MFRS 140 INVESTMENT

PROPERTY – page 510-528

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LEARNING OUTCOME
AT THE END OF THIS TOPIC, YOU SHOULD BE ABLE TO:

• Define and give examples of investment properties

• Explain the initial and subsequent measurement of investment

properties

• Discuss the accounting treatments – recognition and

measurement – for transfers to or from investment properties -
for transfers from investment properties to inventories and
transfers from inventories to investment properties.

• Show the disclosure requirements for reclassification of owner

occupied properties to investment properties
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Investment Property
 Property – (LAND or BUILDING - or part of building -
or both) held to earn rentals or for capital appreciation or
both, not for:
 use in the production or supply of goods or services or for
administrative purposes, or
 sale in the ordinary course of business.

 CARS FOR RENTAL AN IP??? NO

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Investment Property - Examples

 Held for long-term capital appreciation rather than for short-term sale in the
ordinary course of business
 Held for a currently undetermined future use.(if an entity is undecided whether
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 held for capital
appreciation.
 Owned by the entity and leased out under one or more operating leases
 Being constructed or developed for future use as investment property
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Non Investment Property - Examples

 Owner-occupied property, including

 property held to be used in future as owner occupied
 property occupied by employees of the owner
 property awaiting disposal
 Property currently under construction or development on behalf
of third parties
 Property leased to another entity under a finance lease
arrangement
 Property held for sale in the ordinary course of business –
inventory
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Properties With Dual Uses

 If property can be sold or leased out separately
 Part rented out is classified as investment property (MFRS140)
 Part occupied is classified as PPE (MFRS116)

 If property cannot be sold or leased out separately

 The whole property is classified as investment property if the part that is
occupied is insignificant
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Properties Within a Group

 Property owned by a group and occupied by the parent
or subsidiary

 Classified as PPE in the consolidated financial statements

 Classified as investment property in the financial statements
of the company that owns property
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Example:

Page 512 - 514

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Exercise – Investment Property or

Property, Plant and Equipment

• Which of the following are investment properties?

• A is leased to tenants under operating leases, but intended for short-term sale
• B is rented out to employees at market rental rates
• C is partly being occupied and partly rented out to other entities
• D is a hotel which is also own-managed
• E is currently being constructed and developed for future use as an investment property
• F is a newly acquired property still of undetermined use
• G is held for long-term capital appreciation, and not intended for short-term sale

• Answer: Property C (if occupation is insignificant), Property E, F and G

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Exercise – Investment Property or Property, Plant and Equipment

New Bhd purchases a landed property at a cost of RM200,000,000. In the

sale and purchase agreement, RM40,000,000 of the purchase price is
attributed to the land portion. The building consists of 15 floors of equal
space. Three floors are used for administrative purposes and the balance let
out to Old Bhd.
 
Is the building an item of investment property for New Bhd ?
Is the item of investment property within the scope of MFRS 140 ?
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Exercise – Investment Property or Property, Plant and Equipment

Answer:

• MFRS defines investment property as `land or a building or part of a

building or land and building) held to earn rentals of 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’

• In this case, New Bhd shall apply its judgement to determine whether the
criteria for investment property are met or whether the property is more of
an owner-occupied property. New Bhd may conclude that the 12 storey of
building as investment property, while the storeys be classified as owner –
occupied property as stream of cash flows is more rental cash flows .

• The building rental out is an item of investment property for New Bhd and
accounted for under MFRS 140 while the owner-occupied property is
accounted under MFRS 116
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Exercise – Investment Property or Property, Plant and Equipment

An entity owns a building that it rents out to independent third parties under
operating leases in return for rental payments. The entity provides cleaning,
security and maintenance services for the lessees of the building.
 
Can the building be considered as an asset under invesment
property ?

Answer:
• If the services provided by the entity are insignificant to the arrangement as
a whole, the the property is investment property. In most cases cleaning,
security and maintenance services will be insignificant and hence the
building would be classified as investment property.

• When the services provided are significant the property should be classified
as property, plant and equipment. For example, if an entity owns and
manages a hotel, services provided to guests are significant to the
arrangement as a whole.
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Exercise – Investment Property or Property, Plant and Equipment

An entity ( parent) owns a building that it rents out to its subsidiary under an
operating lease in return for rental payment. The subsidiary uses the building
as a retail outlet for its products.
 
Can the building be considered as an asset under invesment
property ?

Answer:
In the consolidated financial statements of the parent the building is not
classified as an item of investment property. The consolidated financial
statements present the parent and its subsidiariary as a single entity. The
consolidated entity uses the building for the supply of goods. Thefore the
building is accounted for by the consolidated group as an item of property,
plant and equipment.
 
