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LEARNING OUTCOMES
At the end of the topic, students should be able to:
Explain the nature of investment property
Discuss the criteria for recognition
Measure and record the investment property
Explain the provision for transfer
Discuss the disclosure requirements
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CHAPTER OUTLINE
Nature of investment property
Recognition
Measurement
Transfer Derecognition
Disclosure requirements
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INTRODUCTION
Nature of investment property:
Property (namely, land or building) held to earn
rentals or for capital appreciation or both (para. 5).
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Examples of investment property: (para 8)
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 heldfor 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. BKAF3063_A1225
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MFRS 140 specifically excludes:
(a) property intended for sale in the ordinarycourse of business or in the process of
construction or development for such sale
(b) property being constructed or developed onbehalf of third parties
(c) owner-occupied property (including held for
future use as owner-occupied prop. & prop.
occupied by employees)(d) property that is leased to another entity
under a finance lease
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Properties that comprise a portion that is held to earnrentals/capital appreciation & another portion that is held
for use in the business: (para 10)
a) If the portions could be sold separately- should accountfor the portions as Investment Property (IP) and as PPE
separately;
b) If the portions could not be sold separately, the propertyqualifies as IP only ifinsignificant portion of the propertyis held for use in business.
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RECOGNITION
Para 16 - IP should be recognized as an asset is andonly if :
a) it is probable that future economic benefits associated
with the IP will flow to the entity; and
b) the cost of the IP can be measured reliably.
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RECOGNITION
1st condition- generally, it is satisfied when the risksand rewards in relation to the ownership of the
property have passed to the entity.
2nd condition- is easily satisfied for an IP acquired from
the market as of the existence of external transaction.
For internally constructed IP, a reliable measurement
of the construction costs incurred is also often readily
available.
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MEASUREMENT BASES
Initial Recognition: IP should be measure at cost (para 20).
Determination of initial cost
a) Purchased IPPurchase price + any directly
attributable expenditure (e.g. professional fees)
b) Self-constructed IP Cost of raw material + direct
labor + factory OH that can be allocated to the asset.
c) IP acquired in exchange for another asset- should be
measured at fair value
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MEASUREMENT BASES
Subsequent Recognition: Choose: (a) the cost model, or
(b) the fair value model
Cannot change from FV model to cost model
Cost model
measured in accordance with MFRS 116 for assetcarried at cost.
Assets may be carried at cost (or revalued amount)
Assets subject to depreciation & impairment test
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MEASUREMENT BASES
Illustration 4.1
ABC Bhd is a computer manufacturer. It adopts 31 Decaccounting year-end, and the straight line method of
depreciation.On 1 Jan 2007, the company uses its excess cash to buya factory for investment purposes. The factory is rentedout to another manufacturer. The factory costsRM50,000,000, and is expected to have a useful life of
50 years with no salvage value.
The company choose to use the cost model.
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Measurement Bases
The relevant journal entries for the first 2 years:
1/1/2007
Dr Inv Property 50,000,000
Cr Cash 50,000,000
31/12/2007
Dr Depreciation exp 1,000,000
Cr Acc dep 1,000,000
31/12/2008
Dr Depreciation exp 1,000,000
Cr Acc dep 1,000,000
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MEASUREMENT BASES
Fair value model
IP will be measured at fair value (except for those FV cannot be
reliably determined on a continuing basis under para 53).
Asset under operating lease that is accounted for as an IP
should apply FV model (para 34).
FV reflecting the market condition at the BS date (para 38).
A gain or loss should be recognize in P&L for the period in
which it arises (para 35).
There is no need for depreciation and impairment test.
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MEASUREMENT BASES
Illustration 4.2
ABC Bhd is a computer manufacturer. It adopts 31 Dec
accounting year-end, and the straight line method of
depreciation.
On 1 Jan 2007, the company uses its excess cash to buy
a factory for investment purposes. The factory is rented
out to another manufacturer. The factory costs
RM50,000,000, and is expected to have a useful life of
50 years with no salvage value.
