 PAS 40

Investment property

Investment Property

Investment property – is land and/or building held to earn rentals or capital appreciation or both.

Investment property includes only land and building. It does not include any other type of asset.

Investment property is held to earn rentals or for capital appreciation or both. Meaning, it generates its
own cash flows independently from the other assets of an entity and is not:

a. Owner-occupied property (i.e., held for use in the production or supply of goods or services for
administrative purposes). Owner occupied is classified as PPE;

b. Held for sale in the ordinary course of business (this is classified as inventory); or

c. Classified as “held for sale” under PFRS 5 Non-current assets Held for Sale and Discontinued
Operations.

Examples of investment property:

a. Land held for long-term capital appreciation rather than for short-term sale in the ordinary
course of business.

b. Land held for a currently undetermined future use.

c. 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.

d. A building that is vacant but is held to be leased out under one or more operating leases.

e. Property that is being constructed or developed for future use as investment property.

The following are not investment property:

a. Property acquired exclusively for sale in the near future or for development and resale.

b. Owner-occupied property, including:

i. Property held for future use as owner-occupied property;

ii. Property held for future development and subsequent use as owner-occupied
property;

iii. Property occupied by employees (whether or not the employees pay rent at
market rates); or
 iv. Owner-occupied property awaiting disposal.

c. Property that is leased out to another entity under a finance lease.

Illustration:

The following information pertains to Entity A:

Land held for long-term capital appreciation ₱ 1,000,000

Land held for a currently undetermined future use 700,000

Land held for future plant site 600,000

Land held for sale in the ordinary course of business 500,000

Building leased out under finance lease 1,900,000

Building leased out under operating lease 800,000

Right-of-use asset relating to a building held by the

entity and leased out under an operating lease 1,200,000

Equipment leased out under an operating lease 100,000

The total investment property is determined as follows:

Land held for long-term capital appreciation 1,000,000

Land held for currently undetermined future use 700,000

Building leased out under operating lease 800,000

Right-of-use asset relating to a building held by the

entity and leased out under an operating lease 1,200,000

Total investment property 3,700,000

Notes:

 The land held for future plant site and the equipment are classified as PPE.

 The land held for sale in the ordinary course of business is classified as inventory.

 The building leased out under finance lease is not an asset of Entity A – it is an asset of the
lessee.
Ancillary Services to Occupants

When ancillary services are provided to the occupants of a property held, the property is classified as
investment property if the services are insignificant to the arrangement as a whole. An example is when
the owner of an office building provides security and maintenance services to the building tenants.

If the services provided are significant, the entire property is classified as PPE. An example is services
provided to hotel guests in an owner-managed hotel. An owner-managed hotel is classified as PPE
rather than investment property.

Investment Property in Consolidated Financial Statements

A property that is leased by a member of a group to another member (parent or subsidiary) does not
qualify as investment property in the consolidated financial statements because, from the group’s
perspective, the property is owner occupied.

However, the property is classified as investment property in the lessor/owner’s individual financial
statements.

Recognition

An investment property is recognized when it meets the definition of an investment property as well as
the asset recognition criteria of “probable future economic benefits” and “reliable measurement of
cost”.

Initial Measurement

An investment property is initially measured at cost. The measurement of cost depends on the mode of
acquisition.

Acquisition by Purchase

The cost of a purchased investment property comprises the purchase price and any directly attributable
costs incurred in bringing the asset to its intended condition, e.g., professional fees for legal services,
property transfer taxes and other transaction costs.

If the payment is deferred, the cost is the cash price equivalent. The difference between this amount
and the total payments is recognized as interest expense over the credit period, unless it qualifies for
capitalization under PAS 23.

The cost of an investment property excludes the following:

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.

b. Operating losses incurred before the investment property achieves the planned level of
occupancy; or
 c. Abnormal amounts of wasted materials, labor or other resources incurred in constructing or
developing the property.