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Recognition Criteria – page 514

Investment property should be recognised as an asset only when:

 It is probable that the future economic benefits (rental income and appreciation in the value) that
are associated with the investment property will flow to entity, and

 The cost can be measured reliably

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Initial Measurement – page 514-515

 Initially measured at its cost

 Costs include
 Initial costs (transaction costs) incurred when first acquired and
 Subsequent costs incurred to add to, replace part of, or service to a property
*** Start-up costs, operating losses and abnormal amounts of wasted material
and labour costs are not included.
 Day to day servicing costs – repairs and maintenance – are not recognized in its
carrying amount
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Initial Measurement

 Purchased investment property

 Costs comprises purchase price, and any directly attributable expenditure.
Directly attributable expenditure includes professional fees for legal
services, property transfer taxes and other transaction costs.

 Property held under finance lease

 The lower of fair value and present value of minimum payments
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Initial Measurement - example

Sate Bhd purchases a landed property at a cost of RM80,000,000. In the sale and purchase agreement,
RM10,000,000 of the purchase price is attributed to the land portion. The building consists of 10 floors
of equal space. Four floors are used for administrative purposes and the balance let out to tenants.

Sate Bhd also incurs the following costs in connection with the purchase of the property.
Legal and agency fees RM2,000,000
Soft launching cost to market for tenants RM300,000
Feng Shui cost for re-arrangements of interiors RM150,000
General administrative expenses RM100,000

Required:
Determine the cost of the investment property on initial recognition.
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Initial Measurement - example

Answer:
Purchase price RM80,000,000
Transaction costs – legal and agency fees RM2,000,000
Total costs RM82,000,000

Allocated to PPE (40%) RM32,800,000

Allocated to IP (60%) RM49,200,000
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Subsequent Measurement - page 516 - 518

 Entity is allowed to choose one of the following:

 Fair value model
 Cost model

 A model, once chosen, must be applied to all its investment properties

 A voluntary change is made only if the change results in the financial
statements providing reliable and more relevant information about the effects of
transaction, other events, or conditions in the entity’s financial position,
performance or cash flows.
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Cost Model

 Property is measured in accordance with MFRS 116 - at cost less accumulated

depreciation and impairment losses

 By using this method, IP is depreciated.

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Fair Value Model

 Property is measured at fair value or market value.

 Fair value – amount for which an asset could be exchanged between
knowledgeable, willing parties in an arms length transaction and should
reflect market conditions at the balance sheet date

 Any gain or loss arising from a change in fair value is recognized in SOCI for
the period in which it arises.

 IP is not depreciated by using this model.

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Fair Value Model

 A willing buyer is motivated, but not compelled to buy at any price

 A willing seller is not over-eager, not forced to sell at any price, not one who is
prepared to hold out for a price not considered reasonable in current market
conditions

 Arms length transaction is a transaction between unrelated parties, acting

independently, with no special relationship
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Fair Value Model

 An entity must ensure that assets and liabilities are not double-counted:

 Equipments – lifts or air conditioning – included in the fair value is not recognized
separately as property, plant and equipment

 Furniture included in the fair value of an office building is not recognized separately as
property, plant and equipment

 Prepaid or accrued operating lease income – accounted as separate liability or asset – is

excluded from the fair value

 Any recognized lease liability is added back to determine the carrying amount
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Inability to Determine Fair Value Reliably – page 518

 If the fair value of an investment property under construction is not reliably

determinable, the cost model should be used until either its fair value is reliably
determinable or construction is completed (whichever is earlier).
 If the fair value is not reliably determinable even after construction is completed, the
property shall be measured based on the cost model in MFRS116

 If the fair value of an investment property is not reliably determinable on a continuing

basis, the cost model in MFRS116 should be used.
 The residual value is assumed zero
 The cost model is applied until its disposal
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Example:

1 July 2010 – AAA Bhd acquired a building with an estimated life of

30 years with an undetermined future use for RM3,000,000. the fair
value of the building given by an independent valuation on 30 June
2011 and 2012 was RM4,500,000 and RM4,100,000 respectively.
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Questions

Required: ( Cost model)

1. Explain the accounting treatment on 1 July 2010, 30 June 2011
and 30 June 2012
2. Show the journal entries on 1 July 2010, 30 June 2011 and 30 June
2012.
3. Prepare SOCI (extract) FTYE 30 June 2011 and 30 June 2012
4. Prepare SOFP (extract) as at 30 June 2011 and 30 June 2012
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Example: Cost Model

Accounting treatment:
Building is classified as investment property and is measured at the initial cost of
RM3,000,000 on acquisition on 1 July 2010.

