klsa ias 40 slides mg
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Investment PropertyTRANSCRIPT
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
Your trusted accountants and business advisors IAS 40 - 3
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.
Your trusted accountants and business advisors IAS 40 - 4
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property is measured using the fair value or cost model, and de-recognised on disposal or when it is permanently withdrawn from use.
Your trusted accountants and business advisors IAS 40 - 5
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
Your trusted accountants and business advisors IAS 40 - 7
Not investment propertyNot investment property
property under finance lease
employee occupiedproperty
property underinitial development
leaseIAS 17
propertyIAS 16
propertyIAS 16
once developed:IAS 40
Your trusted accountants and business advisors IAS 40 - 8
Not investment propertyNot investment property
Biological assetsMineral rights,
exploration/extraction
IAS 41 IFRS 6
Your trusted accountants and business advisors IAS 40 - 9
Dual purpose – able to splitDual purpose – able to split
IAS 16
owneroccupied
IAS 40
rentalincome
Your trusted accountants and business advisors IAS 40 - 10
Dual purpose – unable to splitDual purpose – unable to split
IAS 16owner
occupiedrental
income
IAS 40
ow
ne
ro
ccu
pie
d
rental income
Your trusted accountants and business advisors IAS 40 - 11
Ancillary servicesAncillary services
IAS 16servicesrental
income
IAS 40
services
rental income
Your trusted accountants and business advisors IAS 18 - 12
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?
Your trusted accountants and business advisors IAS 18 - 13
AssessmentAssessment
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
Your trusted accountants and business advisors IAS 18 - 14
AssessmentAssessment
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
Your trusted accountants and business advisors IAS 40 - 15
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
Your trusted accountants and business advisors IAS 40 - 16
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
Your trusted accountants and business advisors IAS 40 - 17
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.
Your trusted accountants and business advisors IAS 40 - 18
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
Your trusted accountants and business advisors IAS 40 - 19
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
Your trusted accountants and business advisors IAS 18 - 20
AssessmentAssessment
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
Your trusted accountants and business advisors IAS 40 - 21
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
Your trusted accountants and business advisors IAS 40 - 22
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.
Your trusted accountants and business advisors IAS 40 - 23
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.
Your trusted accountants and business advisors IAS 40 - 24
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.
Your trusted accountants and business advisors IAS 40 - 25
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.
Your trusted accountants and business advisors IAS 40 - 26
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.
Your trusted accountants and business advisors IAS 40 - 27
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
Your trusted accountants and business advisors
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
Your trusted accountants and business advisors
AssessmentAssessment
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
Your trusted accountants and business advisors
AssessmentAssessment
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
Your trusted accountants and business advisors
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
Your trusted accountants and business advisors
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
Your trusted accountants and business advisors
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
Your trusted accountants and business advisors
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
Your trusted accountants and business advisors
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
Your trusted accountants and business advisors
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
Your trusted accountants and business advisors
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.
Your trusted accountants and business advisors
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
Your trusted accountants and business advisors
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
Your trusted accountants and business advisors
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
Your trusted accountants and business advisors
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.
Your trusted accountants and business advisors IAS 40 - 42
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)
Your trusted accountants and business advisors IAS 40 - 43
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
Your trusted accountants and business advisors IAS 40 - 44
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
Your trusted accountants and business advisors IAS 40 - 45
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
Your trusted accountants and business advisors IAS 40 - 46
Key disclosures – both models (1)Key disclosures – both models (1)
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
Your trusted accountants and business advisors IAS 40 - 47
Key disclosures – both models (1)Key disclosures – both models (1)
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
Your trusted accountants and business advisors IAS 40 - 48
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]
Your trusted accountants and business advisors IAS 40 - 49
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
Contact details
KLSA Consultants and Business Advisers Limited
16th Floor, Golden Jubilee Tower
Ohio Street
Tel: 0784 520 097/ 222 139338/ 222 2139340