Chapter 22 Investment Property (Cash Surrender Value)

Investment property – property held by an owner or by the lessee under a finance lease to earn rentals
or for capital appreciation or both.

Only land and building can qualify as investment property.

Movable property cannot qualify.

An investment property is not held:

a. For use in the production or supply of goods or services or for administrative purposes (owner-
occupied property)
b. For sale in the ordinary course of business

Examples of Investment Property

a. Land held for long-term capital appreciation

b. Land for a currently undetermined use
c. Building owned by the reporting entity leased out under an operating lease
d. Building that is vacant but is held to be leased out under an operating lease
e. Property that is being constructed or developed for future as investment property

Items not considered investment property

a. Owner-occupied property
b. Property held for future use as an owner-occupied property
c. Property held for future development and subsequent use as owner-occupied property
d. Property occupied by employees
e. Owner-occupied property awaiting disposal
f. Property held for sale in the ordinary course of business or in the process of construction or
development for such sale
g. Property being constructed or developed on behalf of third parties
h. Property that is leased to another entity under a finance lease

Additional info.

A leasing contract is an agreement in which the lessor (owner of the equipment) conveys to the lessee
(user), the right to use the equipment in return for a payment over a particular period of time.

In a finance lease agreement, ownership of the property is transferred to the lessee at the end of the
lease term. But, in operating lease agreement, the ownership of the property is retained during and
after the lease term by the lessor.

Investment property held by lessee

IFRS 16 requires a lessee to recognize a right of use asset and a lease liability.

The right of use asset is initially recognized at cost which includes the following:

a. The PV of the lease payment

 b. Lease payment made to the lessor at or before commencement date (it is when the lease term
and benefits of the lease officially commence) less any lease incentive
c. Initial direct cost incurred by the lessee
d. Estimate of cost of dismantling and restoring the underlying asset for which the lessee has a
present obligation

Subsequent measurement

If a lessee applies the FV model in measuring the investment property, the lessee shall also apply the FV
model to the right of use asset that meets the definition of investment property.

Partly investment and partly owner-occupied

If these portions could be sold or leased out separately, an entity shall account the portions separately
as investment property and owner-occupied property.

If the portions could not be sold separately, the property is investment property if only an insignificant
portion is held for manufacturing or administrative purposes.

When relatively insignificant ancillary services are provided by entity, the property is treated as an
investment property.

If the services provided are more significant, the property is treated as owner-occupied property.

Property leased to an affiliate

From the perspective of the individual entity that owns it, it is considered an investment property.

From the perspective of the group and for purposes of consolidated financial statements, it is
considered an owner-occupied property.

Recognition of investment property

Investment property shall be recognized as an asset when and only when:

a. It is probable that the future economic benefits that are associated with the investment
property will flow to the entity
b. The cost of the investment property can be measured reliably.

Initial measurement of Investment Property

IP shall be measured initially at its cost. Transaction costs shall be included.

The cost comprises the purchase price and any directly attributable expenditure. (Professional fees for
legal services and property transfer tax)

Cost excluded from cost of investment property

a. Start-up costs unless necessary to bring the property to the condition necessary for its intended
use.
b. Operating losses incurred before the investment property achieves the planned level of
occupancy
 c. Abnormal amounts of wasted material, labor or other resources incurred in constructing or
developing the property.

Subsequent measurement of IP

The chosen model shall be applied to all of the investment property.

a. Fair value model – fair value. The net gains or losses from FV adjustments shall be disclosed.
b. Cost model – cost less any accumulated depreciation and any accumulated impairment loss
however the FV of the IP is disclosed at every year-end.

Fair value of IP

Fair value – price that would be received to sell an asset in an orderly transaction between market
participants at the measurement date.

The price in the principal market shall not be adjusted for transaction cost.

An integral part of a property is generally included in the FV of the IP.

The FV of IP excludes prepaid or accrued operating lease income.

Inability to determine FV

PAS 40 mandates that the entity shall measure such IP using the cost method until its disposal.