On 30 June 2011, it is measured at cost less accumulated depreciation of

RM2,900,000 (RM3,000,000 – RM100,000).

On 30 June 2012, it is measured at the carrying amount of RM2,800,000

(RM3,000,000 – RM200,000). The fair value changes have been ignored since the
cost model was adopted.
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Example: Cost Model

Journal entries:

1 July 2010 Dr. Investment property RM3,000,000

Cr. Cash RM3,000,000

30 June 2011 Dr. SOPL- dep RM 100,000

Cr. Accumulated depreciation RM 100,000

30 June 2012 Dr. SOPL-dep RM 100,000

Cr. Accumulated depreciation RM 100,000
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Example: Cost Model

Statement of Comprehensive Income FYE 30 June

2011 2012
Depreciation expense RM 100,000 RM 100,000

Statement of financial position as at 30 June

2011 2012
Investment property RM 2,900,000 RM
2,800,000
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Questions

Required: ( Fair value model)

1. Explain the accounting treatment on 1 July 2010, 30 June 2011 and 30 June
2012
2. Show the journal entries on 1 July 2010, 30 June 2011 and 30 June 2012.
3. Prepare SOCI (extract) FTYE 30 June 2011 and 30 June 2012
4. Prepare SOFP (extract) as at 30 June 2011 and 30 June 2012
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Example: Fair Value Model

Accounting treatment:
The building is classified as an investment property on 1 July 2010 at the initial cost of RM3,000,000.

The carrying amount of the building on 30 June 2011 and 2012 is RM4,500,000 and RM4,100,000
respectively.

Consequently, changes in the fair value of the investment property will be recognized in SOPL.

RM1,500,000 (4.5M-3.0M) is credited as income for the year ended 30 June 2011 and RM400,000
(4.1M-4.5M) is treated as expense for year ended 30 June 2012.The building is not depreciated by
using this fair value model.
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Example: Fair Value Model

Journal entries:
1 July 2010 Dr. Investment property RM3,000,000
Cr. Cash RM3,000,000

30 June 2011 Dr. Investment property RM 1,500,000

Cr. SOPL – increase in FV RM 1,500,000
(other income)

30 June 2012 Dr. SOPL – decrease in FV RM 400,000

(other expense) RM 400,000
CR Investment property
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Example 1: Fair Value Model

Statement of Profit or Loss FYE 30 June

2011 2012
Change in fair value of IP RM1,500,000 RM400,000
(income) (expense)

Statement of financial position as at 30 June

2011 2012
Investment property RM4,500,000 RM 4,100,000
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Transfers To or From Investment Property – page 519 -522

 Transfers are made when there is a CHANGE IN USE

Transfers Proof Of Deemed carrying amount and accounting

Change In Use treatment

MFRS140 IP Commenceme Fair value at the date of change. Apply

(accounted as nt of owner- MFRS116 from date of change.
fair value model) occupation
to MFRS116 PPE

MFRS116 PPE to End of owner For investment property carried at fair value
MFRS140 IP occupation model, apply MFRS116 up to the date of
(accounted as change in use. Any difference at that date
fair value model) between the carrying amount of the property
under MFRS116 and its fair value should be
treated the same way as a revaluation under
MFRS116.
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Transfer from MFRS140 Property to MFRS116 Property

IP measured based on cost model

• On date of the transfer, MFRS116 owner occupied property shall be

measured at the carrying amount of the MFRS140 property.
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Example: Transfer from MFRS140 Property to MFRS116 Property

IP measured based on cost model

On 1 January 2009, Lalai Bhd acquired a building for rental purposes at a cost of
RM4,000,000. The building has an estimated useful life of 40 years. On 1 January
2011, the fair value of the building was RM3,610,000. On 1 January 2014, the
building was used as its head office and the fair value of the building on this date
was RM4,200,000.
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Example: Transfer from MFRS140 Property to MFRS116 Property

IP measured based on cost model

• On 1 January 2009, Lalai Bhd acquired a building for rental purpose
▫ Cost - RM4,000,000
▫ Estimated useful life - 40 years
• 1 January 2011 - fair value - RM3,610,000.
• 1 January 2014 - building was used as its head office - fair value -
RM4,200,000.
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Questions

1. Explain the accounting treatment on 1 January 2014.

2. Show the journal entries on 1 January 2014

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Example: Transfer from MFRS140 Property to MFRS116 Property

