CHAPTER 9

INVESTMENT PROPERTY

TOPIC OVERVIEW:
This chapter explains investment property, its characteristics and classifications, initial and
subsequent measurement, and reclassification.

LEARNING OBJECTIVES:
After studying this chapter, the students should be able to:
1. Define investment property.
2. Explain the different classification issues for investment property.
3. Explain the initial recognition, initial measurement, subsequent measurement, derecognition
and financial statement presentation of investment property.

INVESTMENT PROPERTY
Investment property is property (land or a building - or a part of a building - or both) held (by the
owner or by the lessee under finance lease) to earn rentals or for capital appreciation or both.

Examples of Investment Property

 Land held for long-term capital appreciation rather than for short-term sale in the
ordinary course of business
 Land held for a currently undetermined future use (If an entity has not determined that
it will use the land as owner-occupied property or for short-term sale in the ordinary
course of business, the land is regarded as held for capital appreciation.)
 A building owned by the entity (or a right-of-use asset relating to a building held by the
entity)) 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 or developed for future use as investment property

Not Included as Investment Property

 Property intended for sale in the ordinary course of business or in the process of
construction or development for such sale, for example, property acquired exclusively
with a view to subsequent disposal in the near future or for development and resale
 Owner-occupied property (PAS 16 and PFRS 16), including (among other things)
property held for future use as owner-occupied, property held for future development and
subsequent use as owner-occupied property, property occupied by employees (whether or
not the employees pay rent at market rates) and owner-occupied property awaiting
disposal
 Property that is leased to another entity under a finance lease

Other Classification Issues

Partial own use
If the portions can be sold or leased out separately
 Investment property - those portions of the property that is rented out or for capital
appreciation.
 Owner-occupied property - those portions that are used by the company for
administrative purposes.

If the portions cannot be sold or leased out separately

 Investment property - if the owner-occupied portion is insignificant
 Owner-occupied property - if investment property portion is insignificant
Ancillary services
If the enterprise provides ancillary services to the occupants of a property held by the enterprise,
the appropriateness of classification as investment property is determined by the significance of
the services provided.

 Investment property - if those services are a relatively insignificant component of the

arrangement as a whole (for instance, the building owner supplies security and
maintenance services to the lessees)

 Owner-occupied - where the services provided are more significant (such as in the case of
an owner-managed hotel, where services provided to guests are significant to the
arrangement as a whole)

Judgment is needed to determine whether a property qualifies as investment property. An entity

develops criteria so that it can exercise that judgment consistently in accordance with the
definition of investment property

INITIAL RECOGNITION
Investment property should be recognized as an asset when it is
a) probable that the future economic benefits that are associated with the property will flow
to the enterprise, and
b) the cost of the property can be reliably measured

INITIAL MEASUREMENT
Investment property is initially measured at cost, including transaction costs. Directly
attributable cost includes, for example, professional fees for legal services, property transfer
taxes and other transaction costs.

The cost of an investment property is not increased by:

 Start-up costs (unless they are necessary to bring the property to the condition necessary
for it to be capable of operating in the manner intended by management),
 Operating losses incurred before the investment property achieves the planned level of
occupancy, or
 Abnormal amounts of wasted material, labor or other resources incurred in constructing
or developing the property.

Cost of self-constructed investment property

The cost of a self-constructed investment property is total cost incurred at each reporting date or
at the date when the construction or development is complete, whichever is earlier.

ILLUSTRATION: Cost of Self-Constructed Investment Property

The following costs were incurred by ALMA Company in the construction of its building to be
used as investment property:
Labor in construction ₱1,000,000
Materials used for construction 1,500,000
Abnormal amount of wasted material 300,000
Overhead attributable for the construction 750,000
Other directly attributable cost in the construction 350,000

Required: Compute for the cost of self-constructed investment property.

SOLUTION:
Labor in construction ₱1,000,000
Materials used for construction 1,500,000
Overhead attributable for the construction 750,000
Other directly attributable cost in the construction 350,000
Total Cost ₱3,600,000
Investment property held under finance lease
The initial cost of a property interest held under a finance lease and classified as an investment
property shall be recognized at the lower of the:
 Fair value of the property and
 Present value of the minimum lease payments.

