Klsa Ias 40 Slides Mg

Your trusted accountants and business advisors IAS 40 - 1Your trusted accountants and business advisors

IAS 40IAS 40

Investment property

Mustansir Gulamhussein

Investment property

Mustansir Gulamhussein

Your trusted accountants and business advisors IAS 40 - 2

Learning objectivesLearning objectives

Understand how investment property is defined;

Classify property as investment property or as Property, plant and equipment

Understand how investment property should be accounted for; and

Be aware of the disclosure requirements for investment properties


Investment Property -DefinitionInvestment Property -Definition

Investment property is property held to

earn rentals or

capital appreciation

or both,

rather than for use in the production or supply of goods or

services or for administrative purpose or sale in the ordinary

course of the business.


Scope of IAS 40Scope of IAS 40

IAS 40 prescribes the accounting and disclosure for investment property, whether it is land or buildings

Recognition

Investment property is recognized as an asset when it is probable that

(i) future economic benefits associated with it will flow to the enterprise, and

(ii) its cost can be reliably measured.

Measurement

Investment property is measured using the fair value or cost model, and de-recognised on disposal or when it is permanently withdrawn from use.


Examples of investment propertyExamples of investment property

Land held for long-term capital appreciation

Investment property being redeveloped

For continued use as investment property

Land held for undetermined future use

Building owned and leased out

Including vacant building that will be leased out under

operating lease

Your trusted accountants and business advisors

The IAS 40 decision treeThe IAS 40 decision tree

Is the property forsale in the ordinarycourse of business

Is the propertyowner

occupied

Use IAS 2 Inventories

Use IAS 11 Constructions Contracts

Is the property being constructed Or developed for a third Party under previously Agreed Contractual Terms?

Use IAS 16 Property Plant and Equipment

Use IAS 16 Property Plant & Equipment

Is the propertybeing constructed

or developed?

Start

The property is an Investment

property

Yes

Yes

Yes

No

No

No No

Yes


Not investment propertyNot investment property

property under finance lease

employee occupiedproperty

property underinitial development

leaseIAS 17

propertyIAS 16

propertyIAS 16

once developed:IAS 40


Not investment propertyNot investment property

Biological assetsMineral rights,

exploration/extraction

IAS 41 IFRS 6


Dual purpose – able to splitDual purpose – able to split

IAS 16

owneroccupied

IAS 40

rentalincome


Dual purpose – unable to splitDual purpose – unable to split

IAS 16owner

occupiedrental

income

IAS 40

ow

ne

ro

ccu

pie

d

rental income


Ancillary servicesAncillary services

IAS 16servicesrental

income

IAS 40

services

rental income


AssessmentAssessment

M developers occupies four floors of a seven-floor building. The company rents out the remaining three floors to Bongo Estate Agents. Bongo estates buys derelict property in Ilala district, pays M developer to redevelop this property and then sells it on at a profit to private clients. M developers earns 75% of its income from the redevelopment of buildings for Bongo estate agents. In addition, M developers charges rent to Bongo Estate Agents on an operating lease that clearly distinguishes these three floors as leasehold property. The level of rent varies so that M developer is guaranteed a fixed amount of revenues per redevelopment project it carries out on behalf of Bongo Estate agents.

What is the appropriate accounting treatment for the three floors M developer company rents out to Bongo estates agent?



a) These three floors are separately identifiable and should be accounted for as an investment property in accordance with IAS 40

b) The ancillary services M developer provides to estate agent are a relatively significant component of the owner-occupied property arrangement as a whole and M developer should treat the whole of the property as owner-occupied property

c) These three floors are separately identifiable and should be accounted for as an owner-occupied property in accordance with IAS 16

d) The services provided to Bongo Estate Agents are a relatively insignificant component of the investment property arrangement as a whole. The company treats the property as investment property



Dino Davey Executive Services (DDES) owns a hotel and transfers

certain responsibilities to a third party, Mackenzie Management Co

under a management contract. DDES is, in substance, a passive

investor. What is the classification of the hotel in the year end financial

statement?

a) Owner-occupied property

b) Mackenzie Management Co should treat the property as owner-occupied property since it bears the majority of the risks of ownership

c) The property is investment property

d) The property is not held with a view to long-term capital appreciation and should be classified as inventory


Hotels Hotels

Owner-managed = owner-occupied IAS 16

Management contract – involves judgment:

Passive investor = investment property

Significant exposure to cash flow variation= owner-occupied IAS 16

Disclose classification criteria


Example on Scope of IAS 40.Example on Scope of IAS 40.

