Lecture 2 Investment Property MFRS 140

By Dr Mazni Abdullah, CA (M), CFiA (M), PhD (Stirling), MBA (Malaya), B Acc (Malaya) Session 2012/2013

MFRS 140
Defines Investment Property (Para 5): property (land or a building / both) held to earn rentals or capital appreciation or both, rather than use in the business or for sale in the ordinary course of business. Includes:
Property held by the owner Property held by the lessee under a Finance Lease

Excludes:
Owner-occupied property Property occupied by employees of the owner

MFRS 140
Owner-occupied property property held (by the owner/by the lessee under a finance lease) for use in the production / supply of goods or services / for administrative purposes. Para 8- examples of Investment Property:
a) b) c) d) e) Land held for LT capital appreciation rather than for ST sale in the ordinary course of business Land held for a currently undetermined future use. A building owned by the entity (or held by the entity under a finance lease) and leased out under one or more operating leases A building that is vacant but is held to be leased out under one or more operating leases Property that is being constructed/ developed for future use as IP.

How to treat the property if one portion is held to earn rentals and another portion is held for use in the business? MFRS 140 (Para 10): a) If the portion could be sold separately, an entity should account for the portion as investment property and as PPE separately; b) If the portions could not be sold separately, the property qualifies as investment property only if an insignificant portion of the property is held for use in business.
Judgement is needed (Para 14)

MFRS 140, Para 11-12

If an entity provides ancillary services to the occupants of a property:

Insignificant services
:E.g. the owner of the building provides security & maintenance services to the lessees. Investment Property

SIGNIFICANT SERVICES: E.g. owner-managed hotel provides services to guests Owner-occupied property

Illustrations:
a) MM Bhd owns a piece of land, in which 20% is used for its operating activities, the balance is rented out. b) MM Bhd used a building as a warehouse for its inventory. c) MM Bhd purchased a twenty storey building , and one floor is used for office administration and the balance is rented out. d) MM Bhd purchased a piece of land, where 20 % of it is rented out and the balance is used as the site of its transport facilities. e) MM Bhd leased out the building to its subsidiary

Recognition
MFRS 140 (Para 16): should be recognised as an asset if and only 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 reliabily.

Measurement
MFRS140 (Para 20): upon initial recognition, it shall be measured at cost. Transaction costs shall be included in the initial measurement. Subsequent to initial recognition: An entity should choose the Cost model or FV model as its accounting policy; and apply the chosen policy consistently (para 30).

Initial Cost of Investment Property (IP)

1. Purchased IP: Purchase price + any directly
attributable expenditure

2. Self-constructed IP: cost of raw material, direct

labour and factory overheads that can be allocated to the asset. Borrowing Cost? MFRS123 (either expense or capitalised as part of the assets cost)

Cost Model
An entity should measure its IP in accordance with MFRS 116 Property, Plant and Equipment. Assets should be carried at cost (or revalued amount) Assets are subjected to depreciation Assets are subjected to impairment test

Cost Model
Example:
On 1 January 20x1, MM Bhd purchased a factory for investment purposes. The cost of factory was RM 100 million and is expected to have useful life of 50 years with no salvage value. 1 Jan 20x1 Dr Investment Property 100,000,000 Cr Bank 100,000,000 31 Dec 20x1 Dr Depreciation expense 20,000,000 Cr Accumulated depreciation 20,000,000

FV Model
MFRS 140 (Para 38): The IP is measured at its FV, reflecting the market conditions at the balance sheet date. Para 35: A gain or loss arising from a change in the FV should be recognised in profit or loss for the period in which it arises. Depreciation? Impairment test?

FV Model
Example: On 1 January 20x1, MM Bhd purchased a factory for investment purposes. The cost of factory was RM 100 million and is expected to have useful life of 50 years with no salvage value. As at 31 Dec 20x1, the market value of building was RM105 million, but as at 31 Dec 20x2, it dropped to RM 95 million. 1 Jan 20x1 Dr Investment Property 100,000,000 Cr Bank 100,000,000

FV Model
31 Dec 20x1 Dr Investment Property 5,000,000 Cr FV gain on investment property 5,000,000 (to record fv gain for the year)
31 Dec 20x2 Dr FV loss of investment property 10,000,000 Cr Investment property 10,000,000 (to record fv loss for the year)

Transfer
ASSETS INVESTMENT PROPERTY
MFRS140 (para 57): transfer to or from investment property should be made when and only when there is a change in use, evidenced by:
a) Commencement of owner-occupation, for a transfer from IP to OOP b) Commencement of development with a view to sale, for a transfer from IP to inventories c) Commencement of operating lease to another party, for a transfer from inventories to IP. If the entity uses the COST MODEL, the transfers do not change the carrying amount & the cost of that property for measurement/disclosure purposes (Para 59).

Transfer
(1) INVESTMENT PROPERTY (FV) PPE OR INVENTORIES Para 60 : FV of property at the date of transfer is the deemed cost for subsequent accounting under MFRS116 or MFRS102 (2) PPE INVESTMENT PROPERTY (FV) Para 61 : the difference between the carrying amount of PPE and its FV at the date of transfer should be accounted for as a revaluation surplus/deficit in accordance with MFRS116 (3) INVENTORIES INVESTMENT PROPERTY (FV) Para 63: the difference between the carrying amount of inventories and its FV at the date of transfer should be recognised in the profit or loss.

Derecognition
Para 66: an IP should be derecognised:
1. On disposal 2. When the property is permanently withdrawn from use and no future economic benefits are expected from its disposal.

Para 69 gain/loss arise from its disposal should be recognised in profit/loss.

Summarise what youve learned from this lecture. 5 minutes!