Under exceptional cases, the residual value of the IP shall be assumed to be zero.

An entity that uses FV model shall continue to measure other IP at FV, notwithstanding the fact that one
IP is carried using the cost model due to exceptional cases.

Transfers of IP

Transfers to and from IP shall be made when and only when there is a change of use evidenced by:

a. Commencement of owner occupation or development with view to owner-occupation – transfer

from IP to OOP.
b. Commencement of development with a view to sale – transfer from IP to inventory
c. End of owner occupation – transfer from OOP to IP
d. Inception of an operating lease to another entity – transfer from OOP to IP.

Measurement of Transfers

1. When the cost model is used, transfers between IP, OOP, and inventory shall be made at CA.
2. A transfer from IP carried at FV to OOP or inventory shall be accounted for at FV.
3. If OOP is transferred to IP that is to be carried at FV, the difference between the FV and the CA
shall be accounted for as revaluation of PPE.
4. If an inventory is transferred to IP that is to be carried at FV, the remeasurement shall be
included in profit or loss.
5. When an IP under construction is completed and to be carried at FV, the difference between the
FV and the CA shall be included in profit or loss.
Derecognition of IP

An IP shall be derecognized:

a. On disposal
b. When the IP is permanently withdrawn from use
c. When no future economic benefits are expected from the IP

Disclosures related to IP

The general disclosures are:

a. Whether the entity uses the cost model or FV model

b. The amount of rental income with the related expense
c. Restrictions on the IP
d. Contractual obligations to purchase or construct IP

When the FV model is used, the disclosures are:

a. Detailed reconciliation between the CA of the IP at the beginning and end of the period
b. The method of determining the FV of IP and whether the valuation is carried out by an
independent qualified valuer
c. Net gains or losses from FV adjustments
d. Whether significant fixtures within an IP have been separately recognized

When the cost model is used, the disclosures are:

a. The depreciation method or rate and useful life

b. Detailed reconciliation of the gross cost of IP and the related AD.
c. FV of the IP where possible. If not possible, such fact shall be explained.

Cash Surrender Value

The accounting for the payment of insurance premiums will depend on whether the beneficiary is the
entity itself or the officer insured.

If the beneficiary is the officer or any other person other than the entity, the payment of the premium is
charged to insurance expense.

A life insurance policy has a cash surrender value and loan value.

Cash surrender value – amount which the insurance firm will pay upon the surrender and cancelation of
the life insurance policy. It arises if the ff. requisites are present:

a. The policy is a life policy.

b. Premiums for 3 full years must have been paid.
c. The policy is surrendered at the end of the 3 rd year or anytime thereafter.

A CSV legally commences to accrue at the end of the 3 rd year.

There are firms which sell life insurance policies that grant CSV even at the end the 2 nd year only.
CSV Is classified as noncurrent investment.

Loan Value – amount which the insured can borrow from the insurance firm with the CSV as collateral
security.

The loan shall not be deducted from the CSV but accounted for as an ordinary obligation.

The CSV arises from the fact that the fixed annual premium is much in excess of the annual risk during
the earlier years of the policy.

Accounting procedures

a. Payment of insurance premium

Life Insurance Expense
Cash
b. Adjustment of the unexpired premium at the end of the period
Prepaid life insurance
Life insurance expense
c. Dividends received on the life policy are not income but a reduction of life insurance expense
Cash
Life insurance expense
d. Initial recognition of the CSV at the end of the third year
Cash surrender value
Life insurance
Retained earnings

The portion of the CSV applicable to the current year is credited to LIE and that portion applicable to the
prior years is credited to RE.

e. Recognition of CSV subsequent to the third year

CSV
LIE
f. Receipt of the proceeds of the life policy
Cash
CSV
LIE
Gain on life insurance settlement
The amount to be credited to the CSV should be the adjusted balance at the time of death of the
insured.
The LIE account is credited for the unexpired premium at the time of death.