Considering the following situations that one investment property company faces.

Rapid ‘Results’ Realty Ltd has taken certain measures during the year to improve profitability and to raise cash.

New HQ for third party

Rapid Results Realty has agreed terms with a third party –Realistic Realty – to construct new headquarters on a piece of land it bought the pervious year.

Redevelopment of existing investment property

The company is redeveloping an old investment property in order to upgrade it to Grade A office space


Example on ScopeExample on Scope

Selling its own headquarters for profit

Rapid Results Realty has sold its headquarters and moved into one of its investment properties.

Sale of warehouse and rental of another

Rapid Results Realty has sold one of the warehouse it used to store its construction machinery in. It is currently storing the machinery in a warehouse rented out under an operating lease.

Increasing property portfolio

Construction of another investment property was completed during the year by Rapid Results Realty’s construction arm. This property is currently vacant but is being advertised with a view to being leased out under one or more

operating leases.


Question on Scope of IAS40Question on Scope of IAS40

Think about the measures taken by Rapid Results Realty Ltd. Which of its properties are within the scope of IAS 40 at the year-end? Drag each option into the correct column .

Under IAS 40 Other IFRS

The property being constructed on behalf of Realistic Realty

The old investment property being redeveloped

The new head-quarters in one of its former investment properties

The warehouse held by Rapid Results Realty Ltd under an operating lease

The empty building to be leased out under an operating lease


Answer on ScopeAnswer on Scope

Think about the measures taken by Rapid Results Realty Ltd Ltd. Which of its properties are within the scope of IAS 40 at the year-end? Drag each option into the correct column .

Under IAS 40 Other IFRSThe property being constructed on behalf of Realistic Realty (Under IAS 11)

The old investment property being redeveloped

The new head-quarters in one of its former investment properties

The warehouse held by Rapid Results Realty Ltd under an operating lease

The empty building to be leased out under an operating lease



QUESTION 5

The Possum Property Group plc owns a building that is rented to a group company. What would be the classification in the company-only financial statements of Possum Property?

a) Owner-occupied property

b) Investment property

c) Inventory


Initial measurementInitial measurement

Investment property initially, measured at cost

Components of costPurchase price (including import duties and non refundable purchase taxes, after deducting trade discounts and rebates)

any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management

The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located,

The obligation for which an entity incurs either when the item is acquired


Costs ExcludedCosts Excluded

The following should not be included in the cost of investment property, increasing its value inappropriately:

start-up costs (unless necessary to bring the property to the condition necessary for it to be capable of operating in the manner intended by management)

initial operating losses incurred before the investment property achieves the planned level of occupancy

abnormal amounts of wasted material, labour or other resources incurred in constructing or developing the property.


Cost of Self Constructed propertyCost of Self Constructed property

The cost of self constructed investment property is its cost at the date when construction or development is complete. Until that date an entity applies IAS:16 Property Plant and Equipment

If an entity makes investment properties for sale in the normal course of business, the cost of the self- constructed investment property is usually the same as cost of producing the properties for sale (See IAS2: Inventoreis. Therefore, any internal profits are eliminated in arriving at such costs.


Cost of Purchased propertyCost of Purchased property

The cost of a purchased property comprises

Purchase price, and

Any directly attributable expenditure (eg Professional fees for legal services, property transfer taxes and other transaction costs.

Purchase on deferred payment basis

If payment for an investment property is deferred, its costs is the cash price equivalent. The difference between this amount and the total payments is recognised as interest expense over the period of credit.


List of other costs to be included are:List of other costs to be included are:

deferred payment of a portion of the purchase consideration

professional fees charged by (a) consulting engineers or

(b) chartered surveyors for building surveys,or

(c) for legal services

property transfer taxes

site preparation costs

other ‘directly attributable’ transaction costs

This is because these costs are directly

attributable costs of bringing the asset

to the condition necessary for it to be

capable of operating in the manner intended

by management in accordance with IAS 16.


Examples of costs not to be included are:Examples of costs not to be included are:

any internal profits for self-constructed assets abnormal amounts of wasted material or labour (self-constructed

property) rebates for prompt payment of purchase consideration for a

property

This is because these costs are not directly

attributable costs of bringing the asset

to the condition necessary for it to be

capable of operating in the manner intended

by management in accordance with IAS 16.


