MHM Executive Education Series:MHM Executive Education Series:IAS 40 - Investment Property

P t d b K ith P t kPresented by: Keith Peterka Shareholder, Mayer Hoffman McCann P.C.

October 25, 2012

Today’s Agenda

• IAS 40 Investment Properties

• U S GAAP Project Status on Investment PropertiesU.S. GAAP Project Status on Investment Properties

Objective

IAS 40 identifies what an investment property is, how it differs from property, plant and equipment (owner-occupied property); and what recognition measurementoccupied property); and what recognition, measurement and disclosure standards apply to investment properties.

What is an Investment Property?

Investment property is property (land or a building—or part of a building—or both) held (by the owner or by the lessee under a finance lease) to earn rentals or forlessee under a finance lease) 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 businessB. Sale in the ordinary course of business.

What is an Investment Property?

Operating Lease Option Property held by lessee under operating lease may be classified and accounted for as investment property if:classified and accounted for as investment property if:

Property otherwise meets the definition of investmentProperty otherwise meets the definition of investment property, and

Lessee uses the fair value model

This classification alternative is available on a property by property basisproperty-by-property basis.

Investment Property

Investment property is held to earn rentals or for capital appreciation or both. Therefore, an investment property generates cash flows largely independently of the other assets held by an entity.

This distinguishes investment property from owner-occupied g p p y pproperty. The production or supply of goods or service,or the use of property for administrative purposes, generates cash flows that are attributable not only to property, but also to other assets used in the production or supply process. IAS 16 Property, Plant and Equipmentapplies to owner-occupied property.

Investment Property or Not?

Land held for long-term capital appreciation rather than for short-term sale in the ordinary course of business?

Property acquired exclusively with a view to subsequent disposal in the near future or for development and resale? p p

Land held for a currently undetermined future use?

Property that is leased to another entity under a finance lease?lease?

Investment Property or Not?

Land held for long-term capital appreciation rather than for short-term sale in the ordinary course of business? Investment Property.

Property acquired exclusively with a view to subsequent disposal in the near future or for development and resale? pNot Investment Property.

Land held for a currently undetermined future use?Land held for a currently undetermined future use? Investment Property*.

Property that is leased to another entity under a finance lease?Property that is leased to another entity under a finance lease? Not Investment Property.

Definitions

– Carrying amount is the amount at which an asset isrecognised in the balance sheet.

– Cost is the amount of cash or cash equivalents paid or the fair value of other consideration given to gacquire an asset at the time of its acquisition or construction.

DefinitionsFair value is the price that would be received to sell– Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Owner occupied property is property held (by the– Owner-occupied property is property held (by the owner or by the lessee under a finance lease) for use in the production or supply of goods or services or for administrative purposes.

Investment Property - Recognition

Investment property shall be recognised as an asset when, and only when:

1) It is probable that the future economic benefits that are associated with the investment property will floware associated with the investment property will flow to the entity; and

2) The cost of the investment property can be measured reliably.

Investment Property - Recognition

Investment property is recognized initially at cost –applying the cost model of IAS 16 Property, Plant and Equipment including what is capitalized in cost and theEquipment – including what is capitalized in cost and the principles for non-monetary transactions.

Leased investment property is measured according to IAS 17 Leases.

Investment Property - Recognition

After initial recognition, an entity has a choice of methods to account for investment property:

1 F i V l M d l (FVM)1. Fair Value Model (FVM), or2. Cost Model (CM)

Must apply one model to all of its investment property (Accounting Policy Decision).

Subsequent MeasurementFair value model (FVM):Fair value model (FVM):

Assets are measured at fair value. Changes in fair value are recognized in profit or loss in period of

changechange. No depreciation is recorded. Fair values continue to be used even if difficult to measure reliably.

- Fair value is determined in accordance with IFRS 13.- An entity is encouraged, but not required, to measure the fair value e t ty s e cou aged, but ot equ ed, to easu e t e a a ue

of investment property on the basis of a valuation by an independent valuation professional who holds a recognized and relevant professional qualification and has recent experience in the location and category of the investment property being valued.

Fair Value Measurement - Illustration

Property is acquired on September 24, 2009 for $400K.

