S7 Investment Property

Adj A/Prof Tan Yee Peng Email tanyp@ntu.edu.sg Mobile 8138 8318

Agenda
1. What is an investment property?
2. How to measure an investment property? 3. How to account for gain/loss on disposal? 4. How to account for transfers in or out of investment property?

5. A refresh on impairment loss (FRS 36)

What is an investment property?

Uses of property

In the production of goods and services

For administrative purposes

Sale in the ordinary course of business

Earn rental income

Capital appreciation

FRS 16 PPE

FRS 16 PPE

FRS 2 Inventories

FRS 40 Investment Property

FRS 40 Investment Property

Investment property is property held to earn rental income or for capital appreciation, or both, rather than for: use in the production or supply of goods or services or for administrative purposes; or sale in the ordinary course of business
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Refresh
Inventories Assets held for sale in the ordinary course of business, in the process of production for such sale, or materials or supplies to be consumed in the production process or in the rendering of services Property, plant and equipment Tangible items (a) held for use in production/supply of goods/services, for rental to others, or for administrative purposes (b) expected to use for > 1 period

Under the revaluation model, how often must PPE be revalued? 1. At least once in every financial period 2. Only every 3 to 5 years 3. As & when management desires 4. As & when requested by external auditors 5. Sufficiently regular so that carrying amount does not differ significantly from its FV

Which of the following is an IP?

1. Land held for a currently undetermined future use

2. Property leased out under a finance lease 3. Building leased out under an operating lease 4. Property being constructed for future use as IP
FRS 40:8,9

Property held for investment purposes can also be accounted for under FRS 16

1. True
2. False

FRS 2 vs. FRS 16 vs. FRS 40

Purpose 1. Production or supply* 2. Administrative purposes* 3. Rental to others 4. Capital appreciation 5. Sale in ordinary business

Property FRS 16 FRS 16 FRS 40 FRS 40 FRS 2

Plant FRS 16 FRS 16 FRS 16 x FRS 2

Equipment FRS 16 FRS 16 FRS 16 x FRS 2

*Owner-occupied
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Investment property

Operating lease option

Property held by a lessee under an operating lease may be classified and accounted for as investment property if the property otherwise meets the definition of an investment property and the lessee uses the fair value model.

In this instance, FRS 40 overrides FRS 17 by requiring that the lease be accounted for as if it were a finance lease.

Consider the following:

Dual use property

Are you able to split the property? Can the portion be sold or leased out separately under a finance lease?
If yes, account for each portion under the relevant accounting standard If no, the entire property is classified as investment property only if the portion held for own use is insignificant
Own use

Owner occupied

Rental income

rental income

FRS 40

FRS 16

FRS 40

owner occupied

rental income

FRS 16

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Consider the following

Ancillary services

services

rental income

FRS 40

services

rental income

FRS 16

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Agenda
1. What is an investment property?
2. How to measure an investment property? 3. How to account for gain/loss on disposal? 4. How to account for transfers in or out of investment property?

5. A refresh on impairment loss (FRS 36)

Recognition and Measurement

Investment Property

Initial recognition

Subsequent measurement options

Cost as for FRS 16

Cost model

Fair value model

Measure at cost less accumulated depreciation and accumulated impairment losses

Measure at fair value with gains and losses recognised in P/L

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Determination of fair value

Consider Actual current market for that type of property in that type of location at the reporting date and current market expectations; Rental income from existing leases and market expectations regarding possible future lease terms;

Investors expectations

!In a flat market, a loss equivalent to the transaction costs incurred on

acquisition of the investment property likely in the year of acquisition.

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FV model under FRS 40

Independent professional valuers valuation is encouraged but not required (FRS 40:32)
If FV cannot be measured reliably for IP, measure at cost in accordance with FRS 16 (FRS 40:53) Once FV always FV (FRS 40:55) until disposal or change of use

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Measurement under FRS 40

Cost model or FV model

Apply to all IP (FRS 40:34, 56) Inappropriate to change from FV to cost model as cost model unlikely to provide reliable and more relevant information (FRS 40:31)

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Agenda
1. What is an investment property?
2. How to measure an investment property? 3. How to account for gain/loss on disposal? 4. How to account for transfers in or out of investment property?