IP measured based on cost model

Accounting treatment:
On 1 January 2014, the property is reclassified as an MFRS116 building.
The initial cost of the MFRS116 owner-occupied property shall be the
carrying amount of the MFRS140 investment property (RM4,000,000 –
(RM100,000 x 5 years) that is RM3,500,000
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Example: Transfer from MFRS140 Property to MFRS116 Property

IP measured based on cost model

Journal entries on 1 January 2014 – date of transfer

Dr. MFRS116 PPE/MFRS 116 Building RM 3,500,000

Dr. Accumulated depreciation 500,000

Cr. MFRS140 Investment property/MFRS 140 RM 4,000,000
Building

OR

Dr. MFRS116 PPE RM 3,500,000

Cr. MFRS140 Investment property

RM3,500,000
Dr. Accumulated depreciation 500,000

Cr. MFRS140 Investment property RM 500,000

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Example: Transfer from MFRS140 Property to MFRS116 Property

IP measured based on cost model

Disclosure : PPE

Cost/Valuation PPE (RM)

As at 1.1.2014 XXXXX
Additions
Reclassification to MFRS116 3,500,000
As at 31.12.2014 XXXXXXX
Acc. Depreciation
As at 1.12014 XXXXX
Charge for the year XXXX
As at 31.12.2014 XXXXX
Carrying amount XXX
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Example: Transfer from MFRS140 Property to MFRS116

Property

IP measured based on fair value model

• On the date of the transfer, MFRS116 owner occupied property shall

be measured at the fair value of the MFRS140 investment property.
Any difference between the fair value at transfer date and the
previous carrying amount is recognized in profit or loss
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Example: Transfer from MFRS140 Property to MFRS116

Property

On 1 January 2009, Lalai Bhd acquired a building for rental purposes at a cost of
RM4,000,000. The building has an estimated useful life of 40 years. On 1 January
2011, the fair value of the building was RM3,610,000. On 1 January 2014, the
building was used as its head office and the fair value of the building on this date
was RM4,200,000.

Required:
1. Explain the accounting treatment on the date of transfer (1.1.2014)
2. Show the journal entries on 1 January 2014.
 44

Transfer from MFRS140 Property to MFRS116 Property

IP measured based on fair value model

Accounting treatment:
On 1 January 2014, the property is reclassified as an MFRS116
building. On date of the transfer (1 January 2014), MFRS116 property
shall be measured at the fair value of the MFRS140 property that is
RM4,200,000.

The difference between the fair value (RM4,200,000) at transfer date

and the previous carrying amount (RM3,610,000) of RM590,000 is
recognized in SOPL (credited as income).
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Example: Transfer from MFRS140 Property to MFRS116 Property

IP measured based on fair value model

Journal entries on 1 January 2014 – date of transfer

Dr. Investment property/MFRS 140 RM 590,000

building

Cr. SOCI – increase in FV RM590,000

Dr. MFRS116 PPE RM 4,200,000

Cr. MFRS140 Investment property RM4,200,000

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Example: Transfer from MFRS140 Property to MFRS116 Property

Income statement for 31 December 2014

Increase in fair value of investment property RM 590,000

Depreciation expense of building as property, plant

and equipment (RM4,200,000 /35 years) 120,000

SOFP as at 31 December 2011 2014

Investment property RM3,610,000 -

Property, plant and RM 4.080,000

equipment (4,200,000-
120,000)
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Transfer from MFRS116 Property to MFRS140 Property

PPE Measured Based on Cost Model

• On the date of the transfer, the investment property will be measured

at the carrying amount of the owner occupied property.
 
• If the investment property is subsequently measured based on the
fair value model, any difference between fair value at transfer date
and the previous carrying amount is recognized in profit or loss
(income statement)
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Example: Transfer from MFRS116 Property to MFRS140

Property
On 1 January 2006 – Selesa Bhd acquired a building for own use at a cost of
RM8,000,000. The building was depreciated on a straight-line basis over 40 years.
On 1 January 2014, the fair value of the building was RM8,400,000. On this date,
the building was rented out to non-related organizations.

