mg Chapter 9 Investment Property Learning Objectives 1. Define investment property and give examples. 2. State the initial and subsequent measurements of an investment property. 3. Account for the impairment of investment property, and the reversal thereof. Introduction Investment Property - is land and/or building held for rentals or capital appreciation. It is not held for use in the production or supply of goods or services, for administrative purposes, OF sale in the ordinary course of business. Examples of investment property: a. Land held for long-term capital appreciation rather than for short-term sale in the ordinary course of operations; b. Land held for a currently undetermined future use; 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 on a commercial basis; d. A building that is vacant but is held to be leased out under one or more operating leases on a commercial basis to external parties; e. Property that is being constructed or developed for future use as investment property; and f. Significant portion of a property that is held to earn rentals oF for capital appreciation rather than to provide services, and insignificant portion that is held for use in the production of supply of goods or services or for administrative purposes. (GAM for NGAs, Chapter 9, Sec. 3)it Properti sostent roperty om following are items not conside it 2 I™ piological assets telated to esiiaitial ae Property: b Mineral rights and mineral reserves such as ‘oll natural gas and similar non-regenerative resources; , ;, Property held for sale in the ordinary course of operations or in the process of construction or development for such sale; 4, Property being constructed or developed on behalf of third parties; e: Owner-occupied property, including: j. Property held for future use as owner-occupied property; ij. Property held for future development and subsequent use as owner-occupied property; iii. Property occupied by employees; or iv. Owner-occupied property awaiting disposal. f, Property that is leased to another entity under a finance lease; g. Property held to provide a social service and which also generates cash inflows; h. Property held for strategic purposes; and, i, Property held for use in the production or supply of goods or services or for administrative purposes: (GAM for NGAs, Chapter 9, Sec. 4) Initial Measurement An investment property is initially measured at cost. The measurement of cost depends on the mode of acquisition. Modes of Acquisition 1. Cash purchase - the cost of an investment property acquiréd through cash purchase comprises the purchase price and any direct costs necessary in bringing the asset to its intended condition, e.g, professional fees for legal services and Property transfer taxes.Example: Entity A purchases land to be held for capital appreci 1,000,000. Entity A pays 80,000 for legal services and transfer taxes related to the acquisition. ation for 7,080,000 2 Investment Property, Land Cash-Modified Disbursement System (MDS), Regular To recognize the purchase of investment property = 1,080,000 2. Installment purchase - the cost of an investment property acquired through installment purchase is the cash price equivalent. The difference between this amount and the total payments is recognized as interest expense over the period of credit. 3. Non-exchange transaction — the cost of an investment property acquired through a non-exchange transaction is the fair value Example: Entity A receives an unconditional donation of land with fair value of ® 1,000,000. 2 Investment Property, Land 1,000,000 Income from Grants and Donations. in Kind 1,000,000 To recognize receipt of donated land 4. Self-construction — the cost of a self-constructed investment property includes the costs of direct materials, labor, and construction overhead. The cost of wasted materials, labor of other resources incurred in constructing the property are recognized as expense. Construction costs incurred are initially recorded in the “Construction in Progress” account pending thevestment Property 223 completion of the investment construction costs are rec Property” account. Property. Upon completion, the lassified to the “Investment it of an it The oe o an eeciment Property does not include the following: a t up " S, unless they are necessary to bring the property to the con ition 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. Subsequent Measurement Investment properties are subsequently measured under the cost model. Under this model, investment properties are measured at cost less accumulated depreciation and accumulated impairment losses. The fair value model, which is available to business entities, is not allowed for government entities. Transfers To or From Investment Property Transfers to or from investment property shall be 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 owner-occupied property; ; b. End of owner-occupation, for a transfer from owner-occupied Property to investment property; : ; Commencement of an operating lease (on a commercial basis) to another party, for a transfer from inventories tq investment Property; or 4. Commencement transfer from investment prope! t of development with a view to sale, for a rty to inventories.224 Chapter y accounts for transfers to or from A government entity gain or loss shal] investment property at cost. Accordingly, #0 arise from the transfer, except when the transferred asset is impaired, in which case, impairment loss shall be recognized first before making the reclassification. Illustration 1: Transfers to Investment Property Case A: From PPE to IP Entity A transfers a building with a historical cost of 1,000,000 to investment property. At the date of transfer, the building has an accumulated depreciation of 400,000 and an accumulated impairment losses of 100,000. Date | Investment Property, Buildings 500,000 Accumulated Depreciation - Buildings _| 400,000 Accumulated Impairment L.