In progress - PAS 40 Investment Property

Question 1

What is the objective of PAS 40?

Question 2

What are outside the scope of PAS 40?

Question 3

What is an investment property?

Answer 3

Land and/or building (or part of land and/or building) held by an owner or a lessee as a right of use asset to earn rentals or for capital appreciation

leased out property should be under one or more operating leases

Question 4

What distinguishes investment property from an owner-occupied property?

Answer 4

The generation of cash flows is largely independent of other assets held by the entity.

The nature of income from investment property is passive.

Question 5

What is an owner-occupied property?

Answer 5

• used for the production or supply of goods or services; or
• used for administrative purposes

Question 6

What is the nature of use or purpose of an investment property?

Answer 6

• to earn rentals (through operating lease)
• for capital appreciation (land for speculation)

Question 7

Which of the following are investment properties?

a. land held for speculation
b. land held for currently undetermined use
c. building leased out under an operating lease
d. building leased out under a finance lease
e. building leased out to an affiliate
g. right of use asset relating to a building held by the entity and leased out under operating leases
h. apartment rented out to employees who pay rent at market rate
i. high value vehicle leased out to another entity under an operating lease

Answer 7

d. building leased out under a finance lease
h. apartment rented out to employees who pay rent at market rate
i. high value vehicle leased out to another entity under an operating lease

Question 8

Ancillary services

How to treat a property leased out under an operating lease if the entity provides ancillary/additional services as part of the lease arrangement?

Answer 8

if ancillary services is not significant to the arrangement as a whole (e.g. security and maintenance services) - the property is an investment property

if ancillary services is significant to the arrangement as a whole - the property is an owner occupied property (e.g. owner-managed hotel)

Question 9

Dual-use properties

How to treat a property that is partly leased out to other entities and partly used as owner-occupied?

Answer 9

if portions are separable - accounted for separately (i.e. leased out portion is recognized as investment property, while the owner-occupied portion is recognized as PPE)

if portions are not separable
- significant portion is leased out - recognized as investment property
- significant portion is owner-occupied - recognized as PPE

Separable means that the portions can be sold or leased out separately under a finance lease

Question 10

How to treat a land and/or building that is leased out an affiliate (under an operating lease)?

Answer 10

separate financial statement of the entity - property is an investment property

consolidated FS - property is PPE

Question 11

What is the initial measurement of an investment property?

Answer 11

cost

Question 12

Accounting policies

How to subsequently account for an investment property?

Answer 12

All investment properties are accounted for either under the cost model or the fair value model

Unlike in PPE, there is no per class application of the accounting policy to the entity’s investment properties.

Question 13

Exception to the general rule of applying only one accounting policy

What are the exceptions to the general rule of applying only one accounting policy in subsequently measuring all investment properties?

Answer 13

• Inability to measure the FV on a continuing basis
  If the entity uses FV model and it is unable to measure the FV of one or some of its investment properties on a continuing basis
• Investment properties in a mutual fund

Question 14

How to account for an investment property using the fair value model?

Answer 14

• Measurement: at FV
• Changes in the FV - recognized in profit or loss
• Property is not subject to depreciation

Question 15

Is an entity allowed to change from one model to another?

Answer 15

Yes, if the change results to a more reliable and more relevant information in the FS.

However, it is highly unlikely that a change from the fair value model to the cost model will result in a more relevant presentation.

Question 16

Double-counting

How to treat assets that are already included in the fair value of the investment property?

Answer 16

The assets should not be recognized separately

e.g.
- equipment such as lifts or air-con which is an integral part of a leased out building
- furniture if the building is leased out on a furnished basis (because the rental income relates to the furnished building)

Question 17

Does the fair value of an investment property include prepaid or accrued operating lease income?

Answer 17

No. Prepaid operating lease income is a separate liability, while accrued operating lease income is a separate asset.

Question 18

What are the differences between the cost model and fair value model with respect to the:
a. carrying amount of the property
b. amount reported in profit or loss

Answer 18

Carrying amount
- cost model - decreases steadily because of depreciation
- FV model - fluctuates in accordance with changes in fair value

Amounts reported in profit or loss
- cost model - depreciation & impairment loss, if any
- FV model - unrealized gains or losses from changes in fair value

Question 19

Transfer to and from investment property

When to reclassify an investment property to another asset? When to reclassify another asset to an investment property?

Answer 19

when there is a change in use

Change in management intention is not enough as a basis in changing a property’s classification.

Question 20

What are some examples of evidences of change in use?

Answer 20

• Commencement of owner-occupation or of development with a view to owner-occupation, for a transfer from IP to PPE
• Commencement of development with a view to sale, for a transfer from IP to inventory
• End of owner-occupation, for a transfer from PPE to IP
• Inception of an operating lease to another party, for a transfer from inventory to IP

Question 21

What are some examples of not changes in use?

Answer 21

• Change in management’s intention regarding the use of the property but with no corresponding development
• When an entity decides to dispose of an IP without development
• If an entity begins to redevelop an existing IP for continued future use as an investment property (even if no tenant occupies the property during the period of development)

Question 22

Transfers - Cost Model

TRUE or FALSE

When an entity uses cost model, transfers among investment properties, PPE, and inventories do not change the carrying amount of the property transferred.

Answer 22

TRUE

Question 23

Transfers - Cost Model

TRUE or FALSE

When an entity uses cost model, transfers among investment properties, PPE, and inventories do not change the cost of the property for measurement or disclosure purposes.

Answer 23

TRUE

Question 24

Transfers - Fair Value Model (Transfer to Investment Property)

TRUE or FALSE

The investment property shall be initially measured at its fair value at the time of transfer.

Answer 24

TRUE

Question 25

Transfers - Fair Value Model (Transfer to Investment Property)

TRUE or FALSE

If the investment property is transferred from inventory, the difference between its fair value and carrying amount before the transfer is recognized in OCI.

Answer 25

FALSE

Recognized in profit or loss

Question 26

Transfers - Fair Value Model (Transfer to Investment Property)

TRUE or FALSE

The investment property shall be initially measured at its fair value at the time of transfer.

Answer 26

TRUE