INVESTMENT PROPERTY

Noel A. Bergonia CPA, MBA

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 IAS 40: Investment Property

❖The objective of this standard is to prescribe the accounting treatment for investment
property and related disclosure requirements.
❖This Standard does not apply to:
➢biological assets related to agricultural activity (see IAS 41 Agriculture and IAS 16
Property, Plant and Equipment); and
➢mineral rights and mineral reserves such as oil, natural gas and similar
non-regenerative resources

Noel A. Bergonia, CPA, MBA

 Investment Property

❖Investment property is a property (land or a building—or part of a building— or

both) held to earn rentals or for capital appreciation or both.
❖It generates cash flows largely independently of the other assets held by an entity.

Noel A. Bergonia, CPA, MBA

 Investment Property
The following are examples of investment property:
❖land held for long-term capital appreciation rather than for short-term sale in the ordinary
course of business.
❖land held for a currently undetermined future use. (If an entity has not determined that it will
use the land as owner-occupied property or for short-term sale in the ordinary course of
business, the land is regarded as held for capital appreciation.)
❖a building owned by the entity (or a right-of-use asset relating to a building held by the
entity) and leased out under one or more operating leases.
❖a building that is vacant but is held to be leased out under one or more operating leases.
property that is being constructed or developed for future use as investment property.
Noel A. Bergonia, CPA, MBA
 This is a property held (by the owner
or by the lessee as a right-of-use
asset) for use in the production or
Investment Property supply of goods or services or for
administrative purposes.

The following are examples of items that are not investment property:
❖property intended for sale in the ordinary course of business or in the process of construction
or development for such sale.
❖owner-occupied property (see IAS 16 and IFRS 16), including (among other things) property
held for future use as owner-occupied property, property held for future development and
subsequent use as owner-occupied property, property occupied by employees (whether or
not the employees pay rent at market rates) and owner-occupied property awaiting
disposal.
❖property that is leased to another entity under a finance lease.

Noel A. Bergonia, CPA, MBA

 Partially owner-occupied
(IAS 40 par. 10)

❖If these portions could be sold separately (or leased out separately under a
finance lease), an entity accounts for the portions separately.

❖If the portions could not be sold separately, the property is investment property
only if an insignificant portion is held for use in the production or supply of goods
or services or for administrative purposes.

Noel A. Bergonia, CPA, MBA

 Ancillary Services
(IAS 40 par. 11 to 13)

❖An entity treats such a property as investment property if the services are
insignificant to the arrangement as a whole (IAS 40 par. 11).
❖An owner-managed hotel (where services provided are significant) is
owner-occupied property, rather than investment property (IAS 40 par. 12).

Noel A. Bergonia, CPA, MBA

 Intercompany Rentals
(IAS 40 par. 15)

❖The property does not qualify as investment property in the consolidated

financial statements, because the property is owner-occupied from the
perspective of the group.

❖From the perspective of the entity that owns it, the property is investment property
if it for rentals or for capital appreciation or both. Hence, the lessor treats the
property as investment property in its individual financial statements.

Noel A. Bergonia, CPA, MBA

 EXAMPLE 1 Total Investment Properties in the consolidated FS:
Spaghetti Corp. and its subsidiaries, as a group, owned the P9,400,000
following properties:
Building under construction for use as investment
Investment property
property 3,200,000
Building owned by subsidiary and for which the Investment property
subsidiary provides ancillary services 1,800,000
Equipment leased out under operating lease 800,000 Property, plant and equipment
Land held for undetermined future use 2,500,000 Investment property
Land leased to a subsidiary under and
a a finance lease 300,000 Intercompany rental, not IP in the Conso FS
Land leased to a subsidiary under and
a
an operating lease 2,000,000 Intercompany rental, not IP in the Conso FS
Property held by a subsidiary, a real estate company,
Inventory
in the ordinary course of business 2,300,000
Property held for used in the production 3,000,000 Property, plant and equipment
Vacant building to be leased out under operating
Investment property
lease 1,900,000
In the consolidated financial statements, what amount should be
reported as Investment Properties?
Noel A. Bergonia, CPA, MBA
 INITIAL RECOGNITION
❖An owned investment property shall be recognized as an asset when, and only
when:
➢it is probable that the future economic benefits that are associated with the
investment property will flow to the entity; and
➢the cost of the investment property can be measured reliably.