Illustration: Investment property held under finance lease

ALMA Company acquired a building through finance lease. The building is to be rented out
under various operating leases. The present value of minimum lease payments is ₱2,800,000
while its fair value is ₱3,000,000.

Required: Prepare the necessary entries on the date of recognition of investment property.

SOLUTION:
To record the acquisition of the investment property:

Investment Property 2,800,000

Lease liability 2,800,000

The cost is at the lower of present value of minimum lease payments and fair value of the
building.

Acquisition through non-monetary exchange (or combination of monetary and non-

monetary exchange)
When an investment property is acquired through non-monetary exchange, the cost of such an
investment is measured using the following order of priority:

a) Fair value of asset given up plus any cash payment

b) Fair value of asset received minus any cash received
c) Book value of the asset given up plus any cash payment

If the acquired asset is not measured at fair value because the exchange transaction lacks
commercial substance or the fair value of the asset received or the asset given up is not reliably
measurable, the investment property shall be measured at the carrying amount of the asset given
up.

Illustration: Investment Property Acquired through Exchange

AL Company acquired a land to be used as investment property through exchange from MA

Company. The following data are available for the exchange:
AL MA
Carrying amount of the investment property given ₱ 1,000,000 ₱ 900,000
Fair value of the investment property given 1,200,000 1,350,000
Cash paid by AL to MA 150,000

Required: Prepare the necessary entry on the part of AL Company.

1) Assume the exchange has commercial substance.
2) Assume the exchange has no commercial substance.

1. Assume the exchange has commercial substance

AL
Fair value of the investment property given ₱ 1,200,000
Cash paid by AL to MA 150,000
Cost of investment property ₱ 1,350,000
 AL
Fair value of the investment property given ₱ 1,200,000
Less: Book value of the investment property given (1,000,000)
Gain on exchange ₱ 200,000

Investment property – new 1,350,000

Investment property – old 1,000,000
Cash 150,000
Gain on exchange 200,000

2. Assume the exchange has no commercial substance

AL
Book value of the investment property given ₱ 1,000,000
Cash paid by AL to MA 150,000
Cost of investment property ₱ 1,150,000

Investment property – new 1,150,000

Investment property – old 1,000,000
Cash 150,000

SUBSEQUENT MEASUREMENT
After initially recognizing the investment property at cost, an entity may choose between the:

 Fair Value Model; or

 Cost Model

One method must be adopted for all of an entity's investment property. A voluntary change in
accounting policy shall be made only if the change will result in a more appropriate presentation
of transactions, other events or conditions in the entity's financial statements. PAS 40 notes that
this is highly unlikely that a change from the fair value model to the cost model will result in a
more appropriate presentation.

Cost Model
After initial recognition, an entity that chooses the cost model shall measure investment property:
 in accordance with PFRS 5 Non-current Assets Held for Sale and Discontinued
Operations if it meets the criteria to be classified as held for sale (or is included in a
disposal group that is classified as held for sale);
 in accordance with PFRS 16 if it is held by a lessee as a right-of-use asset and is not held
for sale in accordance with PFRS 5; and
 in accordance with the requirements in PAS 16 for the cost model in all other cases

Fair Value Model

After initial recognition, an entity that chooses the fair value model shall measure all of its
investment property at fair value. An entity determines fair value without any deduction for
transaction costs it may incur on sale or other disposal. A gain or loss arising from a change in
the fair value of investment property shall be recognized in profit or loss for the period in which
it arises.

