CHAPTER 4: INVESTMENT PROPERTY MFRS 140

BKAF3063_A122

LEARNING OUTCOMES
At the end of the topic, students should be able to: Explain the nature of investment property Discuss the criteria for recognition Measure and record the investment property Explain the provision for transfer Discuss the disclosure requirements

BKAF3063_A122

CHAPTER OUTLINE
Nature of investment property

Recognition
Measurement Transfer Derecognition Disclosure requirements

BKAF3063_A122

INTRODUCTION
Nature of investment property: Property (namely, land or building) held to earn rentals or for capital appreciation or both (para. 5).

BKAF3063_A122

Examples of investment property: (para 8)

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. e) property that is being constructed or developed for future use as investment property. BKAF3063_A122
a)

MFRS 140 specifically excludes:

(a) property intended for sale in the ordinary

course of business or in the process of construction or development for such sale (b) property being constructed or developed on behalf of third parties (c) owner-occupied property (including held for future use as owner-occupied prop. & prop. occupied by employees) (d) property that is leased to another entity under a finance lease
6 BKAF3063_A122

 Properties that comprise a portion that is held to earn

rentals/capital appreciation & another portion that is held for use in the business: (para 10)
a) If the portions could be sold separately- should account for the portions as Investment Property (IP) and as PPE separately; b) If the portions could not be sold separately, the property qualifies as IP only if insignificant portion of the property is held for use in business.

BKAF3063_A122

RECOGNITION
Para 16 - IP should be recognized as an asset is and

only if :
a) it is probable that future economic benefits associated with the IP will flow to the entity; and b) the cost of the IP can be measured reliably.

BKAF3063_A122

RECOGNITION
1st condition- generally, it is satisfied when the risks

and rewards in relation to the ownership of the property have passed to the entity.
2nd condition- is easily satisfied for an IP acquired from

the market as of the existence of external transaction. For internally constructed IP, a reliable measurement of the construction costs incurred is also often readily available.

BKAF3063_A122

MEASUREMENT BASES
Initial Recognition: IP should be measure at cost (para 20). Determination of initial cost a) Purchased IP Purchase price + any directly attributable expenditure (e.g. professional fees)
b) c)

Self-constructed IP Cost of raw material + direct labor + factory OH that can be allocated to the asset. IP acquired in exchange for another asset- should be measured at fair value
BKAF3063_A122

10

MEASUREMENT BASES
Subsequent Recognition:
Choose: (a) the cost model, or

(b) the fair value model Cannot change from FV model to cost model

Cost model
measured in accordance with MFRS 116 for asset

carried at cost.
Assets may be carried at cost (or revalued amount) Assets subject to depreciation & impairment test
11 BKAF3063_A122

MEASUREMENT BASES
Illustration 4.1 ABC Bhd is a computer manufacturer. It adopts 31 Dec accounting year-end, and the straight line method of depreciation. On 1 Jan 2007, the company uses its excess cash to buy a factory for investment purposes. The factory is rented out to another manufacturer. The factory costs RM50,000,000, and is expected to have a useful life of 50 years with no salvage value. The company choose to use the cost model.
12 BKAF3063_A122

Measurement Bases
The relevant journal entries for the first 2 years: 1/1/2007 Dr Inv Property 50,000,000 Cr Cash 50,000,000 31/12/2007 Dr Depreciation exp Cr Acc dep

1,000,000 1,000,000

31/12/2008 Dr Depreciation exp Cr Acc dep

13

1,000,000 1,000,000
BKAF3063_A122

MEASUREMENT BASES
Fair value model
IP will be measured at fair value (except for those FV cannot be

reliably determined on a continuing basis under para 53). Asset under operating lease that is accounted for as an IP should apply FV model (para 34). FV reflecting the market condition at the BS date (para 38). A gain or loss should be recognize in P&L for the period in which it arises (para 35). There is no need for depreciation and impairment test.