Noel A. Bergonia, CPA, MBA

 INITIAL MEASUREMENT
❖An owned investment property shall be measured initially at its cost.
❖Transaction costs shall be included in the initial measurement.

Noel A. Bergonia, CPA, MBA

 Modes of Acquisition
By Purchase
❖The cost of a purchased investment property comprises its purchase price and any
directly attributable expenditure.
❖Directly attributable expenditure includes, for example, professional fees for legal
services, property transfer taxes and other transaction costs.
❖The cost of an investment property is not increased by
➢start-up costs
➢operating losses incurred before the investment property achieves the planned
level of occupancy, or
➢abnormal amounts of wasted material, labor or other resources incurred in
constructing or developing the property.
Noel A. Bergonia, CPA, MBA
 Modes of Acquisition
By Purchase using Deferred Credit
❖ If payment for an investment property is deferred, its cost is the cash price
equivalent.
❖The difference between this amount and the total payments is recognized as
interest expense over the period of credit.

Noel A. Bergonia, CPA, MBA

 Modes of Acquisition
By Exchange for Non-Monetary Assets
❖ If there is a commercial substance, the cost of the investment property will be the
(in order of priority):
➢ Fair value of the asset Given up (Plus cash Paid or minus cash received)
➢ Fair value of the asset Received
➢ Carrying amount of the asset Given up (Plus cash Paid or minus cash received)
❖If there is no or it lacks commercial substance, the cost of the investment property
will be the carrying amount of the asset given up (plus cash paid or minus cash
received).

Noel A. Bergonia, CPA, MBA

 EXAMPLE 2
Hotdog Inc. has the following transactions during the
Purchase price 9,000,000
year, and you are asked to determine the cost:
Broker's commission 250,000
▪ Land site for capital appreciation was acquired for Net cost of clearing
P9,000,000. Hotdog paid P250,000 commissions to a (105,000 -15,000) 90,000
broker. Cost of P105,000 were incurred to clear the Land site for capital appreciation 9,340,000
land. During the clearing, timber and gravel were
recovered and sold for P15,000. Down payment 3,600,000
▪ Land and building were acquired to be held for lease FV of the shares
under an operating lease. The company made a down (15,000 x P235) 3,525,000
PV of Noninterest-bearing note
payment of P3,600,000, issued 15,000 P210 par
(1,500,000 x 2.4869) 3,730,350
ordinary shares with market price of P235 per share
Total value of the Land and Building 10,855,350
and issued a three-year noninterest-bearing note for
P4,500,000. The note is payable in equal annual Land (P10,855,350 x 40%) 4,342,140
installments of P1,500,000 at the end of each year
from the date of purchase. Market rate of similar notes Building (P10,855,350 x 60%) 6,513,210
is 10%. Forty percent (40%) of the purchase price is
allocated to the land.
Noel A. Bergonia, CPA, MBA
 MEASUREMENT AFTER INITIAL RECOGNITION

❖An entity may choose either the cost model or the fair value model when reporting
all the investment property on the statement of financial position (IAS 40 par. 30).

Noel A. Bergonia, CPA, MBA

 MEASUREMENT AFTER INITIAL RECOGNITION

Cost Model
❖After initial recognition, an entity that chooses the cost model shall measure
investment property:
➢in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations if it meets the criteria to be classified as held for sale (or is
included in a disposal group that is classified as held for sale)
➢in accordance with IFRS 16 if it is held by a lessee as a right-of-use asset and
is not held for sale in accordance with IFRS 5; and
➢in accordance with the requirements in IAS 16 for the cost model in all other
cases.

Noel A. Bergonia, CPA, MBA

 MEASUREMENT AFTER INITIAL RECOGNITION
Fair Value Model
❖After initial recognition, an entity that chooses the fair value model shall measure
all of its investment property at fair value.
❖A gain or loss arising from a change in the fair value of investment property shall
be recognized in profit or loss for the period in which it arises.
❖No depreciation will be recognized.

Noel A. Bergonia, CPA, MBA

 MEASUREMENT AFTER INITIAL RECOGNITION
IFRS 13, paragraph 72 to 90, enumerates the fair value hierarchy or best evidence
of fair value as follows:
1. Level 1 inputs are the quoted prices in an active market for identical assets.

2. Level 2 inputs includes quoted prices for similar assets in an active market and
quoted prices for identical and similar assets in a market that is not active.

3. Level 3 inputs are unobservable inputs for the asset

Unobservable inputs are usually developed by the entity using the best available
information from the entity’s own data.