- Buildings | 100,000 | Buildings 1,000,000 | Case B: From Inventories to IP Entity A transfers a building held as inventory with a carrying amount of ®1,000,000 to investment property. Date | Investment Property, Buildings 1,000,000 | | Merchandise Inventory 1,000,000 | Illustration 2: Transfers from Investment Property Case A: From IP to PPE Entity A transfers a building with a historical cost of 1,000,000 to owner-occupied property. At the date of transfer, the investment property has an accumulated depreciation of 400,000 and an accumulated impairment losses of 100,000.gestiment Property 125 Int pate | Buildings 500,000 Accumulated Depreciation — 1,P,, Buildings | 400,000 Accumulated Impairment L, — LP,, Bldgs. 100,000 Investment Property, Buildings. {000,000 Case B: From IP to Inventories Entity A decides to redevelop the building referred to in Case A above with the view of subsequent sale. ie | Merchandise Inventory 500,000 Accumulated Depreciation -1.P, Buildings | 400,000 Accumulated Impairment L.-1.P., Bldgs. | 100,000 Investment Property, Buildings 1,000,000 Derecognition An investment property is derecognized when it is disposed or when it is permanently withdrawn from use and no. future economic benefits or service potential is expected from its disposal. When an investment property is derecognized, the difference between the net disposal proceeds (if any) and its carrying amount is recognized as gain or loss in surplus or deficit. Impairment An asset is impaired if its carrying amount exceeds its recoverable amount. The excess represents impairment loss which shall be recognized in surplus or deficit. © Recoverable amount is the higher of an asset's fair value less costs to sell and value in use. * Value in use is the present value of the estimated future cash flows expected to be derived from the continuing use of an asset and from its disposal at the end of its useful life.226 Chapter 9 | At each reporting date, an entity shall assess whether there is an indication that an asset may be impaired. If such indication exists, the entity shall estimate the recoverable amount of the asset, An entity shall consider the following indications of impairment: 1. External sources of informatio a. Significant decline in the asset’s market value. b. Significant changes in technological, market, economic, or legal environment that adversely affect the recoverable amount of an asset. c. Increase in market interest rates that adversely affect the discount rate used in calculating an asset's value in use, and consequently, its recoverable amount. Il. Internal sources of information a. Obsolescence or physical damage of an asset. b. Significant changes in the expected use of an asset that adversely affect its recoverable amount (e.g., the asset becomes idle, plan to discontinue or restructure the operation to which an asset belongs, plan to dispose of the asset earlier than expected, and reassessment of an asset’s useful life from indefinite to finite). c. Cessation of the construction of an asset before it is completed. d. Indications that the economic performance of an asset is, or will be, worse than expected (e.g,, the maintenance costs of the asset are significantly higher than expected, cash inflows from the asset are significantly lower than expected) After impairment, depreciation charges on an asset will be based on its recoverable amount.noesiment Property 227 cash Generating Unit e iS an indicat i If = “nd oe for Impairment, recoverable amount is deter! vines an individual asset, except when this is not i in i . possible Mane Case the recoverable amount of the cash generating unit where the individual asset belongs is determined. « Cash Generating Unit (CGU) is the smallest identifiable group of assets: mid with the primary objective of generating a commercial return that generates cash inflows from continuing use that are largely independent of the cash inflows from other assets or grou ps of assets. An impairment loss is Tecognized if the CGU’s carrying amount exceeds its recoverable amount. The impairment loss is allocated to the individual assets in the CGU on a pro rata basis, based on their carrying amounts. In allocating an impairment loss, the carrying amount of an individual asset shall not bé reduced below the highest of: a. Its fair value less costs to sell (if determinable); b. Its value in use (if determinable); and c Zero. Reversal of Impairment An entity shall assess whether there is any indication that an impairment loss recognized in prior periods for an asset may no longer exist or may have decreased. If such indication exists, the entity shall estimate the recoverable amount of that asset. In making the assessment, the