Investments (Part 5) -- IFRS - Investment Property

Examples of Investment Property - Investment property would include the following:

A. Investment property is property that consists of land, a building or part of a building, or both land and building, held by an owner, or lessee under a finance (capital) lease, for the purpose of earning rent, for capital appreciation, or for both rental income and capital appreciation. B. Examples of Investment Property - Investment property would include the following: 1. Land held for long-term capital appreciation; 2. Land held for undetermined future use; 3. Building leased out under an operating lease; 4. Vacant building held for leasing out under an operating lease; 5. Property (land or building) that is being developed or constructed for future use as investment property.

Measurement of Investment Property

A. Measurement at Recognition -- Investment property is initially measured at cost, including direct cost of acquisition (e.g., legal fees, transfer taxes, etc.). Direct cost does not included: 1. Start-up cost, including abnormal waste; 2. Initial operating losses.

Disposal of Investment Property

A. When investment property is disposed of (e.g., sold) or when it becomes worthless, it will be written off (derecognized). B. A gain or loss on disposal is the difference between proceeds received on disposal, if any, and the carrying amount written off. C. Any gain or loss on disposal will be recognized as income or expense in the income statement.

Additional Disclosures Under the Cost Method

Additional Disclosures Under the Cost Method A. The depreciation method used; B. The useful life or depreciation rates used; C. The gross carrying amount (cost) and accumulated depreciation and accumulated impairment losses at the beginning and end of the period; D. The fair value of investment property or, at least, the range of estimates within which fair value falls.

Additional Disclosures Under the Fair Value Method

Additional Disclosures Under the Fair Value Method A. The methods and assumptions used in determining the fair value of investment property; B. Whether or not fair value assigned to investment property is based on valuation made by a qualified independent valuer and, if so, the extent of that valuation and any adjustments thereto.

Measurement Subsequent to Initial Recognition

B. Measurement Subsequent to Initial Recognition -- 1. An entity may elect to measure its investment property subsequent to acquisition using either: a. Fair value method (or model), or b. Cost method (or model). 2. Only one method - fair value or cost - must be used for all of an entity's investment property.

Transfers Into and Out Of Investment Property -- accounting

B. Transfers to or from investment property would be accounted for as follows: 1. Transfers from investment property measured at fair value to owner-occupied property or inventory (e.g., land for sale) - fair value at the date of change is the amount at which the new category is recorded (i.e., its "cost"). 2. Transfers from owner-occupied property to investment property measured at fair value - difference between carrying amount of the property and its fair value should be treated as a revaluation under IAS No. 16. a. Revaluations adjust carrying value to approximate fair value at the balance sheet date; b. Increases in value are recognized in other comprehensive income and show up in the statement of financial position (balance sheet) as accumulated revaluation surplus; c. Decreases (that exceed prior increases) are recognized as an expense.

Transfers Into and Out Of Investment Property -- accounting continued

B. Transfers to or from investment property would be accounted for as follows: 3. Transfers from property inventory to investment property are measured at fair value with any difference between the prior carrying amount and fair value recognized in profit or loss (net income). 4. Transfers to or from investment property measured at cost do not change the carrying amount of the property. Thus, for example, the cost and accumulated depreciation on property transferred to investment property from property, plant and equipment (or vice versa) would carry over to the new classification.

Examples of Property that would not be Investment Property - Investment property would not include the following:

C. Examples of Property that would not be Investment Property - Investment property would not include the following: 1. Property (i.e., land or building) held for use in production or supply of goods or services, or for administrative purposes; 2. Property held for sale in the ordinary course of business or in the process of development or construction for such sale (i.e., land or building inventory); 3. Property being developed or constructed on behalf of another party; 4. Owner-occupied property, including property held for future use by the owner or employees and owner-occupied property awaiting disposal; 5. Property leased to another entity under a finance (capital) lease.

Property interest held by a lessee under an operating lease may be classified and accounted for as investment property provided the following conditions are satisfied:

D. Property interest held by a lessee under an operating lease may be classified and accounted for as investment property provided the following conditions are satisfied: 1. The definition of investment property is otherwise met; 2. The operating lease is accounted for as if it were a finance (capital) lease; 3. The lessee measures the leased asset at fair value.

