INVESTMENT PROPERTY (PAS 40)

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ISSUES IN ACCOUNTING FOR INVESTMENT PROPERTY:

1. Objective and scope of PAS 40
2. Accounting for partly owner-occupied and partly investment property
3. Accounting for intra-company rentals
4. Recognition and measurement of investment property
5. Accounting for transfer from/to investment property
6. Accounting for disposal of investment property
7. Disclosures
*Insignificant component - meaning the owner-occupied portion of the property
provides only ancillary services that are insignificant component of the
arrangement taken as a whole (for instance, the building owner supplies security
and maintenance services to the lessees).
**Significant component - meaning the owner-occupied portion of the property
provides only ancillary services that are significant component of the arrangement
taken as a whole (such as in the case of an owner-managed hotel).

OBJECTIVE AND SCOPE OF PAS 40:

ACCOUNTING FOR INTRA-COMPANY RENTALS:
The objective of this standard is to prescribe the accounting treatment for
investment property and related disclosure requirements. Property rented to a parent, subsidiary, or fellow subsidiary is not investment
property in consolidated financial statements that include both the lessor and the
Investment property is a property (land and/or building) held to earn rentals or lessee, because the property is owner-occupied from the perspective of the group.
for capital appreciation, or both. However, such property could qualify as investment property in the separate
financial statements of the lessor, if the definition of investment property is
It includes: otherwise met.
1. Land held for long-term capital appreciation; In consolidated FS, owner-occupied property
2. Land held for a currently undetermined use;
3. Building owned by the entity and rented out under operating lease to In separate FS, can be an investment property
another entity;
4. Building leased by the entity under finance lease and rented out under
operating lease to another entity. A property leased by the entity under RECOGNITION AND MEASUREMENT OF INVESTMENT PROPERTY:
operating lease can be accounted for as an investment property provided:
a. The property meets the definition of investment property; Investment property should be recognized as an asset when:
b. The operating lease is accounted for as it were a finance lease; 1. It is probable that the future economic benefits that are associated with the
and property will flow to the entity, and
c. The lessee uses the fair value model in measuring the property 2. The cost of the property can be measured reliably.
interest;
5. Vacant building that is to be leased out under operating lease to another Initial measurement*:
entity in the future;
6. Land and building that is under development or construction for future
use as investment property; a. Acquired through cash Cash price
b. Credit/Installment Based on priority:
It excludes (therefore, PAS 40 does not apply for): a.) Cash price, or
1. Property held for use in the production or supply of goods or services or b.) PV of future cash payments
owner-occupied property for administrative purposes (PAS 16: Property,
Plant and Equipment);
2. Property held for future use as owner-occupied property (PAS 16: c. Self-constructed At costs incurred plus any borrowing costs up to the
Property, Plant and Equipment); date when the construction or development is
3. Property held for future development and subsequent use as owner- complete.
occupied property (PAS 16: Property, Plant and Equipment); d. Issuance of shares Based on PFRS 2:
4. Property occupied by employees, whether or not the employee pay rent at a.) FV of property received
market rate (PAS 16: Property, Plant and Equipment); b.) FV of shares issued
5. Owner-occupied property held for sale (PFRS 11: Non-current Assets c.) Par value of shares issued
Held for Sale and Discontinued Operations);
6. Property held for sale in the ordinary course of business or in the process e. Issuance of bonds Based on PAS 39:
of construction of development for such sale (PAS 2: Inventories) payable a.) FV of bonds payable
7. Property being constructed or developed on behalf of third parties (PAS b.) FV of asset received
11: Construction Contracts) c.) Face value of Bonds payable
8. Property owned by the entity and leased out under finance lease to f. Exchange of Assets If with commercial substance:
another company. a.) FV of asset given plus cash paid or less cash
received;
Take note of the following: b.) FV of asset received plus cash paid or less cash
Property owned Purpose Investment received
or leased? Property?
If with no commercial substance:
Owned Long-term capital appreciation  a.) CV of asset given
Owned Undetermined use  g. Donation FV of asset received
Owned To be leased out to another entity  h. Others Same as PAS 16
under operating lease
*Plus incidental costs directly attributable such as professional fees for legal
Owned To be leased out to another entity
under finance lease
 services, and property transfer taxes, but excludes:
a.) Start-up costs, unless necessary to bring the investment property to the
Leased under To be leased out to another entity intended use condition;
finance lease under operating lease
 b.) Operating losses incurred before the investment property achieves the
planned level of occupancy;
Leased under
finance lease
To be leased out to another entity
under finance lease
 c.) Abnormal amounts of wasted material, labor or other resources
incurred in constructing or developing the property.
Leased under Whatever 
Operating lease Subsequent measurement:

