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Chapter 9 HKAS 40 Investment Property

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Objectives
Define an investment property (). Explain the accounting treatment required by H !" #$ in respect of investment property and the necessary disclosures. Describe the recognition criteria for investment properties. Describe the subsequent measurement under H !" #$. 'utline presentation and disclosure requirements for investment properties.

*n v e s tm e n t + r o p e r ti e s

( e c o g n i ti o n

) easurem ent " u b s e q u e n t to *n i ti a l ( e c o g n i ti o n

D isc lo sure ( e q u i r e m e n ts

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2.
(A) 2.1

e!inition
Investment property DEFINITION *nvestment property is property (i.e. land and/or buildings) held to earn rentals or for capital appreciation or both0 rather than for use or for sale in the ordinary course of business.

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1he follo2ing are examples of investment property3 (i) land held for long.term capital appreciation rather than for short.term sale in the ordinary course of business. (ii) land held for a currently undetermined future use. (*f an entity has not determined that it 2ill use the land as o2ner.occupied property or for short. term sale in the ordinary course of business0 the land is regarded as held for capital appreciation.) (iii) a building o2ned by the entity (or held by the entity under a finance lease) and leased out under one or more operating leases. (iv) a building that is vacant but is held to be leased out under one or more operating leases. 1he follo2ing items are not investment properties3 (i) '2ner occupied property. 1he property is being held for use (as a factory or office) and not for its investment potential. *t should be accounted for under H !" 14. +roperty occupied by another group company 2ould come under this heading. (ii) +roperty held for sale in the normal course of business (e.g. a house builder) is inventories accounted for under H !" 2. (iii) +roperty being constructed for third parties is accounted for as a construction contract under H !" 11. (iv) +roperty being constructed or developed for future use as investment property. 1his 2ill be accounted for as capital 2or5 in progress under H !" 14 until the asset is finished and transferred to investment properties. EXERCI E ! 6hich of the follo2ing are investment properties7 "tate 2hich "tandard applies to them.
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2.#

(a) (b) (c) (d)

! field of land0 purchased for its investment potential. ! building occupied by a business as its head office0 2hose capital value is rapidly appreciating. ! building 2hich is surplus to requirements and is for sale. ! building acquired under a finance lease for its investment potential.

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D"al "se properties D"al %se &roperties "ome properties nay have a dual use0 i.e. part o' the property is "sed as investment property and part o' the property is held 'or o(n "se . H !" #$ sets out requirements in respect of 2hether any part of a dual use property can be regarded as investment property. 1hese requirements are that 2here properties have dual use0 the investment property part 2ill only be classified as investment property if one of the follo2ing conditions is met3 (a) the portions could be sold separately (or leased out separately under a finance lease)8 or (b) the portion held for o2n use is an insignificant part of the property as a 2hole (in 2hich case the 2hole property is classified as investment property).

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1his means0 for example0 that if 9$: of the floor area is let out to tenants and 2$: is used by the o2ners0 and if the portion leased out could not be separately sold or let under a finance lease0 the 2hole property 2ill have to be classified as ;o2n.use<0 since 2$: is not an insignificant amount. No de'inition or )"idance on the meanin) o' *insi)ni'icant* is given. *n determining 2hether an amount is =insignificant= management should ta5e qualitative factors into account as 2ell as quantitative ones. >or example0 if the entity only retains
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the use of a basement to an office building0 this may be regarded as insignificant0 even though the same floor area might be regarded as not insignificant if it 2ere prime office space in that building. Ho2ever0 management should develop criteria for determining =insignificant= to be applied ob?ectively to each property 2hen a portfolio of similar properties is held.

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#eco$nition
Reco)nition Criteria *nvestment property shall be recognised as an asset 2hen0 and only 2hen3 (i) it is probable that the future economic benefits that are associated 2ith the investment property 2ill flo2 to the entity8 and (ii) the cost of the investment property can be measured reliably.

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!n entity evaluates under this recognition principle all its investment property costs at the time they are incurred. 1hese costs include costs incurred initially to acquire an investment property and costs incurred subsequently to add to0 replace part of0 or service a property.

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(A) #.1

%eas&rement
+eas"rement at reco)nition ,ey &oint !n investment property shall be meas"red initially at its cost. Transaction costs shall be incl"ded in the initial meas"rement.