Subsequent measurement of Investment property after initial recognitionSubsequent measurement of Investment property after initial recognition

At Fair value• Gain or loss from a

change in the fair value of investment property included in income statement.

• Exemption if cannot reliably determine on ongoing basis.

At Cost• As per IAS 16Cost• Depreciation• Impairment losses

Apply choice to all investment property

Or


Application of fair value modelApplication of fair value model

Once chosen, the fair value model should be applied to all of an entity’s investment properties.

There is a rebuttable presumption that an enterprise will be able to determine the fair value of an investment property reliably on a continuing basis.

However, in exceptional cases, it may not always be possible to determine the fair value of an investment property reliably on a continuing basis.

IAS 40 - 28



Which of the following statements do you believe to be true?

Select one or more options .

(a) Fair value may be determined by reference to transactions with special terms between related parties

(b) An entity determines fair value after deducting transaction costs that it may incur on sale or other disposal

(c) Determining the fair value on the basis of a valuation by an external valuer is required

(d) Fair value should reflect future expected market prices

(e) Fair value is the best price obtainable in the open market after proper marketing

(f) The fair value of investment property is usually its market value

IAS 40 - 29



Which of these statements do you believe to be true? Select one or more options and click Confirm.

(a)The fair value of an investment property should reflect the actual market state and circumstances as of the balance sheet date, not as of either a past or future date

(b) Fair value is similar to value in use, as defined in IAS 36:Impairment of Assets

(c) Determining the fair value on the basis of a valuation by an external valuer is encouraged

(d) Fair value is the best price obtainable in the open market before proper marketing

(e) Fair value should reflect past market prices

IAS 40 - 30


Exception to fair valueException to fair value

In what circumstances is it likely that the fair value cannot be calculated reliably?

And what are consequences?

1. Lack of comparable market transactions

Its unlikely that fair value can be calculated reliably if comparable market transactions – on which fair value measurement might be based – are infrequent

2. lack of alternative estimates

Its unlikely that fair value can be calculated reliably if alternative estimates of fair value, for example, those based on discounted cash flow projections, are not available.

IAS 40 - 31


ExampleExample

An enterprise accounts for its investment properties using the fairvalue model. The enterprise acquires an investment property andthere is clear evidence that it will not be able to determine the fairvalue of this investment property reliably on a continuing basis.Which of these statements about this property is true?

Click the one correct option, and then click Confirm. (a) The enterprise should account for the newly acquired

investment property at cost and apply the cost model to the remainder of its investment property portfolio.

(b) The enterprise should account for the newly acquired investment property using the benchmark treatment in IAS 16: Property, Plant & Equipment.

(c) The enterprise should account for this investment property at cost until it is able to obtain a fair value for it.

(d) It should account for the property at Net Realisable Value (NRV).

IAS 40 - 32


Consequence if fair values not availableConsequence if fair values not available

When there is a lack of comparable market transactions of alternative estimates,

an enterprise should measure that investment property using the benchmark treatment in IAS16, Property, Plant and Equipment i.e. At cost less depreciation and any impairment

The residual value of investment property should be assumed to be zero

IAS 40 - 33


Property ClassificationProperty Classification

The initial assessment made by an entity of the use of land or a building, or both, may change in the course of the business.

Depending on its use a property can be Classified as:

i. an investment property ii. an owner-occupied property iii. Inventory

For example, during its useful economic life, a warehouse may be:

i. a warehouse space – investment propertyii. a warehouse - owner-occupied iii. a warehouse for sale - inventory


Transfers to or from investment property classification(Types of Change in use/transfer)Transfers to or from investment property classification(Types of Change in use/transfer)

Investment property in the course of construction or development to investment property

Investment property to inventory

Inventory to investment property

Investment property to owner-occupied property

Owner-occupied property to investment property


Evidence of a change in useEvidence of a change in use

A transfer to, or from, investment property should be made when, and only when, there is a change in use, which is evidenced by:

start of owner occupation, for a transfer from investment to owner-occupied property

start of development with a view to sale, for a transfer from investment property to inventories

end of owner-occupation, for a transfer from owner-occupied to investment property

start of an operating lease to another party, for a transfer from inventories to investment property, or,

end of construction or development, for a transfer in the course of construction or development to investment property


Transfers of Investment property in the course of construction or development to Investment propertyTransfers of Investment property in the course of construction or development to Investment property

An entity completes the construction or development of a self-constructed investment property (property under construction is accounted at cost). The entity applies the fair value model to its investment property portfolio

Any Difference between fair value at the date of transfer

And

It s previous carrying amount (at cost)

recognized in profit or loss for the period.


