TOPIC 2INVESTMENT PROPERTY

MFRS 140

DefinitionInvestment property is defined as: ‘Land or building or part of a building or land and building) held (by the owner or under finance lease) to earn rentals or for capital appreciation or both’

Owner occupied properties and those held for sale in the ordinary course of business (inventory) do not qualify as investment property

Examples of Investment Properties

Land held for long-term capital appreciation rather than for short-term sales in the ordinary course of business;

Land held for undetermined future use; A building owned (or held under finance lease) and leased out

under operating lease; A building that is vacant but is held to be leased out under

operating lease; and Property being constructed or developed for future use as

investment property.

Recognition

Investment property should be recognised as an asset only when: it is probable that future economic benefits associated with

the investment property will flow to the entity; and the cost of the investment property can be measured

reliably. Day-to-day maintenance costs are not recognised. Subsequent costs for replacement of parts of the property are

recognised if the expenditure meets the recognition criteria. The carrying amount of the parts replaced is derecognised.

Initial Measurement

 All investment properties are initially measured at cost. Transaction costs should be included in the initial

measurement. The cost of a purchased investment property comprises the

purchase price and any directly attributable expenditure e.g. professional fees for legal services, property transfer taxes and other transaction costs.

Start-up costs, operating losses and abnormal amounts of wasted material, and labour costs are not included.

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 recognised as interest expense over the period of credit.

Operating Leases

MFRS 140 overrides MFRS 117 in that where a property held under operating lease is classified as investment property, the lease should be treated as a finance lease. 

It will be measured at the lower of the fair value of the property and the present value of the minimum lease payments. An equivalent amount will be recognised as a liability.

Any premium paid for a lease is treated as part of the minimum lease payments and is therefore included in the cost of the asset but is excluded from the liability.

The standard states that if a property interest held under a lease is classified as investment property, the item accounted for at fair value is that interest and not the underlying property.

Exchange Transaction

When an investment property is acquired in exchange for non-monetary assets, in whole or in part, the commercial substance should be considered.

The cost of such an investment property is measured at fair value unless:

a. the exchange transaction lacks commercial substance; orb. the fair value of neither the asset received nor the asset given up

is reliably measurable. If (despite lack of market transactions) the entity is able to determine

reliably the fair value of either the asset received or the asset given up, then the fair value of the asset given up is taken as cost of the asset received, unless the fair value of the asset received is more clearly evident.

If the fair value of the asset acquired is not measured at fair value then its cost is measured at the carrying amount of the asset given up.

Measurement Subsequent to Initial Recognition

After the initial measurement, an entity may:

a. choose the fair value model or cost model for all investment property backing liabilities that pay a return linked directly to the fair value of, or returns from, specified assets including that investment property; and

b. choose fair value model or the cost model for all other investment properties, regardless of the choice made in (a) above.

Fair value model MFRS 140 defines fair value as ‘the amount for which an asset could be

exchanged between knowledgeable, willing parties in an arm’s length transaction.’

The fair value of investment property should reflect the actual market state and circumstances as of the reporting date, not as of either a part or future date. There should be no deduction for transaction costs.

An entity that chooses the fair value model is required to measure all of its investment properties at fair value.

Fair value model is applicable to an operating lease classified as an investment property by the lessee.

If the entity has adopted the fair value model, it is required to apply the fair value model until the disposal of the asset or until there is a change in use.

A gain or loss arising from a change in the fair value of investment property should be recognised in the income statement for the period in which it arises.

The asset is not depreciated. Fair value is not recoverable amount.

Cost Model

After the initial recognition, an entity that chooses the cost model should measure all of its investment properties in accordance to MFRS 116 Property, Plant and Equipment, at cost less any accumulated depreciation and any accumulated impairment losses.

Those that meet the criteria to be classified as ‘held for sale’ should be accounted for under MFRS 5 Non-current Assets Held for Sale and Discontinued Operations.

The policy chosen, i.e. cost model or fair value model should be consistently applied to all investment properties. If a change results in a more appropriate presentation, a change from one model to the other is allowed.

Example 1 On 1January x1, ACE acquired a property for investment purpose. The cost of the building was RM10 million and the economic life was estimated to be 50 years. At the end of year x1, the fair value of the building was RM11.5 million. The fair value on 31 Dec x2 was RM10.8 million. (a) the company adopts the fair value model to account for this property(b) the company adopts the cost model

(a) Fair value model1/1/x1 Investment property 10,000,000

Cash or liability 10,000,000

31/12/x1 Investment property 1,500,000

Statement of comprehensive income

1,500,000

31/12/x2 Statement of comprehensive income

700,000

Investment property 700,000

b) Cost model

1/1/x1 Investment property 10,000,000

Cash or liability 10,000,000

31/12/x1 Statement of comprehensive income

200,000

Accumulated depreciation 200,000

31/12/x2 Statement of comprehensive income

200,000

Accumulated depreciation 200,000

Transfers

MFRS 140 allows transfers to or from investment property only when there is a change in use evidenced by the following:For transfer from investment property to owner-occupied property on commencement of owner-occupation;For transfer from investment property to inventories on commencement of development with view to sale;For transfer from owner occupied property to investment property at the end of the owner occupation; orTransfer from inventories to investment property at the commencement of an operating lease.