entity shall consider the exact opposites of the indications of impairment provided earlier (¢g,, significant increase in the asset's market value - rather than decline, significant changes in technological......that favorably affect the recoverable amount of an asset - rather than adversely, etc.).228 Chapter 9 The reversal of impairment shall not result to a carrying amount in excess of the asset’s carrying amount had no impairment loss been recognized in prior periods. The reversal of impairment is recognized in surplus or deficit in the period of reversal. Illustration: On January 1, 20x1, Entity A acquires a building to be held as investment property for a total cost of P'1,200,000. The building is estimated to have a 30-year useful life and a 5% residual value. Entity A uses the straight-line method of depreciation. *¢ The annual depreciation is 38,000 [(1.2M x 95%) + 30]. 1231Ix1 | Depreciation-Investment Property 38,000 Accumulated Depreciation — Investment Property, Buildings _ 38,000 On December 31, 20x5, Entity A determines that the building is impaired and makes the following estimates: Fair value less costs to sell. Value in use. -P650,000 750,000 The impairment loss is computed as follows: Recoverable amount (higher) 750,000 Carrying amount [1.2M - (38,000 x 5 yrs.)] 1,010,000 Impairment loss (260,000) —_—— 12/3145 | Impairment Loss — Investment Property | 260,000 Accumulated Impairment Losses — Investment Property, Buildings 260,000 Residual value is revised to 5% of the recoverable amount.yest ment Properts Inve: ‘y 229 The revised annual depreciation f e iods i th Se ae for the subsequent periods is 1251%6 | Depreciation-Investment Property 28,500 Accumulated Depreciation - Investment Property, Buildings 28,500 On December 31, 20x8, Entity A determines an indication that the impairment Joss recognized in the prier period may no longer exist. Entity A makes the following estimates and computations: -P800,000 -P900,000 Fair value less costs to sell. Value in use. The new recoverable amount is ®900,000 (higher). Carrying amount - 12/31/x5 750,000 Accumulated depreciation (28,500 x 3 yrs.) (85,500) Carrying amount - 12/31/x8 664,500 1,200,000 Historical Cost Accumulated (original) depreciation (38,000 x 8 yrs.) 304,000) Carrying amount had no impairment loss been recognized in prior period - 12/31/x8 896,000 The reversal of impairment is computed as follows:230 Chapters New Recovenble Amount 900,000 Excess is ignored CA-hudo LL ben eon’ n proper’ 896,000 Diflrence is gain on Reversal of Inpiimey C.A.at date of impairment reversal 664,500 From the graph above, the gain on Reversal of Impairment Loss is ®231,500 (896,000 - 664,500) 12/5188 | Accumulated Impairment Losses — 231,500 Investment Property, Buildings Reversal of Impairment Losses 231,500 To recognize reversal of impairment loss Compensation from third parties Compensation from third parties for an investment property that was impaired, lost or given up shall be recognized in surplus or deficit when the compensation becomes receivable. Illustration: A building held as investment property was razed by fire. The building has a historical cost of 1,000,000 and an accumulated depreciation of ®400,000. The building is insured for #700,000. ¢ The entry to recognize the loss from the fire is as follows: Date | Loss of Assets 600,000 Accumulated Depreciation - Investment Property, Buildings 400,000 Investment property 1,000,000When the insurance claim is approved and becomes | receivable, the entry is as follows: | me [Due fromGOCCs_, 700,000 Other Service Income 700,000 The loss event and the approval of insurance claim are separate events and therefore are accounted for separately. Chapter 9 Summary: > Investment Property is land and/or building held for rentals or capital appreciation. + Investment property is initially measured “at cost and subsequently measured at cost Jess accumulated depreciation and impairment losses. The fair value model is not allowed for government entities. «Transfers to or from investment property shall be made only when there is a change in use. A government entity accounts for transfers to or from investment property at cost. Accordingly, no gain or loss shall arise from the transfer, except when the transferred asset is impaired. * On derecognition of an investment property, the difference between the net disposal proceeds (if any) and the carrying amount is recognized as gain or loss in surplus or deficit. * An asset is impaired if its carrying amount exceeds its recoverable amount. Recaverable amount is the higher of an asset's fair value less costs to sell and value in use. * The reversal of impairment shall not result to a carrying amount in excess of the asset’s carrying amount had no impairment loss been recognized in prior periods.Chapter my PROBLEMS PROBLEM 9-1: TRUE OR FALSE 3 1. An entity shall capitalize as part of the cost of an investment property the operating losses incurred before the investment Property achieves the planned level of occupancy 2. According to the GAM for NGAS, government entities may choose to use either the cost model or the fair value model to subsequently measure investment properties. 3. According to the GAM for NGAs, an entity shall not depreciate an asset while it is classified as investment property. 