K Compare the Financial Reporting of Investment property w/ that of PPE Flashcards
Investment Property
“Investment property is defined under IFRS as property that is owned (or, in some cases, leased under a finance lease) for the purpose of earning rentals or capital apprecia- tion or both.25 An example of investment property is a building owned by a company and leased out to tenants. In contrast, other long-lived tangible assets (i.e., property considered to be property, plant, and equipment) are owner-occupied properties used for producing the company’s goods and services or for housing the company’s administrative activities. Investment properties do not include long-lived tangible assets held for sale in the ordinary course of business. For example, the houses and property owned by a housing construction company are considered to be its inventory.
Under IFRS, companies are allowed to value investment properties using either a cost model or a fair value model. The cost model is identical to the cost model used for property, plant, and equipment. The fair value model, however, differs from the reval- uation model used for property, plant, and equipment. Under the revaluation model, whether an asset revaluation affects net income depends on whether the revaluation initially increases or decreases the carrying amount of the asset. In contrast, under the fair value model, all changes in the fair value of the asset affect net income. To use the fair value model, a company must be able to reliably determine the property’s fair value on a continuing basis.26 Under U.S. GAAP, there is no specific definition of investment property. Most operating companies and real estate companies in the United States that hold investment-type property use the historical cost model.
Example 12 presents an excerpt from the annual report of a property company reporting under IFRS.”
Investment Property post Example
“In general, a company must apply its chosen model (cost or fair value) to all of its investment property. If a company chooses the fair value model for its investment property, it must continue to use the fair value model until it disposes of the property or changes its use such that it is no longer considered investment property (e.g., it becomes owner-occupied property or part of inventory). The company must continue to use the fair value model for that property even if transactions on comparable prop- erties, used to estimate fair value, become less frequent.
Certain valuation issues arise when a company changes the use of property such that it moves from being an investment property to owner-occupied property or part of inventory. If a company’s chosen model for investment property is the cost model, such transfers do not change the carrying amount of the property transferred. If a company’s chosen model is the fair value model, transfers from investment property to owner-occupied property or to inventory are made at fair value. In other words, the property’s fair value at the time of transfer is considered to be its cost for ongoing accounting for the property. If a company’s chosen model for investment property is the fair value model and it transfers a property from owner-occupied to investment property, the change in measurement of the property from depreciated cost to fair value is treated like a revaluation. If a company’s chosen model is the fair value model and it transfers a property from inventory to investment property, any difference between the inventory carrying amount and the property’s fair value at the time of transfer is recognised as profit or loss.
Investment property appears as a separate line item on the balance sheet. Companies are required to disclose whether they use the fair value model or the cost model for their investment property. If the company uses the fair value model, it must make additional disclosures about how it determines fair value and must provide reconcili- ation between the beginning and ending carrying amounts of investment property. If the company uses the cost model, it must make additional disclosures similar to those for property, plant, and equipment—for example, the depreciation method and useful lives must be disclosed. In addition, if the company uses the cost model, it must also disclose the fair value of investment property.”
