FINANCIAL ACCOUNTING & REPORTING 1

1
Other Types of Investments and Basic Concept of Derivatives

Module 016 Investment Property

Philippine Accounting Standards (PAS) 40 prescribes the accounting

treatment for investment property and related disclosure requirements. This
course will provide a detailed definition of investment property and its
classification. This will also cover the criteria in the recognition, its
measurement at and after recognition, and accounting for the transfer and
disposals of investment property.
At the end of this module, you will be able to:
1. Define investment property
2. Distinguish investment property from owner-occupied property
3. Know the criteria for recognition of investment property
4. Know the accounting rules for the measurement of investment property
5. Be familiar with the accounting rules for the transfer and disposal of
investment property
The common application of the lessons that are under this module is being
able to define, recognize, measure, and account for the changes in relation to
investment properties.
Definition
This is defined as property (land and building or a part of a building or both) held by the
owner or by the lessee under a finance lease to earn rentals or for capital appreciation or
both. In other words, only land and building can qualify as an investment property.
An investment property is not held:
• For use in the production or supply of goods or services or for administrative
purposes.
• For sale in the ordinary course of business.

Equipment or any movable property cannot qualify as an investment property.

The property held by an owner or by the lessee under a finance lease for use in the
production or supply of goods or services or for administrative purposes is known as
owner-occupied property.
Investment property versus owner-occupied
Investment property is held to earn rentals or for capital appreciation, or both.
Therefore an investment property generates cash flows that are largely independent of
the other assets of the entity.
The production or supply of goods or services or the use of the property for
administrative purposes generates cash flows that are attributable not merely to the
property but also to other assets used in the production or supply process.

Course Module
Examples of investment property
a. Land held for long-term capital appreciation
b. Land held for a currently undermined use
For example, if an entity has not determined that it will use the land either as
owner-occupied or for short-term sale in the ordinary course of business, the
land is considered to be held for capital appreciation and, therefore, investment
property.
c. Building owned by the reporting entity, or held by the entity under a finance
lease, and leased out under an operating lease.
d. Building that is vacant but is held to be leased out under an operating lease.
e. Property that is being constructed or developed for future use as an investment
property.

PAS 40 has been amended to bring property that is being constructed or developed
for future use as investment property within the scope of PAS 40.

Items not considered an investment property

a. Owner-occupied property or property held for use in the production or supply
of goods or services or for administrative purposes.
b. Property held for future use as owner-occupied property.
c. Property held for future development and subsequent use as owner-occupied
property.
d. Property occupied by employees, whether or not the employees pay rent at
market rate.
e. Owner-occupied property awaiting disposal.
f. Property held for sale in the ordinary course of business or in the process of
construction or development for such sale.
g. Property being constructed or developed on behalf of third parties
h. Property that is leased to another entity under a finance lease

Property interest held by the lessee

A property interest that is held by a lessee under an operating lease may be
classified and accounted for as investment property provided:
a. The property meets the definition of investment property.
b. The operating lease is accounted for as if it were a finance lease
c. The lease uses the fair value model in measuring the property interest

This classification alternative is available on a property-by-property basis.

However, once this alternative is selected for one such property interest, all
property classified as investment property is to be accounted for consistently on a
fair value basis.
 FINANCIAL ACCOUNTING & REPORTING 1
3
Other Types of Investments and Basic Concept of Derivatives

Where a property held under a lease is classified as an investment property, the

initial cost is the lower amount between the fair value and the present value of the
minimum lease payments.

Partly invested and partly owner-occupied.

Certain properties may include a portion that is held to earn rentals or for
application and another portion that is held for manufacturing or administrative
purposes. If these portions could be sold or leased out separately, an entity shall
account for the portions separately as an investment property and owner-occupied
property.

If the portions could not be sold separately, the property is investment property if
only an insignificant portion is held for manufacturing or administrative purposes.
When ancillary services are provided by the entity to the occupants of the property
and these services are a relatively significant component of the arrangement, the
property is treated as an investment property.

An example would be where the owner of an office building provides security and
maintenance services to the lessees. The building is leased out as an office and is an
investment property. However, if the services provided are a more significant
component of the arrangement, the property is treated as owner-occupied property.

For example, if an entity owns and manages a hotel, services provided to guests are
a significant component of the arrangement as a whole. Therefore, the owner-
managed hotel is treated as owner-occupied property rather than investment
property.

Property leased to an affiliate.

From the perspective of the individual entity that owns it, the property leased to
another subsidiary or its parent is considered an investment property. However,
from the perspective of the group as a whole, for purposes of consolidated financial
statements, the property is treated as owner-occupied property.