Noel A. Bergonia, CPA, MBA

 MEASUREMENT AFTER INITIAL RECOGNITION
In determining the carrying amount of investment property under the fair value
model, an entity does not double-count assets or liabilities that are recognized as
separate assets or liabilities. For example:
❖equipment is often an integral part of a building and is generally included in the
fair value of the investment property, rather than recognized separately as
property, plant and equipment.
❖if an office is leased on a furnished basis, the fair value of the office generally
includes the fair value of the furniture, because the rental income relates to the
furnished office.

Noel A. Bergonia, CPA, MBA

 MEASUREMENT AFTER INITIAL RECOGNITION
In determining the carrying amount of investment property under the fair value
model, an entity does not double-count assets or liabilities that are recognized as
separate assets or liabilities. For example:
❖the fair value of investment property excludes prepaid or accrued operating
lease income, because the entity recognizes it as a separate liability or asset.
❖ the fair value of investment property held by a lessee as a right-of-use asset
reflects expected cash flows (including variable lease payments that are expected
to become payable).
➢ Accordingly, if a valuation obtained for a property is net of all payments expected to be
made, it will be necessary to add back any recognized lease liability, to arrive at the carrying
amount of the investment property using the fair value model.

Noel A. Bergonia, CPA, MBA

 MEASUREMENT AFTER INITIAL RECOGNITION
Inability to measure fair value reliably
❖There is a rebuttable presumption that an entity can reliably measure the fair
value of an investment property on a continuing basis.
❖Fair value cannot be reliably measured when, and only when:
➢the market for comparable properties is inactive and
➢alternative reliable measurements of fair value are not available.
❖In this case, the entity shall measure that investment property using the cost model.
❖The residual value of the investment property shall be assumed to be zero.
❖The entity shall continue to apply IAS 16 or IFRS 16 until disposal of the
investment property.

Noel A. Bergonia, CPA, MBA

 MEASUREMENT AFTER INITIAL RECOGNITION

❖If an entity has previously measured an investment property at fair value, it shall
continue to measure the property at fair value until disposal even if comparable
market transactions become less frequent or market prices become less readily
available.

Noel A. Bergonia, CPA, MBA

 COST MODEL

EXAMPLE 3 April 1, 2018

Investment property 4,800,000
Tokwa Corp. has an investment property with an Cash 4,800,000
original cost of P4,800,000 when acquired on April 1,
December 31, 2018
2018. On that date the property had a useful life of
Depreciation expense 132,000
25 years and an estimated residual value of
Accumulated depreciation- IP 132,000
P400,000 and uses straight-line method for
depreciating its investment property. The asset’s fair (4,800,000 – 400,000) ÷ 25 x 9/12= 132,000
values at the end of each year are as follows: CV 12/31/2018 = P4,800,000 - P132,000= P4,668,000
2018- P4,850,000 December 31, 2019
2019- P5,000,000 Depreciation expense 176,000
2020- P5,100,000
Accumulated depreciation- IP 176,000

Prepare the journal entries from 2018 to 2020 if the (4,800,000 – 400,000) ÷ 25 = 176,000
company uses: CV 12/31/2019 = P4,800,000 – P308,000= P4,492,000
• Cost model December 31, 2020
• Fair value model Depreciation expense 176,000
Accumulated depreciation- IP 176,000
CV 12/31/2020 = P4,800,000 – P484,000= P4,316,000
Noel A. Bergonia, CPA, MBA
 FAIR VALUE MODEL
EXAMPLE 3 April 1, 2018
Investment property 4,800,000
Tokwa Corp. has an investment property with an Cash 4,800,000
original cost of P4,800,000 when acquired on April 1,
December 31, 2018
2018. On that date the property had a useful life of
Investment property 50,000
25 years and an estimated residual value of
Gain from Fair Value Change 50,000
P400,000 and uses straight-line method for
depreciating its investment property. The asset’s fair 4,850,000 – 4,800,000= 50,000
values at the end of each year are as follows: CV 12/31/2018 = P4,850,000
2018- P4,850,000 December 31, 2019
2019- P5,000,000 Investment property 150,000
2020- P5,100,000 Gain from Fair Value Change 150,000
5,000,000 - 4,850,000= 150,000
Prepare the journal entries from 2018 to 2020 if the
CV 12/31/2019 =P5,000,000
company uses:
December 31, 2020
• Cost model Investment property 100,000
• Fair value model
Gain from Fair Value Change 100,000
5,100,000 – 5,000,000 = 100,000
Noel A. Bergonia, CPA, MBA CV 12/31/2020 = P5,100,000
 TRANSFER

❖An entity shall transfer a property to, or from, investment property when, and only
when, there is a change in use.
❖A change in use occurs when the property meets, or ceases to meet, the definition
of investment property and there is evidence of the change in use.
❖A change in management’s intentions for the use of a property does not provide
evidence of a change in use.