Required:
1. Explain the accounting treatment on the date of transfer (1.1.2014)
2. Show the journal entries on 1 January 2014.
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Transfer from MFRS116 Property to MFRS140 Property

Accounting treatment
If Selesa Bhd adopts the cost model for its MFRS116 owner occupied property,
the initial cost of the MFRS140 investment property shall be the carrying
amount of the property on the date of transfer (1 January 2014) of
RM6,400,000. (8,000,000 – (8,000,000/40 x 8)
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Transfer from MFRS116 Property to MFRS140 Property

To determine carrying amount of MFRS116 building

as at 31 December 2013
Cost of FRS116 building RM 8,000,000
Accumulated depreciation (YE 31 Dec 2006 – 2013) 1,600,000
(8,000,000/40) x 8yrs 6,400,000
Journal entries to record transfer as at 1 January 2014 6,400,000
Dr. MFRS 140 Investment property RM 6,400,000
Dr. Accumulated depreciation 1,600,000
Cr. MFRS116 Building RM 8,000,000
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Journal entries on 1.1.2014

OR
Dr. MFRS140 IP RM6,400,000
Cr. MFRS116 Building RM6,400,000

Dr. Acc. Dep. RM1,600,000

Cr. MFRS116 Building RM1,600,000
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Example: Transfer from MFRS116 Property to MFRS140 Property

Disclosure: PPE
Cost/Valuation Building
As at 1.1.2014 8,000,000
Additions -
Elimination of accumulated dep. (1,600,000)
Surplus on revaluation -
Transfer to MFRS140 (6,400,000)
As at 31.12.2014 -
Accumulated depreciation
As at 1.1.2014 1,600,000
Elimination of acc. Dep. (1,600,000)
Charge for the year -
As at 31.12.2014 -
Carrying amount as at 31.12.2014 -
 53

Transfer from MFRS116 Property to MFRS140 Property

PPE Measured Based on Revaluation Model

• On the date of the transfer, the investment property will be measured

at the fair value of the owner occupied MFRS116 Property, plant
and equipment.

• Any difference arising upon revaluation of the owner occupied

property is treated as revaluation as under MFRS 116 Property,
Plant and Equipment.
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Transfer from MFRS116 Property to MFRS140 Property

On 1 January 2006 – Selesa Bhd acquired a building for own use at a cost of
RM8,000,000. The building was depreciated on a straight-line basis over 40 years.
On 1 January 2014, the fair value of the building was RM8,400,000. On this date,
the building was rented out to non-related organizations.

Required:
1. Explain the accounting treatment on the date of transfer (1.1.2014)
2. Show the journal entries on 1 January 2014.
 55

Transfer from MFRS116 PPE to MFRS140 investment property

Accounting treatment
The building is treated as investment property under MFRS 140 on
1 January 2014, and is measured at the fair value of RM8,400,000.
Any difference between the property’s carrying amount and its fair
value is treated as revaluation under MFRS 116.

Thus, on the date of transfer as at 1 January 2014, a revaluation of

the owner occupied property shall take place as per MFRS116.

On this date there is surplus on revaluation of MFRS 116 building

of RM2,000,000 since the fair value is RM8,400,000 and the
carrying amount of MFRS 116 building is RM6,400,000
(8,000,000-1,600,000) and it is credited to asset revaluation
reserve.
 56

Transfer from MFRS116 PPE to MFRS140 investment property

To determine increase or decrease in carrying amount of

MFRS116 building upon transfer on 1 January 2012

Valuation of MFRS116 building – 1 January RM 8,000,000

2006

Accumulated depreciation (YE 31 Dec 2006 –

2013):

(RM8,000,000/40 years) x 8 years 1,600,000

Carrying amount – 31 December 2013 6,400,000

Fair value on revaluation – 1 January 2014 8,400,000

Surplus on revaluation 2,000,000

 57

Transfer from MFRS116 Property to MFRS140 Property

Journal entries to record transfer as at 1 January 2014

Dr. MFRS140 Investment property RM 8,400,000
Cr. MFRS116 Building 8,400,000

Dr. Accumulated depreciation RM 1,600,000

Cr. MFRS116 Building RM 1,600,000

Dr. MFRS116 Building RM 2,000,000

Cr. Revaluation reserve 2,000,000
 58

Disposals of Investment Properties

 Investment property is eliminated from the balance sheet:

 On disposal by sale or by entering into a finance lease; or
 When it is permanently withdrawn from use
 Difference between the net proceeds and the carrying amount - gain or loss – is
recognized in profit or loss
 Compensation from 3rd parties for IPs that have been impaired, lost or given up
are recognized in the income statement when receivable.
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Disclosure
 An entity shall disclose:

 Whether the fair value model or cost model has been applied
 Fair value model- reconciliation of carrying amount at beginning and end of
period
 Cost model – depreciation method, useful lives, gross carrying amount and
accumulated depreciation at beginning and end of period
 Criteria it uses to distinguish investment property from owner occupied
property
 Methods and assumptions used to determine fair value
 Rental income, operating expenses and changes in fair value