Recognition of investment property

Investment property shall be recognized as an asset when and only when
a. It is probable that the future economic benefits that are associated with the
investment property will flow to the entity
b. The cost of the investment property can be measured reliably

Course Module
The initial measurement of investment property
An investment property shall be measured initially as its cost. Transaction costs
shall be included in the initial measurement. The cost of a purchased investment
property comprises the purchase price and directly attributable expenditure.
Directly attributable expenditure includes professional fees for legal services,
property transfer taxes, and other transaction costs.

The cost of a self-constructed investment property is the cost at the date when the
construction or development is complete. If payment is deferred, the cost or the
property is the cash price equivalent. The difference between this amount and the
total payments is recognized as interest expense over the credit period.

An investment property may be acquired in exchange for a nonmonetary asset or a

combination of monetary and nonmonetary assets. The cost of such investment
property is measured at fair value unless the exchange transaction lacks commercial
substance.

If the fair value of neither the asset received nor the asset given up is reliably
measurable, the cost is equal to the carrying amount of the asset given up.

Cost excluded from the cost of investment property

a. Startup costs, unless they are necessary to bring the property to the
condition necessary for its intended use.
b. Operating losses are incurred before the investment property achieves the
planned level of occupancy.
c. Abnormal amounts of wasted material, labor, or other resources incurred in
constructing or developing the property.

Subsequent measurement of investment property

An entity shall choose either of the following models as the accounting policy and
shall apply that policy to all of the investment property:
a. Fair value model
The investment property is carried at fair value. Any changes in the fair value
are included in profit or loss and shown in the income statement of the
current year.

b. Cost model
The investment property is carried at cost less any accumulated depreciation
and any accumulated impairment losses. The fair value of the investment
property shall be disclosed.
 FINANCIAL ACCOUNTING & REPORTING 1
5
Other Types of Investments and Basic Concept of Derivatives

However, when a property interest held by a lessee under an operating lease is

classified as an investment property, the fair value model shall be applied.

The fair value of investment property

Fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement
date.

The price in the principal market used to measure fair value shall not be adjusted
for transaction costs.

Transaction costs are directly attributable to the disposal of an asset and would
have been incurred had the decision to sell the asset not been made.

The fair value of investment property excludes prepaid or accrued operating lease
income.
Fair value hierarchy
PFRS 13 enumerates the fair value hierarchy or best evidence of fair value as
follows:
1. Level 1 inputs are the quoted price in an active market for identical assets.
2. Level 2 inputs include quoted prices for similar assets in an active market
and quoted prices for identical or 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.
Active market and principal market
An active market is a market in which transactions for the asset or liability take
place with sufficient regularity and volume to provide pricing information on an
ongoing basis.
A principal market is a market with the greatest volume and level of activity for
the asset or liability.
The market participants are the buyers and sellers in the principal market who are:
a. Independent or unrelated parties
b. Knowledgeable or having a reasonable understanding of the transaction
c. Willing or motivated but not forced and compelled

Course Module
Inability to determine fair value reliably.
There is a rebuttable presumption that an entity can reliably determine the fair
value of an investment property on a continuing basis. However, in exceptional
cases, when an entity first acquires an investment property or when an existing
property becomes investment property because there has been a change of use,
there may be clear evidence that the fair value of the investment property cannot be
determined reliably on a continuing basis.

Under such exceptional cases, PAS 40 mandates that the entity shall measure such
investment property using the cost model method until the disposal of the property.
Moreover, under such exceptional cases only, the residual value of the investment
property shall be assumed to be zero.

Illustration
An entity ventures into the construction of a hotel in the Philippines, which is rated
as the largest hotel in Asia. The entity's board of directors decided that instead of
selling the hotel to a local investor, the entity would hold this property for purposes
of earning rentals by letting out space in the hotel to tenants.

The construction of the hotel was completed, and the property was placed in service
on January 1, 2017.

The cost of the construction of the hotel was P90,000,000. The useful life of the hotel
is 10 years, and its residual value is P10,000,000.

An independent valuation expert provided the following fair value at each

subsequent year-end:
December 31, 2017 110,000,000
December 31, 2018 115,000,000
December 31, 2019 105,000,000

Unquestionably, the hotel shall be recognized as an investment property. The entity

shall select either the cost model or the fair value model in measuring such property
because the fair value can be determined reliably.

Cost model
If the entity decides to measure the property using the cost model, the asset shall be
carried at cost less accumulated depreciation and any accumulated impairment
losses.

Fluctuations in the fair value of the property from year to year are not recognized.
Instead, the annual depreciation of the property is the charge against profit or loss
for the year unless there is an impairment of an asset.

