PPE – Investment Property 2019
LECTURE NOTES Partial own use
Nature of 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 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 business.
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.
Examples of investment property:
 Land held for long-term capital appreciation
 Land held for undetermined future use
 Building leased out under an operating lease
 Vacant building held to be leased out under an
operating lease
 Property that is being constructed or developed
for use as an investment property
 Existing investment property that is being
redeveloped for continuing use as investment
property
The following are not investment property and,
therefore, are outside the scope of PAS 40:
 property held for use in the production or supply
of goods or services or for administrative
purposes;
 property held for sale in the ordinary course of
business or in the process of construction of
development for such sale (PAS 2 - Inventories);
 property being constructed or developed on
behalf of third parties (PAS - 11 Construction
Contracts);
 owner-occupied property (PAS - 16 Property,
Plant and Equipment), including property held for
future use as owner-occupied property, property
held for future development and subsequent use
as owner-occupied property, property occupied
by employees and owner-occupied property
awaiting disposal; and
 property leased to another entity under a finance
lease.
Other Classification Issues
Property held under an operating lease
A property interest that is held by a lessee under an
operating lease may be classified and accounted for as
investment property provided that:
 the rest of the definition of investment property
is met;
 the operating lease is accounted for as if it were
a finance lease in accordance with PAS 17
Leases; and
 the lessee uses the fair value model set out in
this Standard for the asset recognized.
An entity may make the foregoing classification on a
property-by-property basis.
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If the owner uses part of the property for its own use,
and part to earn rentals or for capital appreciation, and
the portions can be sold or leased out separately, they
are accounted for separately. Therefore the part that is
rented out is investment property. If the portions
cannot be sold or leased out separately, the property is
investment property only if the owner-occupied portion
is insignificant.
Ancillary services
If the enterprise provides ancillary services to the
occupants of a property held by the enterprise, the
appropriateness of classification as investment
property is determined by the significance of the
services provided. If those services are a relatively
insignificant component of the arrangement as a whole
(for instance, the building owner supplies security and
maintenance services to the lessees), then the
enterprise may treat the property as investment
property. Where the services provided are more
significant (such as in the case of an owner-managed
hotel), the property should be classified as owner-
occupied.
Intracompany rentals
Property rented to a parent, subsidiary, or fellow
subsidiary is not investment property in consolidated
financial statements that include both the lessor and
the lessee, because the property is owner-occupied
from the perspective of the group. However, such
property could qualify as investment property in the
separate financial statements of the lessor, if the
definition of investment property is otherwise met.
Recognition
Investment property should be recognized as an asset
when it is probable that the future economic benefits
that are associated with the property will flow to the
enterprise, and the cost of the property can be reliably
measured.
Initial measurement
Investment property is initially measured at cost,
including transaction costs (e.g. professional fees for
legal services and property transfer taxes). Such cost
should not include start-up costs, abnormal waste, or
initial operating losses incurred before the investment
property achieves the planned level of occupancy.
Cost is the amount of cash or cash equivalents paid or
the fair value of other consideration given to acquire
an asset at the time of its acquisition or construction
or, where applicable, the amount attributed to that
asset when initially recognized in accordance with the
specific requirements of other PFRS, eg PFRS 2 Share-
based Payment.
Fair value is the amount for which an asset could be
exchanged between knowledgeable, willing parties in
an arm’s length transaction.
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Measurement subsequent to initial recognition
PAS 40 permits enterprises to choose between:
 a fair value model; and
 a cost model.
One method must be adopted for all of an entity's
investment property. Change is permitted only if this
results in a more appropriate presentation. PAS 40
notes that this is highly unlikely for a change from a
fair value model to a cost model.
Fair value model
 Investment property is remeasured at fair value.
Gains or losses arising from changes in the fair
value of investment property must be included in
net profit or loss for the period in which it arises.
 Fair value should reflect the actual market state
and circumstances as of the balance sheet date.
 The best evidence of fair value is normally given by
current prices on an active market for similar
property in the same location and condition and
subject to similar lease and other contracts.
 In the absence of such information, the entity may
consider current prices for properties of a different
nature or subject to different conditions, recent
prices on less active markets with adjustments to
reflect changes in economic conditions, and
discounted cash flow projections based on reliable
estimates of future cash flows.
 There is a rebuttable presumption that the
enterprise will be able to determine the fair value
of an investment property reliably on a continuing
basis. However, if, in exceptional circumstances,
an entity follows the fair value model but at
acquisition concludes that a property's fair value is
not expected to be reliably measurable on a
continuing basis, the property is accounted for in
accordance with the benchmark treatment under
PAS 16, Property, Plant and Equipment (cost less
accumulated depreciation less accumulated
impairment losses).
 Where a property has previously been measured at
fair value, it should continue to be measured at fair
value until disposal, even if comparable market
transactions become less frequent or market prices
become less readily available.
Cost Model
After initial recognition, investment property is
accounted for in accordance with the cost model as set
out in PAS 16, Property, Plant and Equipment – cost
less accumulated depreciation and less accumulated
impairment losses.
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Transfers to or from Investment Property
Classification
Transfers to, or from, investment property should only
be made when there is a change in use, evidenced by:
 commencement of owner-occupation (transfer
from investment property to owner-occupied
property);
 commencement of development with a view to
sale (transfer from investment property to
inventories);
 end of owner-occupation (transfer from owner-
occupied property to investment property);
 commencement of an operating lease to another
party (transfer from inventories to investment
property); or
When an entity decides to sell an investment property
without development, the property is not reclassified
as investment property but is dealt with as investment
property until it is disposed of.
The following rules apply for accounting for transfers
between categories:
 for a transfer from investment property carried at
fair value to owner-occupied property or
inventories, the fair value at the change of use is
the 'cost' of the property under its new
classification;
 for a transfer from owner-occupied property to
investment property carried at fair value, PAS 16
should be applied up to the date of reclassification.
Any difference arising between the carrying
amount under PAS 16 at that date and the fair
value is dealt with as a revaluation under PAS 16;
and
 for a transfer from inventories to investment
property at fair value, any difference between the
fair value at the date of transfer and it previous
carrying amount should be recognized in net profit
or loss for the period.
When an entity uses the cost model for investment
property, transfers between categories do not change
the carrying amount of the property transferred, and
they do not change the cost of the property for
measurement or disclosure purposes.
Disposal
An investment property should be derecognized on
disposal or when the investment property is
permanently withdrawn from use and no future
economic benefits are expected from its disposal. The
gain or loss on disposal should be calculated as the
difference between the net disposal proceeds and the
carrying amount of the asset and should be recognized
as income or expense in the income statement.
Compensation from third parties is recognized when it
becomes receivable.
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 PPE – Investment Property 2019

