1 Investment Property - MFRS 140

Another category of asset an enterprise may have is the investment property. Usually the
property is in the form of land and building that are not primarily use in the main business
operations. They are held for capital appreciation or to earn rental income.

The investment property could be held on long term for speculative purpose and to diversify of
an enterprise’s investment portfolio. What is important is they are not the main activities of the
entity’s operation.

In the financial statement the investment property is presented like the example below.

Statement of Financial Position as at 31.12.2014

Non -current Assets Notes

Property, Plant, and Equipment
Investment properties 5 300,000

2.1 Definition of Investment Property- Land and building

Para 5 of MFRS140 defines investment property as held (owned or leased under a finance
lease) to earn rentals and capital appreciation or both. For land it includes the land held
for undetermined future use.

An investment property generates cash flows largely independently of other assets held by an
entity. It is not used in production or supply of goods or services or for administrative
purpose or for sale in the ordinary course of business.

Investment property can be acquired by cash or by long term credit. If it is acquired on long term
credit or it must be under finance lease and not operating lease.

Para 8 of MFRS140 lists the example of investment properties.

(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. (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.)
(c) a building owned by the entity (or held by the entity under a finance lease) 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./rental

Note: In the new addition starting January 2010, the investment property includes property
that is being constructed or developed for future use as investment property. Prior to this the
property under construction is treated as PPE (MFRS 116).

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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).

2.2 Recognition Criteria

Investment property shall be recognised as an asset on two criteria.

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

2.3 Initial Measurement

A tangible non-current asset should be initially measured at cost including the transaction costs.
The initial cost of asset acquired include

a The purchase price of non-current asset

b Any attributable costs incurred in bringing the asset into working condition and fully ready
for use. They include the testing or the trial runs.

c The initial estimate of dismantling cost and removing the asset and restoring of site. This
would incorporate the estimation of present value of cost to be incurred in the future.

2.4 Subsequent Measurement

After the initial cost is measured, subsequent measurement has to be done from time to time
until the asset is finally derecognized. There are two model prescribed by the FRS 140 for this
purpose.

a. The Fair value model

b. The Cost model – Test for impairment.

The Fair value model has no depreciation and all changes are accounted in income statement.
Under the cost model, there will be no revaluation and assets will be held at historical cost less
depreciation.

2.4.1 Fair Value model

Generally all initial measurement of assets including the investment property will be at cost.
Under this model, the subsequent measurement will be at fair value which is also the market
price without any deduction for transaction costs. Any gain or loss on subsequent
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measurement or revaluation will be accounted in the income statement as realized profit or loss
for the year. The fair value model is different from revaluation model even though both using the
fair market value. There are two differences:

a. The fair value model does not consider depreciation but revaluation model does
consider depreciation.
b. The gain or loss under fair value model is realized in the income statement whereas
under the revaluation model the gain is not realized immediately. The loss under
revaluation model will be realized immediately provided there is no earlier surplus.
(Please note the difference with the revaluation model)

Fair value is basically the price for which property could be exchanged between knowledgeable
and willing parties in an active free market. It also means other similar properties in the same
market would have the same value like the one recorded by the entity. If there is no similar
property exists in the same market, then the fair value could be referred to other property in
other market with adjustment to reflect those differences.

Example 1

Satu Bhd acquired a building on 1.1.2013 at RM5 millions and it qualified as investment
property. The economic life of the building was estimated to be 40 years. The fair market value
of the building at 31.12.2013 was RM 5.5 millions and at 31.12.2014 was RM5.3 millions. The
journal entries to realize the gain and loss as at 31 December 2013 and 2014 are as below.

Cost model

1.1.2013

Dr Investment property/ Building 5,000,000

Cr Cash 5,000,000

31.12.2013

Dr SOPL – Depreciation Expense 125,000

Cr Accum depreciation 125,000

31.12.2014

Dr SOPL 125,000
Cr Accum depreciation 125,000

Fair value model

1.1.2013

Dr Investment property/ Building 5,000,000

Cr Cash 5,000,000

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 31.12.2013

Dr Investment property/Building 500,000

Cr Gain/SOPL 500,000

31.12.2014

Dr Loss/ SOPL 200,000

Cr Investment property/Building 200,000

Compare the fair value model with the revaluation model and note the differences.

Revaluation model

1.1.2013

Dr Investment property/ Building 5,000,000

Cr Cash 5,000,000

31.12.2013

Dr. Depreciation 125,000

Cr Accumulated Depreciation 125,000

Dr Accumulated depreciation 125,000

CR Investment property/Building 125,000

(5,000,000 – 125,000) VS 5.5m

Dr Investment Property/Building 625,000

Cr Asset Revaluation Reserve 625,000

31.12.2014

Dr Depreciation (5.5 m/39 years) 141,026

Cr Accumulated Depreciation 141,026

Dr. Accumulated depreciation 141,026

Cr Investment property/Building 141,026

(5.5m -141,026) Vs 5.3m

Dr Asset Revaluation reserve 58,974

Cr Investment Property/Building 58,974

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2.4.2 Cost Model / Requires Impairment Test - MFRS 136
Basically, the asset will be held at historic cost less depreciation. The cost model requires an
entity to test the investment property for impairment just like the property, plant and equipment.
The same treatment need to be done when there is a need to reverse the earlier impairment.

2.5 Transfers
Basically, assets like building and land may undergo changes in usage. For example, a building
used for administrative may later be rented out. When the building was used for administrative,
the building is treated as property, plant, and equipment. Later when the building is rented out, it
will be treated as investment property. Thus, different accounting model may be used under
different classification. There are five possible situations related to this transfer.
a. Transfer from investment property (MFRS140) to property, plant, and equipment (MFRS
116). At the date of transfer/change, the value use will be the fair value. Subsequently
the treatment will be according to MFRS116.
b. Transfer from investment property (MFRS140) to inventory (MFRS102). At the date of
transfer/change, the value use will be the fair value. Subsequently the treatment will be
according to MFRS102. Lower of cost & net realizable value.
c. Transfer from property, plant, and equipment (MFRS 116) to Investment property (MFRS
140). At the date of transfer/change, the value use will be the fair value. The fair value
will be compared with the carrying value (cost – accumulated depreciation) at the date of
transfer. Any surplus is to be accounted in revaluation reserve and deficit to the income
statement. Subsequently the treatment will be according to MFRS140.
d. Transfer from inventories (MFRS102) to investment property (MFRS140). At the date of
transfer/change, the value use will be the fair value. Any differences in the carrying
amount and fair value will be accounted in the income statement.

2.6 Dislosure Requirements

Refer to MFRS140 Para 75-79