INVESTMENT PROPERTY

Definition
• It defines as a property (land or building or both) held by the owner or rented by the
lessee under finance lease, to earn rentals or for capital appreciation rather than for:
• Use in the production or supply of goods or services or administrative purposes; or
• Sale in the ordinary course of business

Inclusion
• Land held for long-term appreciation in value, rather than for short term sale in the
ordinary course of business;
• Land whose future use is undeterminable. If future use is not yet determined, land is
assumed to be held for capital appreciation;
• A building owned or held under a finance lease and leased out under an operating lease;
• A vacant building but held to be leased out under an operating lease;
• Investment property being redeveloped for continued use as investment property.

Exclusion
• Property intended for sale in the ordinary course of business or for development and
resale;
• Property under construction for third parties;
• Owner-occupied property, including property held for such use or for redevelopment
prior to such use;
• Property occupied by employees;
• Owner-occupied property awaiting disposal

Initial measurement
• Initial measurement is at cost;
• Transaction costs shall be included in the initial measurement.

Cost includes purchase price and any directly attributable expenditures.

Directly attributable costs

• This includes professional fees for legal services, property transfer taxes and other
transaction costs;
• For self-constructed investment property, the cost is at the date when the construction
or development is completed;
 • If payment for an investment property is deferred, the cost is the cash price equivalent.
The difference between this amount and the total payment is recognized as interest
expense over the period of credit.

Subsequent measurement
• An entity must choose an accounting policy to employ for subsequent recognition either
cost model or fair value model and apply to all its investment property.

Cost model
• All investment property shall be measured at cost less accumulated depreciation less
any impairment losses. Where the cost model is followed, the fair value of the property
should be disclosed.

Fair value model

• Fair value is defined as the amount for which the property could be exchange between
knowledgeable, willing parties in an arm’s length transactions. Fair value will normally
be obtainable by reference to current prices on an active market for similar properties in
the same location and condition as the property under review.
• The fair value policy requires the enterprises to revalue its investment properties every
year and any gain or loss arising from change in fair value must be included in the profit
or loss statement for that period.
• If an entity chooses fair value model, it shall continue to use as the measurement of all
its investment properties until such is dispose or until the properties becomes owner-
occupied property or the entity begins to develop the property for subsequent sale in
the ordinary course of business.

Transfer to or from investment property classification

• Commencement of owner-occupation – transfer from investment to PPE;
• Commencement of development with a view to sale – transfer from investment
properties to inventories;
• End of owner-occupation – transfer from PPE to investment properties;
• Commencement of an operating lease to another party – transfer from inventories to
investment property;
• End of construction or development – transfer from PPE to investment property.
Transfer under the fair value model
• Investment property becomes owner-occupied property – a transfer should be made
from investment property to owner occupied property at the commencement of owner
occupation. Where the investment property has been carried at fair value, the fair value
at the date of transfer becomes the deemed cost for subsequent accounting.
• Investment property is to be developed for sale – a transfer should be made from
investment property to inventory at the date of commencement of development with a
view to sale.
• Owner-occupied property becomes investment property – a transfer should be made
from owner occupied property to investment property when owner-occupation ceases.
If the investment property is carried at fair value, PAS 16 is applied up to the date of
transfer. PAS 16 is the standard that applies for the treatment of PPE. Any revaluation
gains or loss, being the current fair value and previous carrying amount is accounted for
as revaluation surplus or deficit in equity. Surplus recognized directly as increased in
equity, unless there was an impairment loss recognized for the same property in prior
years and a portion of the increase is recognized for the same property in profit or loss
for any excess of the amount included in the revaluation surplus of that property.
Transfer under cost model

• Where an entity has a policy of carrying investment property at cost less depreciation
(the cost model), properties are transferred in the same way and under the same
circumstances as described on the above transfer. However, such transfers do not
change the carrying amount of the property transferred, that is, no revaluation gains or
losses arise, nor they change the cost of the property for measurement or disclosure
purposes
Two specific situations where transfer do not take place

• Investment property sold without development – where an investment property is to

be disposed of without development, there has been no change in use and the property
is not transferred to inventory. Instead it is retained in investment property until
disposal or until it is otherwise derecognized.
• Investment property developed for continuing future use as investment property – if
an investment property is to be developed for continued future use as an investment
property it is also retained in investment property and is not transferred to inventory or
to owner-occupied property. It is because there has been no change of use.
Sample problems
• On January 2, 2017, B Company acquired an investment property and the initial cost of
investment property was P5,000,000. On the date of acquisition, the company chooses
the cost model to account for its investment. AS of December 31, 2018, it has a carrying
value of P4,900,000 and a fair value of P5,100,000. On December 31, 2019, the company
decided to transfer the investment property to owner-occupied property that is also
under the cost model. On the date of transfer, the fair value of property is P5,000,000
while its carrying value was P4,800,000. What amount of gain or loss on transfer should
the company recognized on December 31, 2019?
• Answer: When the company 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.