Problems Use the following information for the next two

1. Quirino, Inc. and its subsidiaries have provided
you, their PFRS specialist, with a list of the
properties they own:
 Land held by Quirino, Inc. for undetermined
future use, P5,000,000.
 A vacant building owned by Quirino, Inc. and
to be leased out under an operating lease,
P20,000,000.
 Property held by a subsidiary of Quirino, Inc., a
real estate firm, in the ordinary course of its
business, P30,000,000.
 Property held by Quirino, Inc. for use in
production, P1,000,000.
 A hotel owned by Sugo, Inc., a subsidiary of
Quirino, Inc., and for which Sugo, Inc. provides
security services for its guests’ belongings,
P50,000,000.
 A building owned by Quirino, Inc. being leased
out to Status, Inc, a subsidiary of Quirino, Inc.,
P20,000,000.
How much will be reported as investment
properties in Quirino, Inc. and its subsidiaries
consolidated financial statements?
2. The Kuala Lumpur Company's accounting policy with
respect to investment properties is to measure them
at fair value at the end of each reporting period.
One of its investment properties was measured at
P800,000 on 31 December 2019.
The property had been acquired on 1 January 2019
for a total of P760,000, made up of P690,000 paid
to the vendor, P30,000 paid to the local authority as
a property transfer tax and P40,000 paid to
professional advisers.
In accordance with PAS40 Investment property, the
amount of the gain to be recognized in profit or loss
in the year ended 31 December 2019 in respect of
the investment property is
questions.
Cabarroguis, Inc., a real estate company, has a
property included in its inventory with a cost of
P10,000,000 and net realizable value of P8,000,000 on
December 31, 2018. Because of the decline in the real
estate industry, the company decided to lease out the
property to a tenant under an operating lease in 2019
when the fair value of the property was P7,000,000.
5. If the company will use the cost model to measure
the investment property, how much should be
recognized in the 2019 profit or loss as a result of
the transfer from inventory to investment
property?
6. If the company will use the fair value model to
measure the investment property, how much
should be recognized in the 2019 profit or loss as a
result of the transfer from inventory to investment
property?
7. Diffun, Inc. owns a building purchased on January
1, 2015 for P50 million. The building was used as
the company’s head office. The building has an
estimated useful life of 25 years. In 2019, the
company transferred its head office and decided to
lease out the old building. Tenants began
occupying the old building by the end of 2019. On
December 31, 2019, the company reclassified the
building as investment property to be carried at
fair value. The fair value on the date of
reclassification was P42 million.
How much should be recognized in the 2019 profit
or loss as a result of the transfer from owner-
occupied to investment property?

3. The Kathmandu Company acquired a building on 1

January 2019 for P900,000. At that date the
building had a useful life of 30 years. At 31
December 2019 the fair value of the building was
P960,000. The building was classified as an
investment property and accounted for under the
cost model.
According to PAS40 Investment property, what
amounts should be carried in the statement of
financial position (SFP) and recognized in profit or
loss (P/L)?

4. The Conehead Company purchased an investment

property on 1 January 2016 for a cost of P220,000.
The property had a useful life of 40 years and at 31
December 2018 had a fair value of P300,000. On 1
January 2019 the property was sold for net proceeds
of P290,000. Conehead uses the cost model to
account for investment properties.
What is the gain or loss to be recognized in profit or
loss for the year ended 31 December 2019
regarding the disposal of the property?

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