Accordingly, the annual depreciation of the property is recorded as follows:

Depreciation 8,000,000
Accumulated depreciation 8,000,000
 FINANCIAL ACCOUNTING & REPORTING 1
7
Other Types of Investments and Basic Concept of Derivatives

Acquisition cost 90,000,000

Residual value (10,000,000)
Depreciable amount 80,000,000
Annual depreciation (80,000,000/10 years) 8,000,000

Fair value model

If the entity decides to measure the property under the fair value model, the
changes in fair value from year to year are recognized in profit or loss. No
depreciation is recorded for the investment property.
Journal entries
2017
Dec. 31Investment property 20,000,000
Gain from change in fair value 20,000,000

Fair value-Dec.31, 2017 110,000,000

Acquisition cost 90,000,000
Increase in fair value in 2017 20,000,000
2018
Dec 31 Investment property 5,000,000
Gain from change in fair value 5,000,000

Fair value-Dec. 31, 2018 115,000,000

Carrying amount- Dec. 31, 2017 110,000,000
Increase in fair value in 2018 5,000,000
2019
Dec. 31 Loss from change in fair value 10,000,000
Investment property 10,000,000
Fair value-Dec.31, 2019 105,000,000
Carrying amount-Dec.31, 2018 115,000,000
Decrease in fair value in 2019 (10,000,000)

Course Module
 Transfer of investment property
Transfer to and from investment property shall be made when and only when there
is a change of use evidenced by:
a. Commencement of owner-occupation- transfer from investment property to
owner-occupied
b. Commencement of development with a view to sale- transfer from
investment property to inventory
c. End of owner-occupation- transfer from owner-occupied to investment
property
d. Commencement of an operating lease to another entity- transfer from
owner-occupied property to investment property

Measurement of transfers
1. When the entity uses the cost model, the transfer between investment
property, owner-occupied, and inventory shall be made at the carrying
amount.
2. A transfer from investment property carried at fair value to owner-occupied
property or inventory shall be accounted for at fair value, which becomes
the deemed cost for subsequent accounting.
3. If the owner-occupied property is transferred to investment property that is
to be carried at fair value, the difference between the fair value and the
carrying amount of the property shall be accounted for as revaluation of
PPE.
4. If an inventory is transferred to an investment property that is to be carried
at fair value, the remeasurement to fair value shall be included in profit or
loss.
5. When an investment property under construction is completed and to be
carried at fair value, the difference between fair value and carrying amount
shall be included in profit or loss.

Derecognition of investment property

An investment property shall be derecognized:
a. On disposal
b. When the investment property is permanently withdrawn for use
c. When no further benefits are expected from the investment property.
Gain or loss from disposal of investment property shall be determined as the
difference between the net disposal proceeds, and the carrying amount of the asset
shall be recognized in profit or loss.

Glossary
Investment property: Land and building held to earn rentals or for capital appreciation.
Owner occupied property: Property held for its own productive purposes.
Active Market: Market that is more liquid and has a smaller bid/ask price.
Principal market: Primary exchange on which the asset/liability is traded.
 FINANCIAL ACCOUNTING & REPORTING 1
9
Other Types of Investments and Basic Concept of Derivatives

References and Supplementary Materials

Books and Journals
1. Cabrera, M. B., & Ocampo, R. R. (n.d.). Financial Accounting & Reporting - Standards &
Application (2014-2015 ed., Vol. 2). Manila, Philippines.
2. Robles, N. S., & Empleo, P. M. (2014). Intermediate Accounting (2014 ed., Vol. 1).
Manila, Philippines.
3. Valix, C. T., Peralta, J. F., & Valix, C. M. (2017). Financial Accounting (2017 ed., Vol.
2).Manila, Philippines.
4. IAS 40 Investment Property
Online Supplementary Reading Materials
1. IAS 40 Investment Property; http://www.ifrs.org/issued-standards/list-of-
standards/ias-40-investment-property; October 23, 2017
2. Acquisition of investment properties;
https://www.grantthornton.global/en/insights/articles/ifrs-viewpoint-issue-2/;
October 23, 2017
3. Investment Property “Entities” — Seriously? Measure All Real Estate Investments at
Fair Value; https://blogs.cfainstitute.org/marketintegrity/2012/05/18/investment-
property-entities-seriously-measure-all-real-estate-investments-at-fair-value/;
October 23, 2017
Online Instructional Videos
1. Investment property IAS 40 – SlidePlayer; slideplayer.com/slide/2574392/; October
23, 2017
2. Summary of IAS 40 Investment Property;
https://www.youtube.com/watch?v=ow5mnxqr3XQ; October 23, 2017

Course Module