In determining the fair value of investment property, an entity does not double-count assets or
liabilities that are recognized as separate assets or liabilities. For example:

a) Equipment such as lifts or air-conditioning is often an integral part of a building and is

generally included in the fair value of the investment property, rather than recognized
separately as property, plant and equipment.
 b) If an office is leased on a furnished basis, the fair value of the office generally includes
the fair value of the furniture because the rental income relates to the furnished office.
When furniture is included in the fair value of investment property, an entity does not
recognize that furniture as a separate asset.

c) The fair value of investment property excludes prepaid or accrued operating lease income
because the entity recognizes it as a separate liability or asset.

d) The fair value of investment property held under a lease reflects expected cash flows
(including contingent rent that is expected to become payable). Accordingly, if a
valuation obtained for a property is net of all payments expected to be made, it will be
necessary to add back any recognized lease liability to arrive at the fair value of the
investment property for accounting purposes.

The fair value of investment property does not reflect future capital expenditure that will
improve or enhance the property and does not reflect future benefits from this future expenditure.

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.

1. At initial recognition
a) In exceptional cases, there is clear evidence when an entity first acquires an investment
property (or when an existing property first becomes investment property after a change
in use) that the fair value of the investment property is not reliably determinable on a
continuing basis. If an entity determines that the fair value of an investment property
under construction is not reliably determinable but expects the fair value of the property
to be reliably determinable when construction is complete, it shall measure that
investment property under construction at cost until either its fair value becomes reliably
determinable or construction is completed (whichever is earlier).
b) If an entity determines that the fair value of an investment property (other than an
investment property under construction) is not reliably determinable on a continuing
basis, the entity shall measure that investment property using the cost model in PAS 16.
The residual value of the investment property shall be assumed to be zero. The entity
shall apply PAS 16 until disposal of the investment property.
c) All the other investment property shall be measured at fair value.

2. Subsequent to initial recognition

a) If an entity has previously measured an investment property at fair value, it shall continue
to measure the property at fair value until disposal (or until the property becomes owner-
occupied property or the entity begins to develop the property for subsequent sale in the
ordinary course of business) even if comparable market transactions become less frequent
or market prices become less readily available.

ILLUSTRATION: Cost Model and Fair Value Model

On January 1, 2016, ALMA Co. purchased building at a cost of ₱3,000,000. On the same date,
the building was leased out under an operating lease. The company's policy regarding
depreciable asset is to depreciate using straight line method of depreciation over an estimated
useful life of 20 years. The fair value of the building from December 31, 2016 to 2018 is as
follows:
12/31/16 12/31/17 12/31/18
Building ₱3,100,000 ₱2,450,000 ₱2,990,000

Required: What is the carrying amount of the land and building from December 31, 2016 to
2018 assuming the company uses
1) Cost model 2) Fair value model
SOLUTION:
Requirement No. 1: Cost model
Using the cost model, the investment property (building) is measured at cost less accumulated
depreciation and impairment loss. The carrying amounts of the building are computed as follows:
12/31/16 12/31/17 12/31/18
Investment Property ₱3,000,000 ₱3,000,000 ₱3,000,000
Less: Accumulated Depreciation 150,000* 300,000 450,000
Investment Property ₱2,850,000 ₱2,700,000 ₱2,550,000
*3,000,000 / 20 = 150,000

Requirement No. 2: Fair model

Using the fair value model, the investment property (building) is measured at fair value at the
end of each reporting period and the building should not be depreciated. The carrying amount of
the investment property would be as follows:
12/31/16 12/31/17 12/31/18
Building ₱3,100,000 ₱2,450,000 ₱2,990,000

Transfers From or To Investment Property

Transfers to, or from, investment property should only be made when there is a change in use,
evidenced by:
 commencement of owner-occupation, for a transfer from investment property to owner-
occupied property;
 commencement 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 property to investment
property; or
 commencement of an operating lease to another party, for a transfer from inventories to
investment property

When an entity decides to dispose of an investment property without development, it continues to

treat the property as an investment property until it is derecognized and does not treat it as
inventory.

Similarly, if an entity begins to redevelop an existing investment property for continued future
use as investment property, the property remains an investment property and is not reclassified as
owner-occupied property during the redevelopment.

Accounting for Transfers

Transfers To and From Investment Property - Cost Method
When an entity uses the cost model, transfers between investment property, owner-occupied
property and inventories do not change the carrying amount of the property transferred and they
do not change the cost of that property for measurement or disclosure purposes.

