Module 15

PAS 40 – Investment Property

Introduction

Philippine Accounting Standards 40 applies to the accounting for property (land and/or buildings)
held to earn rentals or for capital appreciation (or both). Investment properties are initially
measured at cost and, with some exceptions. May be subsequently measured using a cost model
or fair value model, with changes in the fair value under the fair value model being recognised in
profit or loss.

Learning outcomes:
1. Define an investment property.
2. State the initial and subsequent measurements of investment property.
3. Apply the fair value model of accounting for 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,
rather than for:
• use in the production or supply of goods or services or for administrative purposes; or
• sale in the ordinary course of business.”

Examples of investment property:

• land held for long-term capital appreciation
• land held for a currently undetermined future use
• building leased out under an operating lease
• vacant building held to be leased out under an operating lease
• property that is being constructed or developed for future use as investment property

Other classification issues

Property held under an operating lease. A property interest that is held by a lessee under an
operating lease may be classified and accounted for as investment property provided that:

• the rest of the definition of investment property is met

• the operating lease is accounted for as if it were a finance lease in accordance with PAS 17
Leases
• the lessee uses the fair value model set out in this Standard for the asset recognized

An entity may make the foregoing classification on a property-by-property basis.

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 Partial own use. If the owner uses part of the property for its own use, and part to earn rentals or
for capital appreciation, and the portions can be sold or leased out separately, they are accounted
for separately. Therefore the part that is rented out is investment property. If the portions cannot
be sold or leased out separately, the property is investment property only if the owner-occupied
portion is insignificant.

Ancillary services. If the entity provides ancillary services to the occupants of a property held by
the entity, the appropriateness of classification as investment property is determined by the
significance of the services provided. 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), then the entity may treat the property as investment property. Where the
services provided are more significant (such as in the case of an owner-managed hotel), the
property should be classified as owner-occupied.

Intracompany rentals. Property rented to a parent, subsidiary, or fellow subsidiary is not

investment property in consolidated financial statements that include both the lessor and the lessee,
because the property is owner-occupied from the perspective of the group. However, such property
could qualify as investment property in the separate financial statements of the lessor, if the
definition of investment property is otherwise met.

Investment property vs. PPE

Investm ent pr oper ty Ow ner -occupied pr oper ty
• Held to earn rentals or for • Held for use in the production
capital appreciation or both. or supply of goods or services
or for administrative purposes.
• Generates cash flows largely • Generates cash flows in
independently of the other conjunction with the other
assets held by an entity assets held by an entity.
• Includes only land and • May include assets other than
building land and building
• Accounted for under PAS 40 • Accounted for under PAS 16

Measurement

Initial: Cost

Subsequent: Either the Cost model or Fair value model

The following are excluded from the cost of investment property and are expensed
immediately:
a. 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)

THIS MODULE IS FOR THE EXCLUSIVE USE OF THE UNIVERSITY OF LA SALETTE, INC. ANY FORM OF
REPRODUCTION, DISTRIBUTION, UPLOADING, OR POSTING ONLINE IN ANY FORM OR BY ANY MEANS WITHOUT THE
WRITTEN PERMISSION OF THE UNIVERSITY IS STRICTLY PROHIBITED.
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 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

Change in accounting policy

• A change from the cost model to the fair value is accounted for prospectively.
• A change from the fair value model to the cost model is not permitted.

Determining fair value

PAS 40 requires all entities to determine the fair value of investment property whether it uses the
cost model or fair value model. Fair values determined are used for measurement and disclosure
purposes if the entity uses the fair value model and for disclosure purposes only if the entity uses
the cost model.

Fair value model

• After initial recognition, an entity that chooses the fair value model shall measure all of its
investment property at fair value, except in cases where the exemptions under PAS 40
applies.
• Changes in fair values are recognized in profit or loss.
• Depreciable assets classified as investment property measured under fair value model are
not depreciated.
• If the fair value of an item of investment property cannot be determined reliably on initial
recognition, such item is subsequently measured under the cost model.

Cost model
After initial recognition, an entity that chooses the cost model shall measure all of its investment
property at cost less any accumulated depreciation and impairment losses in accordance with PAS
16 Property, plant, and equipment.

Transfers
Transfers to, or from, investment property shall be made when, and only when, there is a change
in use, evidenced by:
a. Commencement of owner-occupation, for a transfer from investment property to owner-
occupied property;
b. Commencement of development with a view to sale, for a transfer from investment
property to inventories;
c. End of owner-occupation, for a transfer from owner-occupied property to investment
property; or
d. Commencement of an operating lease to another party, for a transfer from inventories to
investment property

THIS MODULE IS FOR THE EXCLUSIVE USE OF THE UNIVERSITY OF LA SALETTE, INC. ANY FORM OF
REPRODUCTION, DISTRIBUTION, UPLOADING, OR POSTING ONLINE IN ANY FORM OR BY ANY MEANS WITHOUT THE
WRITTEN PERMISSION OF THE UNIVERSITY IS STRICTLY PROHIBITED.
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 Disposal
An investment property should be derecognized on disposal or when the investment property is
permanently withdrawn from use and no future economic benefits are expected from its disposal.
The gain or loss on disposal should be calculated as the difference between the net disposal
proceeds and the carrying amount of the asset and should be recognized as income or expense in
the income statement. Compensation from third parties is recognized when it becomes receivable.

Disclosure
Both Fair Value Model and Cost Model

• 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 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
• the amounts recognized 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 recognized 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
• restrictions on the realizability 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

Additional Disclosures for the Fair Value Model

• 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
• significant adjustments to an outside valuation (if any)
• 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

Additional Disclosures for the Cost Model

THIS MODULE IS FOR THE EXCLUSIVE USE OF THE UNIVERSITY OF LA SALETTE, INC. ANY FORM OF
REPRODUCTION, DISTRIBUTION, UPLOADING, OR POSTING ONLINE IN ANY FORM OR BY ANY MEANS WITHOUT THE
WRITTEN PERMISSION OF THE UNIVERSITY IS STRICTLY PROHIBITED.
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 • 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 recognized 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

References:

Millan, Z. V. (2018). PAS 40 Investment Property In Conceptual Framework and Accounting

Standards (2018 Edition, pp. 423-436). Bandolin Enterprise.

IAS 40- Investment Property

(2020).http://www.iasplus.com/.https://www.iasplus.com.en/standards/oas/ais40

Activity:
Answer Problem 1 and Problem 2 (except No. 4), PAS 40 Investment Property (pp. 437-439) in
your textbook.

THIS MODULE IS FOR THE EXCLUSIVE USE OF THE UNIVERSITY OF LA SALETTE, INC. ANY FORM OF
REPRODUCTION, DISTRIBUTION, UPLOADING, OR POSTING ONLINE IN ANY FORM OR BY ANY MEANS WITHOUT THE
WRITTEN PERMISSION OF THE UNIVERSITY IS STRICTLY PROHIBITED.
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