4. Recoverable amount is the lower of an asset's fair value less costs to sell and value in use. 5, If an asset’s recoverable amount exceeds its carrying amount, the asset is impaired. 6. An investment property with carrying amount of #10 is determined to have a fair value less costs to sell of ®7 and a value in use of #8. The impairment loss is P3. 7. An investment property with carrying amount of #10 is sold for #7. Transaction costs on the sale amounted to P1. The loss on derecognition is P4. 8. An investment property that was previously impaired is determined to have a new recoverable amount of #10. Right now, the asset’s carrying amount is ®7. However, if 0 impairment loss had been recognized in the prior year, the ‘asset would have a carrying amount of ®9 by now. The gail! on reversal of impairment, therefore, is ®1.Investment Property 233 g, According to the GAM for at each reporting date, an investment Propert amount. NGAs, a government entity shall, determine the recoverable amount of ty and compare it with its carrying 10. An entity need not compute for the value in use of an asset if the entity has no reason to believe that the value in use exceeds the fair value less costs to sell, PROBLEM 9-2: MULTIPLE CHOICE 1, Which of the following is considered an investment property? a, Owner-occupied Property awaiting disposal. b. Property that is leased to another entity under a finance lease. : c. Property held for-use in the Production or supply of goods or services or for administrative purposes. . d. A building held by the entity under a finance lease and leased out under one or more operating leases on a commercial basis. 2. Which of the following would not be reported as investment property? a. Property owned by the entity and leased out under one or more operating leases. b. Property held by the entity to be leased out tinder one or more operating leases Real estate held with an undetermined future use, d. Property owned by the entity and leased out to another entity under a finance lease. 2 3. Which of the following costs may properly be included in the carrying amount of an investment property? a. Start-up costs, such as opening costs. b. Operating losses incurred before the investment property achieves the planned level of occupancy.: Chapt me materials, labor or othe, ted c. Abnormal amounts of waste’ ting or developing the resources incurred in construc Property. a. ; d. Accrued taxes prior to acquisition date that the entity assumes an obligation to pay: a building to be leaseq ty, acquires . 2 mercial basis. Entity 4, Entity A, a government entit out under various operating leases 0" comm A incurs the following costs on the acquisition Purchase price ° 10,000,000 Legal services and transfer taxes 10,000 Refurbishments before occupancy 30,000 Occupancy permit fees 25,000 Property taxes after occupancy 8,000 Opening costs (blessing and feng shui) 500,000 The entry to initially recognize the investment property in Entity A’s books of accounts is a, Investment Property, Land 10,065,000 Cash-Modified Disbursement 10,065,000 System (MDS), Regular b. Investment Property, Land 10,565,000 Cash-Modified Disbursement 10,565,000 System (MDS), Regular c. Investment Property, Land 10,010,000 Cash-Modified Disbursement 10,010,000 System (MDS), Regular d._ Investment Property, Land 10,040,000 Cash-Modified Disbursement 10,040,000 System (MDS), Regular 5. During the period, Entity A, a government entity, decides to use as an office one of its buildings that has previously been leased out under various Operating leases on commercial basis. Information on the investment property is as follows:yr sxsmet Property 235 eee EE * Investment property - Building 1,000,000 Accumulated depreciation 800,000 At the date of change in use, the fair value of the investment property is ®250,000. How much is the gain (loss) on the transfer? a, 30,000 <0 b. (50,000) d. A transfer is prohibited. 6, On January 1, 20x1, Entity A acquires a building to be held as investment property for a total cost of #1,500,000. The building is estimated to have a 30-year useful life and a 5% residual value. Entity A uses the straight-line method of depreciation. On December 31, 20x5, Entity A sells the building for 1,300,000, How much is gain (loss) on the sale? a. 35,700 cc. 53,700 b. 37,500 d. 75,300 Use the following information for the next three questions: Entity A determines an indication that its investment property might be impaired. Entity A then. gathers the following information: Carrying amount of investment property 1,000,000 Fair value less costs to sell 900,000 Value in use 880,000 Following the impairment, Entity A revises its estimate of residual value to 5% of the recoverable amount and the remaining useful life to 10 years. ?. How much is the impairment loss? @. 120,000 c. 100,000 b. 20,000 d.o0 _— CeChapter 8. How much is the annual depreciation after the impairment? a. 85,500 ¢, 85,000 b. 90,000 4. 