ILLUSTRATION: Transfer from PPE to Investment Property

On January 1, 2016, AL Company bought a land and building from MA Company for
₱3,500,000. AL Company will use the building as its head office. The portion of the total
purchase price attributable to the land is ₱1,700,000 while the balance is attributable to the
building. The company depreciates the building using straight line method over an estimated
useful life of 25 years. The company uses cost model in measuring its property, plant and
equipment subsequent to initial measurement.

On December 1, 2018, the company has acquired another land and building in the Central
Business District to be used as their new head office as this would be a good location. The
management decided to lease the old building under operating lease. By the end of 2018, the old
building was already vacated by AL Company and another company has already occupied the
old building. The fair value of the land and building at the end of 2018 was ₱3,400,000.
Required: Account for the transfer of the PPE to investment property.

SOLUTION:
Since the property, plant and equipment is accounted using the cost model, the transfer will be
based on the carrying amount on the date of transfer. Hence, the fair value at the date of transfer
is ignored and no gain or loss on transfer will be recognized. The new cost of the investment
property on December 31, 2018 is computed as follows:
Land ₱1,700,000
Building
Cost ₱1,800,000
Less: Accumulated depreciation (1.8M/25) * 3 216,000 1,584,000
New cost of investment property ₱3,284,000

Transfers from Investment Property - Fair Value Model

For a transfer from investment property carried at fair value to owner-occupied property or
inventories, the property's deemed cost for subsequent accounting shall be its fair value at the
date of change in use.

Transfers from PPE to Investment Property - Fair Value Model

If an owner-occupied property becomes an investment property that will be carried at fair value,
an entity shall apply PAS 16 for owned property and PFRS 16 for property held by a lessee as a
right-of-use asset up to the date of change in use. Up to the date when an owner-occupied
property becomes an investment property carried at fair value, an entity depreciates the property
and recognizes any impairment losses that have occurred.

At the date of reclassification, the entity treats any difference between the carrying amount of the
property and its fair value as follows:

1. Any resulting decrease in the carrying amount of the property is recognized in profit or loss.
However, to the extent that an amount is included in revaluation surplus for that property, the
decrease is charged against that revaluation surplus.

2. Any resulting increase in the carrying amount is treated as follows:

a) To the extent that the increase reverses a previous impairment loss for that property, the
increase is recognized in profit or loss. The amount recognized in profit or loss does not
exceed the amount needed to restore the carrying amount to the carrying amount that
would have been determined (net of depreciation) had no impairment loss been
recognized.
b) Any remaining part of the increase is credited directly to equity in revaluation surplus.
On subsequent disposal of the investment property, the revaluation surplus included in
equity may be transferred to retained earnings. The transfer from revaluation surplus to
retained earnings is not made through profit or loss.

ILLUSTRATION: Transfer from PPE to Investment Property using Fair Value Model
On December 31, 2018, ALMA Company reclassified its previously held asset as owner
occupied to investment in property due to change in use. The following data were determined by
ALMA Company:

Original cost ₱5,000,000

Accumulated depreciation – 12/31/2018 1,800,000
Carrying amount 3,200,000
Carrying amount had no impairment loss recognized – 12/31/2018 3,500,000
Fair value – 12/31/2018 3,850,000

Since the fair value of the asset can be determined at the end of each reporting period, ALMA
Company's policy is to use the revaluation model in its item of PPE subsequent to initial
measurement. ALMA Company also uses the straight line method of depreciation and
depreciates PPE using estimated useful life of 20 years.

Required: Account for the transfer of the PPE to investment property,

SOLUTION:
Since the transfer is to be made at fair value, the PPE first should be accounted under PAS 16 up
to the date of transfer. Therefore, the increase in fair value of ₱650,000 should be treated as
follows:
 First ₱300,000 - treated as reversal of impairment loss in the profit or loss.
 Excess of ₱350,000 - treated as revaluation surplus.

The journal entry related to the transfer would be as follows:

To account for the PPE using PAS 16 before the transfer to investment property:

Accumulated Depreciation 650,000

Gain on reversal of impairment loss 300,000
Revaluation surplus 350,000

Note that the revaluation surplus will remain in equity until the investment property is
derecognized.

