,000 Carrying amount: P12,000,000
Statement of profit or loss: Statement of profit or loss
Depreciation expense: P650,000 Unrealized loss: P1,000,000
Department of Accountancy - Accounting 10 & 11 Intermediate
Accounting Part 2
Transfers
Transfers to or from investment property are made only when there
is a change in use, as evidenced by the following:
a. Commencement of owner-occupation, for a transfer from
investment property to PPE;
b. End of owner-occupation, for a transfer from PPE to investment
property;
c. Commencement of an operating lease to another party, for a
transfer from inventories to investment property; or
d. Commencement of development with a view to sale, for a transfer
from investment property to inventories.
Department of Accountancy - Accounting 10 & 11 Intermediate
Accounting Part 2
In the absence of a change in use, no transfer is made to or from
investment property. For example, in (d) above, a building that is
classified as investment property which the entity decides to dispose
of without development (e.g., no renovation) remains as investment
property until it is derecognized, and not transferred to inventories,
because there is no change in use.
Similarly, an investment property that is redeveloped for
continued use as investment property remains as investment
property.
If the entity uses the cost model, transfers between investment
property, PPE and inventories are accounted for at the carrying
amount of the asset transferred. No gain or loss arises because the
asset's measurement remains the same before and after the
transfer.
Department of Accountancy - Accounting 10 & 11 Intermediate
Accounting Part 2
If the entity uses the fair value model, transfers between
investment property, PPE and inventories are accounted for at the
asset's fair value at the date of change in use, and:
a. For a transfer from investment property to PPE or inventories,
the entity applies PAS 40 until the date of transfer. Accordingly, the
entity recognizes the change in fair value on that date as unrealized
gain or loss in profit or loss, just as it would if the investment
property is remeasured to fair value at the end of the period. The
asset's fair value at the date of transfer becomes its deemed cost for
subsequent accounting using PAS 16, PFRS 16 or PAS 2.
Department of Accountancy - Accounting 10 & 11 Intermediate
Accounting Part 2
b. For a transfer from PPE to investment property, the entity
applies PAS 16 until the date of transfer. Accordingly, the entity
recognizes any depreciation on the asset until that date. Any
difference between the fair value and carrying amount is recognized
in other comprehensive income as an adjustment to the asset's
revaluation surplus, except if the difference represents an
impairment loss or a reversal thereof.
c. For a transfer from inventories to investment property, the
difference between the fair value on the date of transfer and the
previous carrying amount is recognized in profit or loss.
Department of Accountancy - Accounting 10 & 11 Intermediate
Accounting Part 2
Derecognition
An investment property is derecognized when it is disposed of or
when no future economic benefits are expected from it.
On derecognition, the difference between the carrying amount and
the net disposal proceeds, if any, is recognized as gain or loss in profit or
loss (unless PFRS 16 Leases requires otherwise on a sale and leaseback).
Self-constructed investment property
A self-constructed investment property is accounted for in much the
same way as a purchased investment property. The initial cost of a self-
constructed investment property includes all directly attributable costs of
constructing and preparing the property for its intended use, such as
materials, labor and construction overhead.
Department of Accountancy - Accounting 10 & 11 Intermediate
Accounting Part 2
The cost excludes abnormal amounts of wasted material, labor or
other resources incurred in constructing or developing the property.
A self-constructed investment property is subsequently measured
using either the cost model or the fair value model.
The fair value model may be applied even during the construction
period. If, however, fair value cannot be determined until construction is
finished, the investment property is temporarily measured under the cost
model. Upon completion, the difference between the investment
property's cost and fair value is recognized in profit or loss.
Department of Accountancy - Accounting 10 & 11 Intermediate
Accounting Part 2
Subsequent expenditures
Subsequent expenditures on recognized investment property are
generally expensed, unless they clearly meet the recognition criteria. For
example, costs of day-to-day servicing of an investment property are
expensed in the period in which they are iricurred (i.e., as repairs and
maintenance expense).
PAS 40 states an instance where a subsequent expenditure is
capitalized, which is the replacement of parts of an investment property.