F i V l D b 31 2009 $350KFair Value December 31, 2009 $350KFair Value December 31, 2010 $390KFair Value December 31 2011 $410KFair Value December 31, 2011 $410K

Fair Value Measurement - Illustration20092009

Loss on Investment Property $50KInvestment Property $50K

(400K – 50K = 350K)2010

Investment Property $40Kp yGain on Investment Property $40K

(350K+40K = 390K)20112011

Investment Property $20KGain on Investment Property $20K

(390K+20K = 410K)

Fair Value Model

There is a rebuttable presumption that an entity can reliably measure the fair value of an investment property on a continuing basis. However, in exceptional cases, there is clear evidence when

tit fi t i i t t t ( h i tian entity first acquires an investment property (or when an existing property first becomes investment property after a change in use) that the fair value of the investment property is not reliably measurable on a continuing basismeasurable on a continuing basis. This arises when, and only when, the market for comparable properties is inactive (eg there are few recent transactions, price quotations are not current or observed transaction prices indicatequotations are not current or observed transaction prices indicate that the seller was forced to sell) and alternative reliable measurements of fair value (for example, based on discounted cash flow projections) are not availableflow projections) are not available.

Fair Value Model

If an entity determines that the fair value of an investment property under construction is not reliably measurable but expects the fair value of the property to be reliably measurable when construction is

l t it h ll th t i t t t dcomplete, it shall measure that investment property under construction at cost until either its fair value becomes reliably measurable or construction is completed (whichever is earlier). If tit d t i th t th f i l f i t t tIf an entity determines that the fair value of an investment property (other than an investment property under construction) is not reliably measurable on a continuing basis, the entity shall measure that investment property using the cost model in IAS 16 The residualinvestment property using the cost model in IAS 16. The residual value of the investment property shall be assumed to be zero. The entity shall apply IAS 16 until disposal of the investment property

Cost Model of Measurement

Applies cost model described in IAS 16 Assets reported at cost less accumulated depreciation

and accumulated impairment lossesand accumulated impairment losses Depreciation expense recognized each period

Transfers

Transfers to, or from, investment property shall be made when, and only when, there is a 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; or

D. Commencement of an operating lease to another party, for a transfer from inventories to investment property.

Transfers – Cost Model

From To TreatmentCost Model

PPE IP No change in cost

Inventory IP No change in cost

IP PPE No change in cost

IP Inventory No change in cost

Transfers – Fair Value Model

From To TreatmentIP at fair value

PPE at cost IP Value IP at date of transfer in accordancewith IAS 16 (revaluation)

Inventory IP Change to P & L

IP PPE No change in value

IP Inventory No change in value

Derecognition

Derecognize Investment Property• On disposal – when sold or transferred under a finance

lease orlease, or• On retirement – when permanently removed from use

and no benefits are expected from its disposal.p p• Gains and losses on disposal generally recognized in

profit or loss.

Disclosures

US GAAP – Investment Property

In October 2011, the FASB proposed guidance that would have required entities that meet certain criteria to measure their investment properties at fair value throughmeasure their investment properties at fair value through net income. The primary objectives of the project were: a. Align U.S. GAAP with IFRS in connection with the FASB and

IASB’s joint lease accounting projectb. Narrow the diversity in practice related to accounting and

reporting by certain real estate entities

US GAAP – Investment Property

At the FASB’s meeting on August 8, 2012, the Board discussed the next steps on its project on investment property entities.

Th FASB did t k fi l d i i th thThe FASB did not make a final decision on the path forward, and tentatively decided not to continue developing an entity-based approach for investment property.

Questions?

Speaker BiographyKeith Peterka CPAKeith Peterka, CPA

Shareholder

Mayer Hoffman McCann P.C.

610.862.2744

kpeterka@cbiz.com

With more than 19 years of experience in public accounting, Keith performs national firmresponsibilities for IFRS, fair value accounting and auditing, revenue recognition andbusiness combinations. He has also developed national training programs for accounting

t d l ti t i K ith i bj t tt t fpronouncements and complex accounting topics. Keith is a subject matter expert forIFRS, SEC reporting and fair value accounting in MHM’s Professional Standards Group.He also is a member on the IFRS Foundation's Small & Medium-sized Entities (SMEs)Implementation Group.