To transfer the PPE to investment property:

Investment Property 3,850,000
Accumulated Depreciation 1,150,000
Property, plant and equipment 5,000,000

Transfers from inventories to investment property - Fair Value Model

For a transfer from inventories to investment property that will be carried at fair value, any
difference between the fair value of the property at that date and its previous carrying amount
shall be recognized in profit or loss. The treatment of transfers from inventories to investment
property that will be carried at fair value is consistent with the treatment of sales of inventories.

ILLUSTRATION: Transfers of inventory to investment property

On January 1, 2016, the ALMA Company bought a piece of land worth ₱2,600,000. The
company is engaged in buying and selling of land. On February 14, 2018, the company leased
the land under an operating lease to another company. The estimated selling price and cost to sell
of the inventories for the past two years are as follows:
12/31/16 12/31/17
Selling Price ₱2,650,000 ₱2,750,000
Cost to sell 150,000 120,000

On February 14, 2018, the fair value of the asset and its cost to sell is ₱2,880,000 and ₱130,000,
respectively.

Required: Account for the inventory and its transfer to investment property.

SOLUTION:
Since the company is engaged in the buy and sell of land, the land is considered as inventory and
to be accounted using PAS 2 Inventories. PAS 2 requires that inventories need to be measured at
lower of cost or net realizable value subsequent to initial measurement; therefore, the land will
be written down to its net realizable value of ₱2,500,000 (₱2,650,000-150,000) on December
31, 2016 and a loss will be recognized amounting to ₱100,000 (2.6M - 2.5M).

On December 31, 2017, the new carrying amount of the inventory will be ₱2,600,000. PAS 2,
paragraph 33, provides that reversal of write-down of inventories will be limited to write-down
recognized in prior periods. Therefore, only ₱100,000 is recognized as reversal of inventory
write-down as a deduction to amount of inventories expensed (known as cost of goods sold).

On February 14, 2018, the date of transfer, the new cost of the investment property is the fair
value of ₱2,880,000 on the date of transfer. The difference between the fair value of ₱2,880,000
and the previous carrying amount of ₱2,600,000 will be recognized in the profit or loss as gain
on transfer.

Completion of self-constructed or developed investment property

When an entity completes the construction or development of a self-constructed investment
property that will be carried at fair value, any difference between the fair value of the property at
that date and its previous carrying amount shall be recognized in profit or loss.

Take note that during construction, the asset is already accounted as an investment property. The
only issue is the difference between the fair value and the cost of construction upon completion.

ILLUSTRATION: Self-constructed investment property

On January 1, 2018, ALMA Co. started construction of a building to be rented out under an
operating lease after the building was completed. The total cost incurred by ALMA Co. which
includes materials, labor and overhead totaled ₱5,200,000. On December 31, 2018, when the
building was completed, the fair value of the building was determined to be ₱5,000,000.

Required: How should the investment property be measured at December 31, 2018?

SOLUTION:
On December 31, 2018, the investment property should be measured at its fair value of
₱5,000,000. The difference of the fair value and the construction cost of ₱200,000 are recognized
in profit or loss.

FINANCIAL STATEMENT PRESENTATION

Investment property is presented in the statement of financial position as one line item under the
non-current asset section.

DERECOGNITION
An investment property should be derecognized when the investment property is:
a) Disposed
b) Permanently withdrawn from use (retired)
c) No future economic benefits are expected from its disposal.

Gains or losses arising from the retirement or disposal of investment property shall be
determined as the difference between the net disposal proceeds and the carrying amount of the
asset and shall be recognized in profit or loss (unless PFRS 16 requires otherwise on a sale and
leaseback) in the period of the retirement or disposal.

Impairment or losses of investment property, related claims for or payments of compensation

from third parties and any subsequent purchase or construction of replacement assets are separate
economic events and are accounted for separately.

Reference:
Asuncion, et. al. (2018). Applied Auditing Book 1 of 2, Baguio City: Real Excellence Publishing