Exchanges of Assets

The measurement of an investment property acquired in exchange for another non-monetary asset
depends on whether the exchange transaction has commercial substance or not.

a. With Commercial Substance – an exchange has a commercial substance if the entity’s

1. Fair value of the asset Given up;

2. Fair value of the asset Received; or

3. Carrying amount of the asset Given up.

b. Lacks Commercial Substance – the asset received is measured at the Carrying amount of the
asset Given up.

No gain or loss arises if the asset received is measured at the carrying amount of the asset given up.

Subsequent Measurement

After initial recognition, an entity chooses either the cost model or the fair value model as its
accounting policy and applies that policy to all of its investment property.

Only one model shall be used. Using both models selectively for items of investment property is
prohibited, except in the following cases:

1. When the fair value model is used but the fair value of one investment property cannot be
reliably determined on initial recognition, that investment property will be measured under the
cost model; the rest are measured under the fair value model. For purposes of depreciation, the
residual value of the said property is assumed to be zero.

2. Separate choices of accounting policy may be made for (a) investment property that backs
liabilities that pay return linked directly to the fair value of, or returns from, specified assets
including that investment property and (b) all other investment property.

PAS 40 requires an entity to determine the fair value of its investment property, regardless of the
accounting policy used. Under the fair value model, fair value is used for measurement purposes while
under the cost model, fair value is used for disclosure purposes. PAS 40 encourages, but does not
require, the use of an independent valuer in determining the fair value of an investment property.
An entity may subsequently change its accounting policy from the cost model to the fair value model,
subject to the provisions of PAS 8. however, PAS 40 states that it is highly unlikely that a change from
the fair value model to the cost model will result in a more relevant presentation.

Accordingly, if the fair value model is chosen, it shall be applied until the investment property is
derecognized or reclassified to another asset classification, even if fair value becomes less readily
determinable.

Cost Model

An entity that chooses the cost model shall measure the investment property using the cost model
under PAS 16 (PPE).

The entity uses PFRS 5 Non-current Assets Held for Sale and Discontinued Operations if it classifies an
investment property as “held for sale” or PFRS 16 Leases if the investment property is a right-of-use
asset resulting from a lease.

Fair Value Model

Under the fair value model, an investment property is subsequently measured at its fair value at the end
of each reporting period.

Gains and losses arising from changes in fair value are recognized in profit or loss.

Assets measured under the fair value model are not depreciated.

If the investment property is a right-of-use asset, fair value is measured for the right-of-use asset and
not the underlying property.

An entity uses the principle in PFRS 13 Fair Value Measurement when determining the fair value of an
investment property. To avoid double-counting, assets and liabilities that are integral parts of the
investment property are not recognized separately. For example, elevator and air-conditioning are an
integral part of a building and are necessarily included in the building’s fair value. Therefore, these items
are included in the measurement of the investment property (i.e., the building as a whole) rather than
as separate items of PPE.

Illustration:

Entity A acquires a building at a purchase price of ₱10,000,000 and spends an additional ₱3,000,000 in
getting the building to the condition for its intended use. The building is intended to be leased out under
various operating leases. Accordingly, it is classified as investment property. The building becomes
available for lease on January 1, 20x1, at which date, Entity A estimates its useful life to be 20 years,
with no residual value. On December 31, 20x1, the investment property’s fair value is ₱12,000,000.

 Initial Measurement
The building is initially measured at its cost of ₱13,000,000 (10M purchase price + 3M direct costs). This
is irrespective of the accounting policy chosen for the subsequent measurement.

 Subsequent Measurement – Dec. 31, 20x1 (Cost Model)

Under the cost model, the investment property is carried at its cost less accumulated depreciation and
accumulated impairment losses.

Statement of financial position:

Cost 13,000,000

Accumulated depreciation [(13M ÷ 20) x 1 yr.) (650,000)

Carrying amount – 12/31/x1 12,350,000

Statement of profit or loss:

Depreciation expense (13M ÷ 20) 650,000

 Subsequent Measurement – Dec. 31, 20x1 (Fair Value Model)

Under the fair model, the investment property is carried at its fair value at the end of each reporting
period. Changes in fair value are recognized in profit or loss. The investment property is not depreciated.