PAS 40 permits entities to choose between:

ACCOUNTING FOR PARTLY OWNER-OCCUPIED AND PARTLY a. Cost model - the investment property is carried at Cost less any accumulated
INVESTMENT PROPERTY: depreciation and any accumulated impairment losses.

If the owner uses part of the property for its own use, and part to earn rentals or b. Fair Value model - the investment property is carried at fair value without
for capital appreciation, and the portions can be sold or leased out separately, they deducting cost to sell. Any changes in fair value is recognized in profit or loss of
are accounted for separately. Therefore, the part that is rented out is investment the period in which they arise.
property. If the portions cannot be sold or leased out separately, the property is
investment property only if the owner-occupied portion is insignificant. 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
If could be sold separately, One portion is investment property, this is highly unlikely for a change from a fair value model to a cost model.
another portion is owner-occupied
property The best evidence of fair value. It is normally given by current prices on an active
market for similar property in the same location and condition and subject to
If could not be sold separately, and similar lease and other contracts. In the absence of such information, the entity may
The owner-occupied is insignificant All portion is investment property consider current prices for properties of a different nature or subject to different
component* conditions, recent prices on less active markets with adjustments to reflect changes
in economic conditions, and discounted cash flow projections based on reliable
If could not be sold separately, and All portion is owner-occupied
estimates of future cash flows.
The owner-occupied is significant property
component**

Investment Property (PAS 40) Page 1

Investment property under construction. If an entity determines that the fair value
of an investment property under construction is not reliably determinable but
expects the fair value of the property to be reliably determinable when construction
is complete, it measures that investment property under construction at cost until
either its fair value becomes reliably determinable or construction is completed.
Investment property other than under construction. If an entity determines that the
fair value of an investment property (other than an investment property under
construction) is not reliably determinable on a continuing basis, the entity shall
measure that investment 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.
ACCOUNTING FOR TRANSFER FROM/TO INVESTMENT PROPERTY:
DISCLOSURES:
• GENERAL DISCLOSURES:
1. Whether the fair value or the cost model is used;
2. The amounts recognised in profit or loss for:
a. rental income from investment property; and
b. direct operating expenses (including repairs and maintenance) arising
from investment property that generated rental income during the period;
3. Restrictions on the realizability of investment property or the remittance of
income and proceeds of disposal;
4. Contractual obligations to purchase, construct, or develop investment property
or for repairs, maintenance or enhancements;
5. If classification is difficult, the criteria to distinguish investment property
from owner-occupied property and from property held for sale;