Noel A. Bergonia, CPA, MBA

TRANSFER

Change in use Transfer from investment property

a) Commencement of owner-occupation Owner-Occupied
b) Commencement of development with Property
a view to sale Investment Property
Inventories

Change in use Transfer to investment property

a) End of owner-occupation Owner-Occupied
Property
Investment Property
b) Commencement of an operating Inventories
lease to another party
 TRANSFER
Investment Property Owner-occupied property or
(at Cost Model) inventories

When an entity uses the cost model, transfers between investment

property, owner-occupied property and inventories do not change
the carrying amount of the property transferred and they do not
change the cost of that property for measurement or disclosure
purposes (IAS 40 par. 59).

Noel A. Bergonia, CPA, MBA

 EXAMPLE 4

A land, initially with an undetermined use

owned by Inihaw Inc., will now be used as
a plant site of the company starting
January 2, 2021. The carrying value of Land 1,600,000
the land as of that date is P1,600,000. Investment property- Land 1,600,000

What will the entry to record the transfer

of the land to PPE?

Noel A. Bergonia, CPA, MBA

 TRANSFER
Investment Property Owner-occupied property or
(at Fair Value) inventories

The property’s deemed cost for subsequent accounting in

accordance with IAS 16, IFRS 16 or IAS 2 shall be its fair value at
the date of change in use (IAS 40 par. 60).

Noel A. Bergonia, CPA, MBA

 EXAMPLE 5

A building of Hamonado Corp., initially leased

out under an operating lease agreement, will
now be used as an office space by the
company starting January 2, 2021. The fair
Building 4,500,000
value of the building recorded on December
Investment property- Building 4,500,000
31, 2020 is P4,500,000.

What will the entry to record the transfer of the

building to owner-occupied property?

Noel A. Bergonia, CPA, MBA

 TRANSFER
Investment Property
Owner-occupied property
(at Fair Value)

The entity shall treat any difference at that date between the
carrying amount of the property in accordance with IAS 16 or IFRS
16 and its fair value in the same way as a revaluation in
accordance with IAS 16 (IAS 40 par. 60).

Noel A. Bergonia, CPA, MBA

 EXAMPLE 6.1
A building owned by Sopas Company located at Sta.
Mesa, Manila is originally used as an office space by
the company. On December 31, 2020, the management
decided that they will now occupy the office located to
Mandaluyong. The building in Sta. Mesa is being leased
out in an operating lease arrangement to another Investment property- Building 8,000,000
company starting January 4, 2021. The carrying value
Building 5,600,000
of the building in the books of Sopas as of December
Revaluation surplus 2,400,000
31, 2020 was P5,600,000 and the fair value on
January 4, 2021 was P8,000,000. Sopas Company
account for investment property using the fair value
model and owner-occupied using revaluation model.
What will the entry to record the transfer of the building
to investment property?
Noel A. Bergonia, CPA, MBA
 EXAMPLE 6.2
A building owned by Sopas Company located at Sta.
Mesa, Manila is originally used as an office space by
the company. On December 31, 2020, the management
decided that they will now occupy the office located to
Mandaluyong. The building in Sta. Mesa is being leased Investment property- Building 5,600,000
out in an operating lease arrangement to another
Revaluation surplus 1,400,000
company starting January 4, 2021. The carrying value
of the building in the books of Sopas as of December Impairment loss 1,000,000
31, 2020 was P8,000,000 and the fair value on Building 8,000,000
January 4, 2021 was P5,600,000. Sopas Company
account for investment property using the fair value
model and owner-occupied using revaluation model.
Moreover, the building has a related revaluation surplus
of P1,400,000 as December 31, 2020.
What will the entry to record the transfer of the building
to investment property?
Noel A. Bergonia, CPA, MBA
 TRANSFER
Investment Property
Inventories
(at Fair Value)

For a transfer from inventories to investment property that will be

carried at fair value, any difference between the fair value of the
property at that date and its previous carrying amount shall be
recognized in profit or loss (IAS 40 par. 63).

