investment property a122 1

7/30/2019 Investment Property A122 1

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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


Cr Cash 50,000,000

31/12/2007


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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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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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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investment property a122 1

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