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Lecture 2 - Investment Property

This lecture defines investment property and outlines the accounting treatment under MFRS 140. Investment property is property held to earn rentals or for capital appreciation rather than for use in business operations. Properties can be classified as investment property if insignificant ancillary services are provided. Investment property is initially recognized at cost and subsequently measured either under the cost model or fair value model. Gains or losses from fair value changes are recognized in profit or loss under the fair value model. The lecture discusses transfers between investment property, property, plant & equipment and inventory, and derecognition of investment property.

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124 views18 pages

Lecture 2 - Investment Property

This lecture defines investment property and outlines the accounting treatment under MFRS 140. Investment property is property held to earn rentals or for capital appreciation rather than for use in business operations. Properties can be classified as investment property if insignificant ancillary services are provided. Investment property is initially recognized at cost and subsequently measured either under the cost model or fair value model. Gains or losses from fair value changes are recognized in profit or loss under the fair value model. The lecture discusses transfers between investment property, property, plant & equipment and inventory, and derecognition of investment property.

Uploaded by

Nantha Kumaran
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Lecture 2

Investment Property
MFRS 140
By
Dr Mazni Abdullah, CA (M), CFiA (M), PhD (Stirling), MBA (Malaya), B Acc (Malaya)
Session 2012/2013

MFRS 140
Defines Investment Property (Para 5): property (land
or a building / both) held to earn rentals or capital
appreciation or both, rather than use in the business
or for sale in the ordinary course of business.
Includes:
Property held by the owner
Property held by the lessee under a Finance Lease

Excludes:
Owner-occupied property
Property occupied by employees of the owner

MFRS 140
Owner-occupied property property held (by the owner/by
the lessee under a finance lease) for use in the production /
supply of goods or services / for administrative purposes.
Para 8- examples of Investment Property:
a)
b)
c)
d)
e)

Land held for LT capital appreciation rather than for ST sale in the
ordinary course of business
Land held for a currently undetermined future use.
A building owned by the entity (or held by the entity under a finance
lease) 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/ developed for future use as IP.

How to treat the property if one portion is held to earn


rentals and another portion is held for use in the
business?
MFRS 140 (Para 10):
a) If the portion could be sold separately, an entity
should account for the portion as investment
property and as PPE separately;
b) If the portions could not be sold separately, the
property qualifies as investment property only if an
insignificant portion of the property is held for use
in business.

Judgement is needed (Para 14)

MFRS 140, Para 11-12


If an entity provides ancillary services to the
occupants of a property:

Insignificant services
:E.g. the owner of the
building provides security
& maintenance services
to the lessees.
Investment Property

SIGNIFICANT SERVICES:
E.g. owner-managed hotel
provides services to guests
Owner-occupied property

Illustrations:
a) MM Bhd owns a piece of land, in which 20% is used
for its operating activities, the balance is rented out.
b) MM Bhd used a building as a warehouse for its
inventory.
c) MM Bhd purchased a twenty storey building , and
one floor is used for office administration and the
balance is rented out.
d) MM Bhd purchased a piece of land, where 20 % of it
is rented out and the balance is used as the site of
its transport facilities.
e) MM Bhd leased out the building to its subsidiary

Recognition
MFRS 140 (Para 16): should be recognised as an
asset if and only if:
a) It is probable that future economic benefits
associated with the IP will flow to the entity; and
b) The cost of the IP can be measured reliabily.

Measurement
MFRS140 (Para 20): upon initial recognition, it
shall be measured at cost. Transaction costs
shall be included in the initial measurement.
Subsequent to initial recognition: An entity
should choose the Cost model or FV model as
its accounting policy; and apply the chosen
policy consistently (para 30).

Initial Cost of Investment Property (IP)


1. Purchased IP: Purchase price + any directly
attributable expenditure

2. Self-constructed IP: cost of raw material, direct


labour and factory overheads that can be allocated
to the asset. Borrowing Cost?
MFRS123 (either
expense or capitalised as part of the assets cost)

Cost Model
An entity should measure its IP in accordance with
MFRS 116 Property, Plant and Equipment.
Assets should be carried at cost (or revalued amount)
Assets are subjected to depreciation
Assets are subjected to impairment test

Cost Model
Example:
On 1 January 20x1, MM Bhd purchased a factory for
investment purposes. The cost of factory was RM 100 million
and is expected to have useful life of 50 years with no salvage
value.
1 Jan 20x1
Dr Investment Property 100,000,000
Cr Bank
100,000,000
31 Dec 20x1
Dr Depreciation expense 20,000,000
Cr Accumulated depreciation 20,000,000

FV Model
MFRS 140 (Para 38): The IP is measured at its
FV, reflecting the market conditions at the
balance sheet date.
Para 35: A gain or loss arising from a change in
the FV should be recognised in profit or loss
for the period in which it arises.
Depreciation?
Impairment test?

FV Model
Example:
On 1 January 20x1, MM Bhd purchased a factory for
investment purposes. The cost of factory was RM 100 million
and is expected to have useful life of 50 years with no salvage
value. As at 31 Dec 20x1, the market value of building was
RM105 million, but as at 31 Dec 20x2, it dropped to RM 95
million.
1 Jan 20x1
Dr Investment Property
100,000,000
Cr Bank
100,000,000

FV Model
31 Dec 20x1
Dr Investment Property
5,000,000
Cr FV gain on investment property 5,000,000
(to record fv gain for the year)

31 Dec 20x2
Dr FV loss of investment property 10,000,000
Cr Investment property
10,000,000
(to record fv loss for the year)

Transfer
ASSETS

INVESTMENT PROPERTY

MFRS140 (para 57): transfer to or from investment


property should be made when and only when there is a
change in use, evidenced by:
a)

Commencement of owner-occupation, for a transfer from IP to


OOP
b) Commencement of development with a view to sale, for a
transfer from IP to inventories
c) Commencement of operating lease to another party, for a
transfer from inventories to IP.
If the entity uses the COST MODEL, the transfers do not change
the carrying amount & the cost of that property for
measurement/disclosure purposes (Para 59).

Transfer
(1) INVESTMENT PROPERTY (FV)
PPE OR INVENTORIES
Para 60 : FV of property at the date of transfer is the
deemed cost for subsequent accounting under MFRS116
or MFRS102
(2) PPE
INVESTMENT PROPERTY (FV)
Para 61 : the difference between the carrying amount of
PPE and its FV at the date of transfer should be accounted
for as a revaluation surplus/deficit in accordance with
MFRS116
(3) INVENTORIES
INVESTMENT PROPERTY (FV)
Para 63: the difference between the carrying amount of
inventories and its FV at the date of transfer should be
recognised in the profit or loss.

Derecognition
Para 66: an IP should be derecognised:
1. On disposal
2. When the property is permanently withdrawn
from use and no future economic benefits are
expected from its disposal.

Para 69 gain/loss arise from its disposal


should be recognised in profit/loss.

Summarise what youve


learned from this lecture.
5 minutes!

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