Investment property to inventoryInvestment property to inventory

An entity decides to redevelop an investment property in order to sell it.

Investment property carried at fair value Transferred to Inventory

The property’s cost for accounting under IAS 2should be its fair value at the date of change inuse


Inventory to investment propertyInventory to investment property

An entity decides to retain an investment property that has been redeveloped (and carried in inventory during the redevelopment).

Difference between the fair value of the property at that date and its previous carrying amount [at the lower of “cost” (based on fair value at the time of transfer to inventory)Or net realizable value]

Recognised in profit or loss for the period


Investment property to owner-occupied propertyInvestment property to owner-occupied property

An entity decides to adopt one of its investment properties as its new headquarters.

For a transfer of from Investment property (carried at fair value) to Owner-occupied property (accounted for at cost),

The property’s cost for accounting under IAS 16 should be its fair value at the date of change in use


Owner occupied property to investment propertyOwner occupied property to investment property

If an owner-occupied property becomes an investment property carried at fair value

Any difference at that date between the carrying amount of the property under IAS16 and its fair value should be treated in the same way asRevaluation under IAS16

The revaluation gain is taken to a revaluation reserve in equity, not to the income statement.


Transfers to investment property carried at FV (1)Transfers to investment property carried at FV (1)

initial developmentIAS 16

investmentproperty

fair value(income statement)

inventoryIAS 2

investmentproperty

fair value(income statement)

owner occupiedIAS 16

investmentproperty

fair value(revaluation)


Transfers from investment property carried at FV (2)Transfers from investment property carried at FV (2)

investmentproperty

inventoryIAS 2

owner occupiedIAS 16

fair value becomes new cost basis


Retirements and disposalsRetirements and disposals

Eliminate items of investment property

On disposal, or

When permanently withdrawn from use and no future benefits expected through disposal

Difference between carrying amount and net disposal proceeds recognised as income or expense


Key disclosures – both models (1)Key disclosures – both models (1)

whether the fair value or the cost model is used

if the fair value model is used, whether property interests held under operating leases are classified and accounted for as investment property

if classification is difficult, the criteria to distinguish investment property from owner-occupied property and from property held for sale

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



the extent to which the fair value of investment property is based on a valuation by a qualified independent valuer; if there has been no such valuation, that fact must be disclosed

restrictions on the realisability of investment property or the remittance of income and proceeds of disposal

contractual obligations to purchase, construct, or develop investment property or for repairs, maintenance or enhancements



the amounts recognised in profit or loss for:

rental income from investment property

direct operating expenses (including repairs and maintenance) arising from investment property that generated rental income during the period

direct operating expenses (including repairs and maintenance) arising from investment property that did not generate rental income during the period

the cumulative change in fair value recognised in profit or loss on a sale from a pool of assets in which the cost model is used into a pool in which the fair value model is used


Key disclosures – Fair Value (1)Key disclosures – Fair Value (1)

a reconciliation between the carrying amounts of investment property at the beginning and end of the period, showing additions, disposals, fair value adjustments, net foreign exchange differences, transfers to and from inventories and owner-occupied property, and other changes [IAS 40.76]

significant adjustments to an outside valuation (if any) [IAS 40.77]

if an entity that otherwise uses the fair value model measures an item of investment property using the cost model, certain additional disclosures are required [IAS 40.78]


Key disclosures – Cost model Key disclosures – Cost model

the depreciation methods used

the useful lives or the depreciation rates used

the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period

a reconciliation of the carrying amount of investment property at the beginning and end of the period, showing additions, disposals, depreciation, impairment recognised or reversed, foreign exchange differences, transfers to and from inventories and owner-occupied property, and other changes

the fair value of investment property. If the fair value of an item of investment property cannot be measured reliably, additional disclosures are required, including, if possible, the range of estimates within which fair value is highly likely to lie

Contact details

KLSA Consultants and Business Advisers Limited

16th Floor, Golden Jubilee Tower

Ohio Street

Tel: 0784 520 097/ 222 139338/ 222 2139340

[email protected]

[email protected]

Contact details

KLSA Consultants and Business Advisers Limited

16th Floor, Golden Jubilee Tower

Ohio Street

Tel: 0784 520 097/ 222 139338/ 222 2139340

[email protected]

[email protected]

Klsa Ias 40 Slides Mg

Documents

Transcript of Klsa Ias 40 Slides Mg