Disclosures for Investment Property

Disclosures for Investment Property A number of specific disclosures for investment property are required. Some disclosures are required regardless of whether the fair value method or the cost method is used; other disclosures are specific to each method. The most important disclosures are identified here.

Definition and Description of Investment Property

E. When an owner uses part of a property and the other part is held for rental or capital appreciation, if the parts can be sold or leased out separately they should be accounted for separately. Thus, the qualified part rented to others would be investment property and the owner-used part would not be. If the parts cannot be separately sold or rented, the property would not be investment property unless the part used by the owner is insignificant. F. If services are provided in connection with the occupancy of a property and those services are relatively insignificant to the arrangement (e.g., cleaning or security), the owner may still treat the property as investment property. G. Property rented or leased between a parent and its consolidated subsidiaries would not be investment property because at the consolidated level the property would be owner-occupied.

If an owner uses part of property, under what conditions may the other part be accounted for as investment property?

If the part of the property used by the owner and the part not used by the owner can be sold or leased separately and if the part not used otherwise meets the definition of investment property, it can be treated as investment property.

What are the acceptable methods (models) for measuring and reporting investment property?

The cost method (model) and the fair value method (model). An entity may use only one of these methods to measure and report all of its investment property.

Under what conditions can property already held be transferred into or out of the investment property category?

Transfers of property into or out of the investment property category can be made only when it is clearly evident that there has been a change in the use of the property.

What are the characteristics of investment property under International Financial Reporting Standards (IFRS)?

1. Investment property consists of building and/or land; 2. Held by the owner or a lessee under a capital lease; 3. For the purpose of earning rental income, recognizing capital appreciation, or both.

Disclosures under either fair value or cost methods

1. Whether fair value measurement or cost measurement is used; 2. If classification of property as investment property was difficult to make, the criteria used to distinguish property as investment property; 3. The amounts recognized in profit or loss related to investment property from: a. Rental income; b. Direct operating expenses, separately for investment property that generated rental income and investment property that did not. 4. Contractual obligations related to investment property (e.g., to develop, for repairs, for maintenance, etc.) ; 5. A reconciliation showing causes of the changes in the carrying amounts of investment property between the beginning and end of the period.

Fair Value Measurement

3. Fair Value Measurement -- a. 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 (IFRS No. 13); b. Fair value is determined as of each balance sheet date, and the asset adjusted to the new fair value; c. Gains or losses resulting from changes in fair value are reported in net profit or net loss (net income) of the period in which fair value changes; d. Example entry: Assume the fair value of land held as investment property increases during the period. The period-end entry would be: DR: Land CR: Unrealized gain on investment property e. Investment property measured at fair value should continue to be measured at fair value, even if market prices become less readily available.

Cost Measurement

4. Cost Measurement -- a. Under the cost method, investment property continues to be carried and reported at cost. However, fair value is required to be disclosed; b. If the property is depreciable, depreciation expense and accumulated depreciation are recognized; c. Investment property carried at cost is assessed for impairment and, if impaired, a loss and accumulated impairment are recognized.

Measurement of Investment Property -- Changing Methods

5. Changing from one method of measuring all investment property to another method is permitted only if it will result in a more relevant presentation. The Standard, IAS 40, states that it is highly unlikely to be the case for a change from fair value measurement to cost measurement.

Introduction

A separate category of investments for "investment property" exists under IFRS standard, IAS 40, but not under U.S. GAAP. Assets that constitute investment property under IFRS likely would be included with the category "property, plant, and equipment" under U.S. GAAP. Further, unlike U.S. GAAP, which requires property, plant ,and equipment to be measured and reported at cost, IFRS permits the use of either cost or fair value to measure and report the nonfinancial asset "investment property."

Transfers Into and Out Of Investment Property

A. A transfer to or from the investment property classification would be made only when there is a change in use of the property as evidenced by the following kinds of events: 1. Owner occupies property previously classified as investment property; 2. Owner ceases to occupy property that otherwise meets the criteria of investment property; 3. Property classified as investment property is readied for sale; 4. Property is leased to another party under an operating lease.