Transfers to, or from, investment property should only be made when there is a • ADDITIONAL DISCLOSURE FOR FAIR VALUE MODEL:
change in use, evidenced by one or more of the following:
1. Commencement of owner-occupation (transfer from investment property 1. Whether property interests held under operating leases are classified and
to owner-occupied property); accounted for as investment property;
2. Commencement of development with a view to sale (transfer from 2. The methods and significant assumptions applied in determining the fair value
investment property to inventories); of investment property. The extent to which the fair value of investment property
3. End of owner-occupation (transfer from owner-occupied property to is based on a valuation by a qualified independent valuer; if there has been no
investment property) such valuation, that fact must be disclosed;
4. Commencement of an operating lease to another party (transfer from 3. The cumulative change in fair value recognized in profit or loss on a sale from
inventories to investment property) a pool of assets in which the cost model is used into a pool in which the fair
5. End of construction or development (transfer from property in the course value model is used
of construction/development to investment property. 4. A reconciliation between the carrying amounts of investment property at the
beginning and end of the period, showing additions, disposals, fair value
adjustments, net foreign exchange differences, transfers to and from inventories
FROM TO INVESTMENT INITIAL MEASUREMENT and owner-occupied property, and other changes
PROPERTY 5. Whether significant fixtures, such as lift and office furniture, within an
CARRIED AT investment property, have been separately recognized.
Owner-occupied Investment Cost Model Carrying value of owner-
property and Property occupied property and • ADDITIONAL DISCLOSURE FOR COST MODEL:
inventory inventory. 1. The depreciation methods or rate used and the useful life;
2. The gross carrying amount and the accumulated depreciation (aggregated with
Owner-occupied Investment Fair Value Fair Value of owner-occupied accumulated impairment losses) at the beginning and end of the period;
property Property Model property. Difference between 3. Reconciliation of the carrying amount of investment property at the beginning
CV and FV should be treated in and end of the period, showing additions, disposals, depreciation, impairment
the same way as a revaluation, recognised or reversed, foreign exchange differences, transfers to and from
impairment or gain on inventories and owner-occupied property, and other changes;
reversal of impairment in 4. The fair value of investment property. If the fair value of an item of investment
accordance with PAS 16 and property cannot be measured reliably, additional disclosures are required,
PAS 36. including, if possible, the range of estimates within which fair value is highly
likely to lie.
Fair Value XX
Carrying Value (XX)
RS (or impairment loss) XX EXERCISES:
Inventory Investment Fair Value Fair Value of inventory.
Property Model Difference between CV and FV 1. Ace Company acquired an investment property with an installment price of
should be recognized P2,400,000. The acquisition of the property requires downpayment of 20% and a
immediately in profit or loss. non-interest bearing note payable at the end of each year for 5 years. The
prevailing market rate of interest for similar instrument is 12%. Ace incurred
Fair Value XX transaction costs amounting to P50,000 for the property. What is the acquisition
Carrying Value (XX) cost of the investment property?
Gain (loss) on reclassification to a. P 1,862,400 b. P 1,914,320 c. P 2,400,000 d. P 2,450,000
investment property XX
Investment Investment Fair Value Fair Value of inventory.
Property under Property Model Difference between CV and FV 2. On January 2, 2009, Grand made a test of impairment on one of its buildings
construction should be recognized carried as plant asset. The test on impairment revealed a recoverable value of
immediately in profit or loss. P5,500,000 on that building. The carrying amount of this building as of January
2, 2009 was P8,000,000 with a remaining useful life of 10 years.
Fair Value XX On January 2, 2011, Grand decided to convert this building into an investment
Carrying Value (XX) property that is to be carried at fair value. The cost of converting the building is
Gain (loss) on reclassification to insignificant but as a result of the change in the usage, the fair value of the
investment property XX building was reliably measured at P7,000,000. What amount of realized revenue
should Grant recognize in its profit or loss statement on the date of transfer?
Investment Owner- Cost Model Carrying value of investment
a. P 0 b. P 600,000 c. P 2,000,000 d. P 2,600,000
Property occupied property.
property
and 3. Using data in no. 2, what amount of unrealized gain should Grant recognize in
Inventory its shareholders' equity on the date of transfer?
Investment Owner- Fair Value Fair Value of investment a. P 0 b. P 600,000 c. P 2,000,000 d. P 2,600,000
Property occupied Model property at date of change in
property use. Changes from previous fair 4. Carol's investment property has a historical cost of P2,400,000. On December
and value shall be included in the 31, 2011, the fair value of this investment property is P2,800,000. If carol uses
Inventory profit or loss. the fair value model to account for the difference, Carol should:
a. recognize P400,000 unrealized gain in shareholders' equity
FV-date of change in use XX b. recognize P400,000 unrealized gain in the profit or loss
FV-last reporting period (XX) c. recognize a revaluation surplus of P400,000
Gain (loss) in fair value XX d. not recognize the P400,000 increase

5. On January 2, 2009, Might converted its occupied property to investment

ACCOUNTING FOR DISPOSAL OF INVESTMENT PROPERTY:
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 in the income statement of the period. Compensation
from third parties is recognized when it becomes receivable.
property that is to be carried at fair value. The carrying amount of the property in
its books is P4,000,000. Assuming the fair value on the date of transfer is
P3,800,000, Might should recognize:
a. impairment loss of P200,000 in profit and loss statement
b. P200,000 deferred loss as an asset
c. P200,000 unrealized loss in shareholders' equity
d. P4,000,000 cost of investment property

ANSWER KEY:
Net Proceeds from sale XX
Less: Carrying value of investment property (XX) 1. B 2. C 3. B 4. B 5. A
Gain (loss) on sale XX

Investment Property (PAS 40) Page 2