Statement of financial position:

Carrying amount – 12/31/x1 (fair value) 12,000,000

Statement of profit or loss:

Unrealized loss 1,000,000

The unrealized loss from the fair value change is analyzed below:

Carrying amount 13,000,000

Fair value – 12/31/x1 12,000,000

Decrease in value – unrealized loss 1,000,000

Transfers

Transfers to or from investment property are made only when there is a change in use, as evidenced by
the following:

a. Commencement of owner-occupation, for a transfer from investment property to PPE;

b. End of owner-occupation, for a transfer from PPE to investment property;

d. Commencement of development with a view to sale, for a transfer from investment property to
inventories.

If the entity uses the cost model, transfers between investment property, PPE and inventories are
accounted for at the carrying amount of the asset transferred. No gain or loss arises because the asset’s
measurement remains the same before and after the transfer.

If the entity uses the fair value model, transfers between investment property, PPE and inventories are
accounted for at the asset’s fair value at the date of change in use.

The entity recognizes the change in fair value on that date as unrealized gain or loss in profit or loss. If
the PPE is carried at revalued amount the difference between the fair value and carrying amount is
recognized in other comprehensive income as an adjustment to the assets revaluation surplus.

Derecognition

An investment property is derecognized when it is disposed of or when no future economic benefits are
expected from it.

On derecognition, the difference between the carrying amount and the net disposal proceeds, if any, is
recognized as gain or loss in profit or loss (unless PFRS 16 Leases requires otherwise on a sale and
leaseback).

Self-Constructed Investment Property

A self-constructed investment property is accounted for in much the same way as a purchased
investment property. The initial cost of a self-constructed investment property includes all directly
attributable costs of constructing and preparing the property for its intended use, such as materials,
labor and construction overhead. The cost excludes abnormal amounts of wasted material, labor or
other resources incurred in constructing or developing the property.

Subsequent Expenditures

Subsequent expenditures on recognized investment property are generally expensed, unless they clearly
meet the recognition criteria.

PAS 40 states an instance where a subsequent expenditure is capitalized, which is the replacement of
parts of an investment property accounted for a follows:

a. Under the cost model, the cost of the replacement part (new part) is capitalized to the
investment property, if it meets the recognition criteria. The carrying amount of the replaced
part (old part) is derecognized and charged as loss, regardless of whether it had been
depreciated separately.
 b. Under the fair value model, the cost of the replacement part (new part) is capitalized to the
investment property. The investment property fair value is then reassessed and any difference
between the fair value and the carrying amount is recognized in profit or loss.

Impairment

An investment property that is subsequently measured under the cost model is tested for impairment
using PAS 36.

There is no separate accounting for impairment losses for investment property measured under the fair
value model because any increase or decrease in fair value is simply recognized as gain or loss in profit
or loss.

Any compensation from third party for an investment property that is impaired, lost or given up is
recognized in profit or loss when the compensation becomes receivable. The impairment loss, the
compensation from the third party, and any subsequent acquisition of a replacement asset are separate
economic events and are accounted for separately.

Disclosure

General disclosures:

a. Whether the entity uses the fair value model or the cost model.

b. When classification is difficult, the criteria used to distinguish investment property from PPE and
inventory.

c. The extent to which the fair value of investment property is based on a valuation by an
independent valuer. If an independent valuation is not obtained, that fact is disclosed.

d. The amounts recognized in profit or loss for rental income and related expenses.

e. The existence and amounts of restrictions on investment property.

f. Contractual obligations to purchase, construct or develop investment property or for repairs,

Additional disclosures under the Fair Value Model

a. Reconciliation showing increases and decreases in investment property.

b. When valuation obtained for investment property is adjusted to avoid double-counting of assets
or liabilities that are recognized as separate assets and liabilities, the entity discloses a
reconciliation between the valuation obtained and the adjusted valuation.

c. Disclosure of any investment property whose fair value on initial recognition cannot be reliably
measured and hence measured under the cost model using the exception allowed under PAS 40.
Additional disclosures under the Cost Model

a. The depreciation methods used, the useful lives, and the depreciation rates used;

b. Reconciliation showing increases and decreases in investment property and related