Recognition and Measurement of Investment Properties

Question 1

How to recognize IP?

Answer 1

Recognize and asset if and only if it is probable that future economic benefits associated with the item will flow to the entity or cost of the item can be measured reliably.

Question 2

Initial recognition of IP.

Answer 2

Upon initial recognition of IP, it is measured at cost. It comprises purchase price and directly attributable expenditure.

Question 3

Subsequent measurements of IP

Answer 3

An entity needs to decide whether to capitalize or expense off the subsequent cost.

If cost can potentially create future economic benefits associated with the investment property the entity should capitalize the cost.

If not the entity should expense of the subsequent cost.

There are two subsequent measurement models to choose:

1. Cost model
2. Fair value model (Does not have depreciation)

Question 4

Cost Model (IP)

Answer 4

Carrying amount of investment property = cost - accumulated depreciation - accumulated impairment loss

• Fair value of investment property should be disclosed in notes to financial statements
• Accounting treatments for investment property under cost model is the same as PPE.
• We use cost model if fair value cannot be measured reliably for investment property.

Question 5

Fair Value Model (IP)

Answer 5

• Investment property is marked to fair value at each balance sheet date.
• All changes in Fair Value will be recognized in profit or loss.
• Do not confuse this with the revaluation model for PPE where increases in carrying amount are recognized as revaluation supplies in the section of other comprehensive income while decrease in carrying amount of recognized as an expense in profit or loss.
• Note that impairment is automatically accounted for when fair value is lower than before thus in payment of assets does not apply to investment property measured at fair value.
• Fair value needs to be able to be measured reliably.
• Once an investment property is measured using fair value model, it shall remain as such until disposal or change in use.
• Ones and entity choose either cost model or fair value model, the same model should be applied to all investment property.

Question 6

When should transfer to or from Investment Property be made?

Answer 6

It is only when there is a change in use of the property. For example, PPE and inventory transferred to investment property and vice versa.

Question 7

Transfer to and from Investment Property (Cost Model)

PPE -> IP

Answer 7

When we account for a transfer to IP from PPE or inventory, the transfer amount should be measured at the carrying amount of the property on the date of the transfer.

Then the transfer amount becomes the initial cost of the investment property.

After the transfer, the cost model will be applied to account for the investment property.

Question 8

Transfer to and from Investment Property (Fair Value Model)

PPE -> IP

Answer 8

The transfer amount should be the fair value of the property on the date of the change in use.

Question 9

Transfer to and from Investment Property (Inventory to Investment Property)

Answer 9

The difference between the carrying amount and the fair value of the property will be recognized as a profit or loss depending on whether the carrying amount or the fair value is greater.

If the fair value is greater, we should recognize a profit. If the carrying amount is greater, we should recognize our loss

The profit or lost account used to record the transfer is “FV adjustment for inventory”

Question 10

Transfer to and from Investment Property (PPE to Investment Property)
PPE -> IP

Answer 10

We should first apply the revaluation model to account for the PPE until the date of the change.

After the revaluation, the carrying amount of the PPE on the date of the transfer will be the fair value of the property.

We then transfer the PPE to an investment property at the fair value of the property. If there is any net revaluation surplus after the revaluation, the surplus will stay in the account of revaluation reserve until subsequent disposal of the IP.

At the disposal we will transfer all the credit balance of the revaluation Surplus associated with the property to the retained earnings.

Question 11

When do we derecognize an investment property?

Answer 11

We derecognize and investment property when there is a disposal of the IP or when the investment property is permanently withdrawn from use with no expected future economic benefits.

Question 12

How do we derecognize an investment property?

Answer 12

Similar to the recognizing PPE:

1. Remove all records related to IP including accumulated depreciation under the cost model.
2. Record the net disposal proceeds from the disposal
3. Account for gain or loss on the recognition by calculating the difference between net proceeds and carrying amount of the IP.
4. If there was a transfer from PPE to investment property before the derecognition of the property, any revaluation reserve associated with that PPE should be transferred to retained earnings.

Question 13

Transfer from Investment Property to PPE.

Answer 13

This occurs when there is commencement of owner occupation for the property.

For example, when an entity holds an office building for earning rental income, a transfer from investment property to PPE occurs if the entity decides to use an office building for its own administrative purpose of the operating lease terminates.

Question 14

Transfer from Investment Property to PPE (Cost model)

IP -> PPE

Answer 14

The transfer amount should be measured at the carrying amount of the IP on the date of the change in use

Question 15

Transfer from Investment Property to PPE (Fair Value model)

IP -> PPE

Answer 15

The transfer amount should be the fair value of the investment property on the date of the change in use

Question 16

Intention to sell things (Does it make it inventory or/PPE/IP)

Answer 16

We need to look at the principle activities of the company.

If the principle activities is to sell things, then we will say it is an inventory.

If the principle activities is not selling things but wants to sell, it can be PPE or IP.

Question 17

Looking for tenant. Is the building an IP?

Answer 17

It is an IP because it is assumed to be:

1. Not owner-occupied at the moment and you are looking for a buyer.
2. Not a property company with the intention to sell the building in the ordinary course of business.

It is possible to be PPE if a large portion of the building is owner occupied.

Question 18

Does intention or no intention matter when deciding is a building is PPE or IP?

Answer 18

No it does not. What is most important is about the occupation. Where the owner occupied the building or not. If occupied, then PPE. If not, IP.

Question 19

What is the threshold for significance?

Answer 19

Anything more than 10% is significant. Anything less than that is not significant.

Question 20

There are only 2 types of insignificant ancillary services.

Answer 20

Maintenance services
Security services

If the owner of the building actually provides more than these 2 ancillary services, then the ancillary services are considered as significant. Building will be considered as PPE. Not IP anymore.

Question 21

Is the hotel building considered as IP or PPE?

Answer 21

It depends on whether the owner of the hotel building is a passive or active investor.

For the hotel building to be IP, the hotel owner need to be a passive investor. This means that the owner himself does not run the hotel business but maybe outsource to a management company to manage the hotel business for him. He just sits back and relax and earn the rental income.

If the owner is involved in the activities of the hotel operations, then he is considered as active and the hotel will be considered as a PPE.