14

BKAF3063_A122

MEASUREMENT BASES
Illustration 4.2
ABC Bhd is a computer manufacturer. It adopts 31 Dec accounting year-end, and the straight line method of depreciation. On 1 Jan 2007, the company uses its excess cash to buy a factory for investment purposes. The factory is rented out to another manufacturer. The factory costs RM50,000,000, and is expected to have a useful life of 50 years with no salvage value. The market value of the building is RM55,000,000 as at 31 Dec 2007 and RM48,000,000 as at 31 Dec 2008. The company choose to use the Fair value model.
15 BKAF3063_A122

Measurement Bases
The relevant journal entries for the first 2 years: 1/1/2007 Dr Inv Property 50,000,000 Cr Cash 50,000,000 31/12/2007 Dr Inv Property 5,000,000 Cr Fair value gain on IP

5,000,000

31/12/2008 Dr Fair value loss on IP Cr Inv Property

16

7,000,000 7,000,000
BKAF3063_A122

TRANSFER
Transfer of assets to or from IP. Should be made when and only when there is a

change in use (para 57). IP to PPE may be evidenced by commencement of owner-occupation. PPE to IP - may be evidenced by the end of owneroccupation, or upon completion of the construction of self-constructed property. IP to inventories (view to sale) vs. Inventories to IP (rent to another party
17 BKAF3063_A122

TRANSFER..
Para 57- ..change in use, evidenced by: :
a) commencement of owner-occupation, for a transfer from b) c) d)

e)

investment property to owner-occupied property; commencement of development with a view to sale, for a transfer from investment property to inventories; end of owner-occupation, for a transfer from owneroccupied property to investment property; commencement of an operating lease to another party, for a transfer from inventories to investment property; or end of construction or development, for a transfer from property in the course of construction or development (covered by MFRS 116) to investment property.
BKAF3063_A122

18

TRANSFER
At the date of transfer: IP accounted for using the FV model to PPE or to Inventories = IPs FV is the deemed cost for subsequent accounting under MFRS116 or MFRS 102 (para 60).
PPE to IP accounted for using the FV model = the

difference between the CA of the PPE and its FV should be accounted for as a revalution surplus/deficit (para 61).

19

BKAF3063_A122

TRANSFER
At the date of transfer: PPE to IP (using FV model) upon completion of the construction, the difference between CA and FV should be recognized in the P&L (para 65).
The same treatment applies from Inventories to IP (using

FV model) para. 63

20

BKAF3063_A122

DERECOGNITION
Provides that an IP should be derecognized (para 66):
on disposal; or
When the property is permanently withdrawn from use and

no future economic benefits are expected from its disposal

- Gain or loss should be recognized in P&L in the period of derecognition (para 69).

21

BKAF3063_A122

DISCLOSURE REQUIREMENTS
Para 75 for all IP e.g. whether cost model or FV

model
Para 79 additional disclosure requirements for cost

model
Para 78 for IP under the FV model but its FV cannot

be measured reliably

22

BKAF3063_A122

DISCLOSURE REQUIREMENTS
Para 75:
a) whether it applies the fair value model or the cost model.

b)

if it applies the fair value model, whether, and in what circumstances, property interests held under operating leases are classified and accounted for as investment property.
when classification is difficult (see paragraph 14), the criteria it uses to distinguish investment property from owner-occupied property and from property held for sale in the ordinary course of business. the methods and significant assumptions applied in determining the fair value of investment property, disclosed in the financial statements) is based on a valuation by an independent valuer who holds a recognised and relevant professional qualification and has recent experience in the location and category of the investment property being valued. If there has been no such valuation, that fact shall be disclosed.

c)

d)

e) the extent to which the fair value of investment property (as measured or

23

BKAF3063_A122

DISCLOSURE REQUIREMENTS
Para 75: ..
f)

the amounts recognised in profit or loss for: i. rental income from investment property; ii. direct operating expenses (including repairs and maintenance) arising from investment property that generated rental income during the period; and iii. direct operating expenses (including repairs and maintenance) arising from investment property that did not generate rental income during the period. iv. the cumulative change in fair value recognised in profit or loss on a sale of investment property from a pool of assets in which the cost model is used into a pool in which the fair value model is used (see paragraph 32C). property or the remittance of income and proceeds of disposal.

g) the existence and amounts of restrictions on the realisability of investment h) contractual obligations to purchase, construct or develop investment

property or for repairs, maintenance or enhancements.

BKAF3063_A12 2

24

END OF TOPIC 4
References: MFRS 140- Inv Property Ng Eng Juan 2010

25

BKAF3063_A122