Transfer from Transfer to

Evidence Deemed CV and accounting treatment

a) IP (accounted on FV model)

Owner-occupied property

Commencement of owner occupancy period

FV at the date of change. Apply MFRS 116 from date of change

b) IP (accounted on FV model)

Inventories Commencement of development with view to sale

FV at the date of change. Apply MFRS 102 from date of change

c) Owner-occupied property

IP End of owner occupancy

For IP carried at FV, apply MFRS 116 up to the date of change in use. Any difference at the date between the CA of the property under MFRS 116 and its FV should be treated the same way as a revaluation under MFRS 116.

d) Inventories IP Commencement of an operating lease to another party

The difference between the fair value at the date of change and its previous CA should be recognized in profit/loss for the period

Example 2

PQ Bhd has an investment property which is carried at fair value. The fair value at 1 Jan x4 was RM48 million and its remaining life on the date was 20 years. On 1 July x4, PQ Bhd decided to convert the investment property to owner-occupied property. The FV on that date was RM50 million. PQ will adopt the revaluation model and the property’ s FV on 31 Dec x4 was RM57 million. Year end is 31 Dec.

Discuss the accounting treatment

On 1 July x4, the property was transferred to owner-occupied property at RM50 million. The difference between FV on the date of transfer and its CV of RM 2 million will be recognized as income in the statement of comprehensive income.

The depreciation charge will be RM50 million/19.5 years x 6/12 = RM1.28 million

The CV as at 31 Dec x4 will be RM48.72 million and FV of RM57 million. The difference of RM8.28 million is credited to revaluation reserve. On 31 Dec x5, depreciation RM57 million/19 = RM3 million.RM8.28 million/19 = RM435,789 is transferred from revaluation reserve to retained earnings

Disposals

An investment property should be derecognised or removed from the SOFP on disposal or when the investment property is permanently withdrawn from use and no future economic benefits are expected from its disposal.

Any gain or loss arising from the disposal or retirement should be determined as the difference between the net disposal proceeds and the carrying amount of the asset and should be recognised as income or expense in the income statement. 

Disclosures The model applied When classification is difficult, the criteria it uses to distinguish

investment property from owner-occupied property and from property ‘held for sale

Methods and significant assumptions applied in determining the fair value of investment property

Extent to which the fair value of investment property is based on a valuation by an independent valuer. If there has been no such valuation, that fact shall be disclosed.

The amounts recognised in income statement: rental income, direct operating expenses arising from investment property

The existence and amounts of restrictions on the realisability of investment property or the remittance of income and proceeds of disposal; and

Contractual obligations to purchase, construct or develop investment property or for repairs, maintenance or enhancement.

Additional Disclosure for Fair Value Model Additions resulting from acquisitions and those resulting from

subsequent expenditure recognised in the carrying amount of an asset

Additions resulting from acquisitions through business combinations; Assets classified as held for sale or included in a disposal group

classified as held for sale in accordance with MFRS 5 and other disposals

Net gains or losses from fair value adjustments Net exchange of differences arising on the translation of the financial

statements into a different presentation currency and a translation of a foreign operation into the presentation currency of the reporting entity

Transfers to and from inventories and owner-occupied property Other changes.

Additional Disclosure for Fair Value Model (c‘td)

• When a valuation obtained is adjusted significantly for the purpose of the financial statements, the entity shall disclose a reconciliation between the valuation obtained and the adjusted valuation

• When an entity measures investment property using the cost model because of the lack of a reliable fair value on a continuing basis, the entity should disclose amounts relating to that investment property separately from amounts relating to other investment properties in the above disclosure.

• An entity should disclose:a. a description of the investment property;b. an explanation of why fair value cannot be reliably measured;c. the range of estimates within which fair value is highly likely to lie; andd. on disposal of investment property not carried at fair value:

the fact that the entity has disposed of investment property not carried at fair value;

the carrying amount of that investment property at the time of sale; and

the amount of gain or loss recognised.

Additional Disclosure for Cost Model Depreciation methods used Useful lives or depreciation rates used Gross carrying amount, accumulated depreciation and accumulated

impairment losses at the beginning and end of the period; A reconciliation of the carrying amount of the investment property at the

beginning and end of the period showing: Additions from acquisitions and those resulting from capitalised

subsequent expenditure; Additions from acquisitions through business combinations; Disposals; Depreciation; Amount of impairment losses recognised and the amount of impairment

losses reversed, during the period under MFRS 136; Net exchange differences arising on the translation of the financial

statements of a foreign entity; Transfers to and from inventories and owner-occupied property; and Other movements

Additional Disclosure for Cost Model (c’td)

Fair value of investment property. In the exception when an entity cannot determine the fair value of the

investment property reliably, the following should be disclosed: A description of the investment property; An explanation of why fair value cannot be determined reliably; and The range of estimates within which fair value is highly likely to lie.