95,000 Entity A determines an 9. Five years after the impairment, \ : no longer exist. Entity A indication that the impairment may makes the following estimates and computations: 800,000 Fair value less costs to sell 750,000 Value in use......cseesrseie e a carrying amount of The investment property would hav had been recognized in 600,000 by now if no impairment loss the past. How much is the gain on the reversal of impairment? a. 125,000 c. 127,500 b. 129,500 d. 327,500 10. During the period, one of the buildings of Entity A, a government entity, was completely destroyed by. fire. The building has a historical cost of 1,000,000 and an accumulated depreciation of 400,000. The building is insured for 700,000. Which of the following statements is correct? a. Entity A reports a net gain of 300,000 from the event in its year-end financial statements. b. Entity A reports a net gain of 100,000 from the event in its year-end financial statements. Entity A recognizes a loss of 600,000 but no gain. d. Entity A shall treat the loss event and the insurance claim as separate events. Dsstmentt Property went ‘i OBLEM 9-3: FOR CLASSROOM DISCUSSION L. which of the following is an investment Property? a. Property held to provide a Social service and which also generates cash inflows, b. Property held for strategic Purposes, c, Property occupied by employees. d. Property that is being constructed or developed for future use as investment property. Which of the following is not an investment property? a. Land held for long-term capital appreciation rather than for short-term sale in.the ordinary course of operations. b. Land held for a currently undetermined future use. 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 on a commercial basis. d. Equipment held to be leased out under one or more operating leases on a commercial basis to external parties. According to the GAM for NGAs, government entities shall measure an investment property as follows: Initial Subsequent a. cost Cost Model or Fair value Model be cost Cost Model c. fair value Fair value Model d. fair value Cost Model of Fair value Model Investment property acquired: through donation is initially measured a. equal to the carrying amount in the donor’s books b. at the cost to the donor ¢. at fair value on acquisition date . 4. equal to the costs incurred in transferring title of the investment property to the entity5. An entity acquires investment property in exchange for a long-term noninterest-bearing note: Assuming, all of the following are determinable with sufficient reliability but differ ‘in amounts, which of them is most likely to be used in the initial measurement of the investment property? a. cash price equivalent of the investment property b. cash price equivalent of the note payable ¢. present value of future cash flows on the note payable discounted at the current market rate d. face amount of note which is equal to the installment price 6. Entity A acquires an investment property for 1,000,000 cash, ‘Additional costs incurred are as follows: «Repairs and remodelling before occupancy, 950,000. © Legal costs of transferring title to the property, 20,000. «Repairs after occupancy, #15,000. The investment property is estimated to have a remaining useful life of 10 years and a residual value equal to 5% of initial cost. Entity A uses the straight line method of depreciation. How much is the carrying amount of the investment property after one year? a. 914,850 cc. 923,100 b. 968,350 d. 872,100 7. According to the GAM for NGAs, transfers to or from investment property shall be made only when there is a a. change in management's intention b. change in use cc. change in business model d. change in dlassification 8. During the period, Entity A decides to lease out under various operating leases on commercial basis one of its buildings that has previously been used as office building. Information 0" the building is as follows:proestraent Property 239 Historical cost 1,000,000 Accumulated depreciation 800,000 At the date pe change in use, the fair value of the building is 250,000. Which of the following is the correct reclassification entry? a. _ Investment Property, Buildings 200,000 Accumulated Depreciation - Buildings 800,000 Buildings 1,000,000 b, Investment Property, Buildings 250,000 Accumulated Depreciation — Buildings 800,000 Buildings 1,000,000 Gain on reclassification 50,000 c, Investment Property, Buildings 250,000 Accumulated Depreciation - Buildings 800,000 Buildings 1,000,000 Revaluation Surplus 50,000 d. aor c, depending on the entity’s accounting policy. Use the following information for the next tivo questions: On January 1, 20x1, Entity A acquires a building to be held as investment property for a total cost of 1,500,000. The building is estimated to have a 30-year useful life and a 5% residual value, Entity A uses the straight-line method of depreciation. On December 31, 20x5, Entity A determines that the building is impaired and makes the following estimates: Fair value less costs to sell....... sveveeesP900,000 Value in use. 1,000,000 Following the impairment, Entity A revises its estimate of residual Value to 5% of the recoverable amount,240 Chapter 9 9. How much is the impairment loss on December 31, 20x5? a. 226,500 ¢. 257,500 b. 326,500 d, 262,500 10. On December 31, 2x10, Entity A determines an indication that the impairment loss recognized in the prior period may no longer exist. Entity A makes the following estimates and computations: Fair value less costs to sell......--+++0+++ 1,100,000 Woah tr we vennnanncnndiosagstovavenrnsnen @LSOOOO How much is the gain on the reversal of impairment? a. 215,000 cc. 75,000 b. 290,000 d. 218,000