Noel A. Bergonia, CPA, MBA

 EXAMPLE 7

A land purchased by Champorado Inc., a real-estate

firm, on January 2, 2020 worth P3,000,000 is held for January 2, 2021
resale in the ordinary course of business. Since the land
is not yet sold as of December 20, 2020, the Investment property- Land 5,000,000
management decided to lease it out to another entity Inventories 3,000,000
starting January 2, 2021. The fair value of the land on Fair value gain on transfer from
2,000,000
January 2, 2021 is P5,000,000. inventories to Investment Property

What will the entry to record the transfer of the land to

investment property?

Noel A. Bergonia, CPA, MBA

 TRANSFER
Self-constructed Investment Property
(at cost) (at Fair Value)

When an entity completes the construction or development of a

self-constructed investment property that will be carried at fair
value, any difference between the fair value of the property at
that date and its previous carrying amount shall be recognized in
profit or loss.

Noel A. Bergonia, CPA, MBA

 DERECOGNITION

❖ An investment property shall 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 disposal of an investment property may be achieved by sale or by

entering into a finance lease.

Noel A. Bergonia, CPA, MBA

 DERECOGNITION

❖ Gains or losses arising from the retirement or disposal of investment

property shall be determined as the difference between the net disposal
proceeds and the carrying amount of the asset and shall be recognized
in profit or loss in the period of the retirement or disposal.

Noel A. Bergonia, CPA, MBA

 COST MODEL
EXAMPLE 8 Investment property- Land 22,000,000
Land 22,000,000
The Tinola Company is in the process of opening a new
division as a result of its expansion. As a consequence,
Investment property- Building 54,000,000
its main operation will be transferred to Quezon City.
It vacated its land and building in Pasay City and held Accumulated depreciation 17,000,000
them for commercial rental under operating leases. On Building 54,000,000
such date, the land had a carrying amount Accumulated depreciation- IP 17,000,000
P22,000,000, while the building had a carrying value
of P37,000,000, net of 17,000,000 accumulated FAIR VALUE MODEL
depreciation. An independent appraiser engaged by Investment property- Land 29,000,000
Tinola placed a revalue amount P29,000,000 for the Land 22,000,000
land and P41,000,000 for the building.
Revaluation surplus 7,000,000

Prepare the entries for the reclassification of the Investment property- Building 41,000,000
property, assuming that Accumulated depreciation 17,000,000
• Tinola uses the cost model for its investment property
Building 54,000,000
• Tinola uses the fair value model for its investment
Revaluation surplus 4,000,000
property.
Noel A. Bergonia, CPA, MBA
 EXAMPLE 9
Paksiw Company owned three investment
properties with the following details: Property 1 (P4M -P3.2M) 800,000
Property 2 (P2.1M - P3M) (900,000)
Property 3 (P3.6M - P3.9M) (300,000)
Loss on fair value change (400,000)

Each property was acquired in 2020 with a useful

life of 10 years. The accounting policy is to use the
fair value model for investment property. Property 1 4,000,000
Property 2 2,100,000
What is the gain or loss to be recognized for Property 3 3,600,000
2021? Total investment property 9,700,000
What is the amount to be reported as investment
property under the fair value model in 2021?

Noel A. Bergonia, CPA, MBA

 EXAMPLE 10
Sinigang Company purchased an investment property COST MODEL
on November 1, 2015 at a cost of P2,500,000. The
Selling price 2,300,000
property had a useful life of 10 years and a residual Less: Carrying value 4/1/2020
value of P150,000. On December 31, 2019, the Cost 2,500,000
property had a fair value of P2,400,000. The Accumulated depreciation
company's depreciation policy is straight line basis (2,500,000 - 150,000) x 53/120 (1,037,917) 1,462,083
Gain on sale 837,917
computed to the nearest month. On April 1, 2020, the
property was sold for net proceeds of P2,300,000.
FAIR VALUE MODEL
Using both the cost model and fair value model,
determine the gain or loss to be recognized in profit or Selling price 2,300,000
loss for the year ended December 31, 2020, regarding Carrying value 2,400,000
the disposal of the property according to IAS 40 Loss on sale 100,000
investment property.

Noel A. Bergonia, CPA, MBA

Noel A. Bergonia, CPA, MBA