5. A refresh on impairment loss (FRS 36)

Disposal of investment properties

Gain or loss on disposal of investment property is measured as the difference between the net disposal proceeds and the carrying amount of the property Other related issues to consider:

Sale and leaseback

Deferred consideration

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Agenda
1. What is an investment property?
2. How to measure an investment property? 3. How to account for gain/loss on disposal? 4. How to account for transfers in or out of investment property?

5. A refresh on impairment loss (FRS 36)

Transfers to or from investment property

Timing of transfers Actual change of use rather than on changes in an entitys intentions Measurement of transfers

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Measurement of transfers
From Investment property
-Cost model -Fair value model

To Property, plant and equipment

Investment property
-Cost model -Fair value model

Inventories

Property, plant and equipment

-Cost -Revalued basis

Investment property

Inventories

Investment property

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Transfer to investment property (fair value)

Owner occupied (FRS 16)

Inventory (FRS 2)

End of owner occupation

Commencement of operating lease to another party

Investment property at fair value

Revaluation in OCI
OCI = other comprehensive income

Revaluation in profit or loss

Transfer from investment property (fair value)

Investment property at fair value Commencement of owner occupation Commencement of development with a view to sale

Owner occupied (FRS 16)

Inventory (FRS 2)

Fair value becomes new cost basis

Under FRS 40, transfers to or from investment property shall be made when there is a change in use, evidenced by (i) commencement of owner-occupation, for a transfer from investment property to owner-occupied property (ii) commencement of development with a view to sale, for a transfer from investment property to inventories (iii) end of owner-occupation, for a transfer from owner-occupied property to investment property (iv) commencement of an operating lease to another party, for a transfer from inventories to investment property a. b. c. d. e. (i) and (ii) (i) and (iii) (i), (ii) and (iii) All of the above None of the above

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Due to a government clampdown on the overheated property market, Prosperous Ltd, a property developer, decides to rent out some of its completed apartments through operating lease agreements with external parties instead of selling them. Prosperous Ltd uses the fair value model under FRS 40 to account for its investment property. Which one of the following statements below is correct?
a. The above represents a transfer from Plant, Property and Equipment (FRS 16) to Investment Property (FRS 40) Upon the transfer, the difference between the fair value and carrying amount of the apartments will go to Profit & Loss. Upon the transfer, the difference between the fair value and carrying amount of the apartments will go to Revaluation Reserve. The carrying amount of the apartments will be transferred to an Investment Property account upon the signing of the lease agreements. The transfer is just a reclassification of assets and as such there are no valuation issues.

b.
c. d. e.

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Agenda
1. What is an investment property?
2. How to measure an investment property? 3. How to account for gain/loss on disposal? 4. How to account for transfers in or out of investment property?

5. A refresh on impairment loss (FRS 36)

Impairment Loss (FRS 36)

FRS 36 Impairment of assets applies to all assets except

Inventories (FRS 2) Assets arising from construction contracts (FRS 11) Deferred tax assets (FRS 12) Financial assets (FRS 39) other than investments in subsidiaries, associates and jointly controlled entities Assets arising from employee benefits (FRS 19) Investment property measured at fair value (FRS 40) Biological assets measured at fair value less estimated point-of-sale costs (FRS 41) Assets arising from insurance contracts (FRS 104) Non-current assets classified as held for sale (FRS 105)

FRS 36 is mainly applicable to PPE and intangible assets.

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Steps to impairment testing

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Reversal of impairment

Summary of Property Accounting Under

Revaluation Method

Cost Method

Fair Value Model

Property nature

PPE or IP

PPE

IP

Applicable FRS

FRS 16 / FRS 40

FRS 16

FRS 40

Depreciable?

Yes unless freehold land

Yes, up to revaluation/ derecognition Same as a revaluation Same as a revaluation

N.A.

Subject to impairment? Can impairment be reversed?

Yes

Same as a FV adjustment Same as a FV adjustment

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Yes