The market value of the building is RM55,000,000 as at
31 Dec 2007 and RM48,000,000 as at 31 Dec 2008.
The company choose to use the Fair value model.
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Measurement Bases
The relevant journal entries for the first 2 years:
1/1/2007
Dr Inv Property 50,000,000
Cr Cash 50,000,000
31/12/2007
Dr Inv Property 5,000,000
Cr Fair value gain on IP 5,000,000
31/12/2008
Dr Fair value loss on IP 7,000,000
Cr Inv Property 7,000,000
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TRANSFER
Transfer of assets to or from IP. Should be made when and only when there is a
change in use (para 57).
IP to PPE may be evidenced by commencement of
owner-occupation.
PPE to IP - may be evidenced by the end of owner-
occupation, or upon completion of the construction
of self-constructed property. IP to inventories (view to sale) vs. Inventories to IP
(rent to another party
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TRANSFER..
Para 57- ..change in use, evidenced by: :a) commencement of owner-occupation, for a transfer from
investment property to owner-occupied property;
b) commencement of development with a view to sale, for a
transfer from investment property to inventories;c) end of owner-occupation, for a transfer from owner-
occupied property to investment property;
d) commencement of an operating lease to another party, for a
transfer from inventories to investment property; ore) end of construction or development, for a transfer from
property in the course of construction or development
(covered by MFRS 116) to investment property.BKAF3063_A122
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TRANSFER
At the date of transfer: IP accounted for using the FV model to PPE or to
Inventories = IPs FV is the deemed cost for subsequent
accounting under MFRS116 or MFRS 102 (para 60).
PPE to IP accounted for using the FV model = thedifference between the CA of the PPE and its FV shouldbe accounted for as a revalution surplus/deficit (para 61).
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TRANSFER
At the date of transfer: PPE to IP (using FV model) upon completion of the
construction, the difference between CA and FV should
be recognized in the P&L (para 65).
The same treatment applies from Inventories to IP (using
FV model) para. 63
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DERECOGNITION
Provides that an IP should be derecognized (para 66):
on disposal; or
When the property is permanently withdrawn from use and
no future economic benefits are expected from its disposal
- Gain or loss should be recognized in P&L in the period of
derecognition (para 69).
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DISCLOSURE REQUIREMENTS
Para 75 for all IP e.g. whether cost model or FV
model
Para 79 additional disclosure requirements for cost
model
Para 78 for IP under the FV model but its FV cannotbe measured reliably
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DISCLOSURE REQUIREMENTS
Para 75:
a) whether it applies the fair value model or the cost model.
b) if it applies the fair value model, whether, and in what circumstances,
property interests held under operating leases are classified and accounted
for as investment property.
c) when classification is difficult (see paragraph 14), the criteria it uses to
distinguish investment property from owner-occupied property and from
property held for sale in the ordinary course of business.
d) the methods and significant assumptions applied in determining the fair
value of investment property,
e) the extent to which the fair value of investment property (as measured or
disclosed in the financial statements) is based on a valuation by anindependent valuer who holds a recognised and relevant professional
qualification and has recent experience in the location and category of the
investment property being valued. If there has been no such valuation, that
fact shall be disclosed.
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DISCLOSURE REQUIREMENTS
Para 75: ..
f) the amounts recognised in profit or loss for:
i. rental income from investment property;
ii. direct operating expenses (including repairs and maintenance) arising
from investment property that generated rental income during the
period; and
iii. direct operating expenses (including repairs and maintenance) arising
from investment property that did not generate rental income during the
period.
iv. the cumulative change in fair value recognised in profit or loss on a sale
of investment property from a pool of assets in which the cost model is
used into a pool in which the fair value model is used (see paragraph32C).
g) the existence and amounts of restrictions on the realisability of investment
property or the remittance of income and proceeds of disposal.
h) contractual obligations to purchase, construct or develop investment
property or for repairs, maintenance or enhancements. BKAF3063_A122 24
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END OF TOPIC 4
References:
MFRS 140- Inv Property
Ng Eng Juan 2010
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