Replacements are accounted for as follows:
Department of Accountancy - Accounting 10 & 11 Intermediate
Accounting Part 2
a. Under the cost model, the cost of the replacement part (new
part) is capitalized to the investment property, if it meets the
recognition criteria. The carrying amount of the replaced part (old
part) is derecognized and charged as loss, regardless of whether it
had been depreciated separately. If the carrying amount of the
replaced part cannot be determined, the cost of the replacement
part is used as an indication of what the cost of the replaced part was
at the time it was acquired or constructed.
Department of Accountancy - Accounting 10 & 11 Intermediate
Accounting Part 2
b. Under the fair value model, the cost of the replacement part
(new part) is capitalized to the investment property. The investment
property's fair value is then reassessed and any difference between
the fair value and the carrying amount is recognized in profit or loss.
Impairment
An investment property that is subsequently measured under the
cost model is tested for impairment using PAS 36.
There is no separate accounting for impairment losses for
Investment property measured under the increase or decrease in fair
value is simply recognized as gain or loss in profit or loss.
Department of Accountancy - Accounting 10 & 11 Intermediate
Accounting Part 2
Any compensation from a third party for an investment property that
is impaired, lost or given up is recognized in profit or loss when the
compensation becomes receivable. The impairment or loss, the
compensation from the third party, and any subsequent acquisition
of a replacement asset are separate economic events and are
accounted for separately.
Disclosure
General disclosures:
a. Whether the entity uses the fair value model or the cost model.
b. When classification is difficult, the criteria used to distinguish
investment property from PPE and inventory.
Department of Accountancy - Accounting 10 & 11 Intermediate
Accounting Part 2
c. The extent to which the fair value of investment property is
based on a valuation by an independent valuer. If an
independent valuation is not obtained, that fact is disclosed.
d. The amounts recognized in profit or loss for rental income and
related expenses.
e. The existence and amounts of restrictions on investment
property.
f. Contractual obligations to purchase, construct or develop
investment property or for repairs, maintenance or
enhancements.
Department of Accountancy - Accounting 10 & 11 Intermediate
Accounting Part 2
Additional disclosures under the Fair value model
a. Reconciliation showing increases and decreases in investment
property.
b. When a valuation obtained for investment property is adjusted
to avoid double-counting of assets or liabilities that are recognized
as separate assets and liabilities, the entity discloses a
reconciliation between the valuation obtained and the adjusted
valuation.
c. Disclosure of any investment property whose fair value on initial
recognition cannot be reliably measured and hence measured
under the cost model using the exception allowed under PAS 40.
Department of Accountancy - Accounting 10 & 11 Intermediate
Accounting Part 2
Additional disclosures under the Cost model
a. The depreciation methods used, the useful lives, and the
depreciation rates used;
b. Reconciliation showing increases and decreases in investment
property and related accumulated depreciation and accumulated
impairment loss.
Department of Accountancy - Accounting 10 & 11 Intermediate
Accounting Part 2
Summary:
• Investment Property – is land and/or building held to eam rentals
or for capital appreciation or both.
• The portions of a property that is partly being rented out and
partly owner-occupied are accounted for separately if the
portions can be sold separately (or leased out separately under a
finance lease). If not, the entire property is classified as either
investment property or PPE, whichever portion is more
significant.
• If ancillary services provided to occupants are insignificant, the
property is classified as investment property.
• A property that is leased between members of a group is
classified as PPE in the group's consolidated financial statements.
Department of Accountancy - Accounting 10 & 11 Intermediate
Accounting Part 2
• Investment property is initially measured at cost.
• Investment property is subsequently measured using either the
cost model or the fair value model.
• An investment property that is measured under the cost model is
accounted for using PAS 16 (PPE).
• An investment property that is measured under the fair value
model is remeasured to fair value at the end of each reporting
period. Changes in fair value are recognized in profit or loss. The
investment property is not depreciated.
Department of Accountancy - Accounting 10 & 11 Intermediate
Accounting Part 2
• Regardless of which model is used, an entity is required to
determine the fair value of an investment property.
• Transfers to or from investment property are made only when
there is a change in use.
• When an investment property is derecognized (e.g., disposed of),
the difference between the carrying amount and the net disposal
proceeds, if any, is recognized as gain or loss in profit or loss
(unless PFRS 16 requires otherwise on a sale and leaseback.).
Department of Accountancy - Accounting 10 & 11 Intermediate
Accounting Part 2