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1he cost of a purchased investment property comprises its purchase price and any directly attributable expenditure. Directly attributable expenditure includes0 for example0 professional fees for legal services0 property transfer taxes and other transaction costs. 1he cost of a self.constructed investment property is its cost at the date 2hen the construction or development is complete. 1he cost of an investment property is not increased by3 (i) start-"p 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)0 (ii) operatin) losses incurred before the investment property achieves the planned level of occupancy0 or (iii) abnormal amo"nts of 2asted material0 labour or other resources incurred in constructing or developing the property. 1he initial cost of a property interest held under a lease and classified as an investment property shall be as prescribed for a finance lease by H !" 1@0 i.e. the asset shall be
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recognised at the lo2er of the fair value of the property and the present value of the minimum lease payments. ($) #.4 +eas"rement a'ter reco)nition Ander H !" #$0 there is a free policy choice made for the investment property as a 2hole bet2een the cost model and the fair value model0 2ith the exception of3 (i) those investment properties that bac5 liabilities 2hich pay a return directly lin5ed to the fair value of0 or returns from0 specified assets including that investment property. *n this case0 a separate fair value or cost policy choice can be made for this subset of investment property8 (ii) those investment property 2hich it is established 2hen the property 2as first acquired that the fair value is not reliably determinable on a continuing basis. *n this case the H !" 14 cost model shall be used for that individual property until its disposal8 and in all other cases8 (iii) 2here an entity decides to account for any of its properties held "nder operatin) leases as investment property . *n this case0 the 'air val"e model m"st be "sed for that lease and for all of the entityBs other investment properties0 other than the t2o exceptions highlighted immediately above. The cost model Cost +odel !fter initial recognition0 an enterprise that chooses the cost model should measure all of its investment property using the benchmar5 treatment in H !" 14 ;+roperty0 +lant and Equipment<0 that is at cost less depreciation and impairment losses. #.9 !n enterprise that chooses the cost model sho"ld disclose the 'air val"e of its investment property. Fair value model () Fair .al"e +odel Ander fair value model0 the initial recognition and measurement 2ill still be at cost. "ubsequent measurement 2ill be at fair value. !ll )ains and losses on revaluation 2ill be reported in the income statement as
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(a) #.@

(b) #.-

part of the profit or loss for the period. !lso0 no depreciation is required to charge to profit or loss. #.1$ #.11 >air value 2ill normally be the mar5et price. 1here should be no deduction for transaction costs. Reco)nisin) )ains and losses in the income statement is revol"tionary . +reviously0 these gains 2ere ta5en to reserves and not claimed as realiCed profits. 1he profit or loss on disposal of an investment property 2ill be based upon the carrying value in the balance sheet. >air value 2ill normally be obtainable by reference to current prices on an active mar5et for similar properties in the same location. *f no such mar5et exists then the follo2ing values should be considered3 (i) current prices on an active mar5et for properties of a different nature0 condition or location0 ad?usted to reflect those differences8 (ii) recent prices in less active mar5ets8 (iii) discounted cash flo2 pro?ections based on reliable estimates of future cash flo2s. *f it is impossible to meas"re 'air val"e reliably 0 then the cost-based model sho"ld be adopted. 1he adoption of the fair value model or the cost model 2ill be a policy choice. 1herefore0 once either model has been chosen0 any change from one to the other needs to meet the requirements of H !" 9 ;!ccounting +olicies0 Dhanges in !ccounting Estimates and Errors<. *n particular0 a voluntary change can only be made if it 2ill result in a more appropriate presentation. H !" #$ states that this is hi)hly "nli/ely in the case of a chan)e 'rom the 'air val"e model to the cost model. H !" #$ states that an entity is encouraged0 but not required0 to determine the fair value of investment property on the basis of a valuation by an independent valuer 2ho holds a recogniCed and relevant professional qualification and has recent experience in the location and category of the investment property being valued. Trans'ers 1ransfers to or from investment property can only be made if there is a change of use. 1here are several possible situations3 (i) 1ransfer from investment property to o2ner.occupied property. Ase the fair value at the date of the change for subsequent accounting under H !" 14.
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(ii)

(iii)

1ransfer from investment property to inventory. Ase the fair value at the date of the change for subsequent accounting under H !" 2 ;*nventories<. 1ransfer from o2ner.occupied property to investment property to be carried at fair value. H !" 14 (cost less depreciation) 2ill have been applied up to the date of the change. 'n adopting fair value there 2ill normally be an increase in value. 1his 2ill be ta5en to the revaluation reserve in accordance 2ith H !" 14. *f the fair value valuation causes a decrease in value0 then it should be charged to the statement of comprehensive income. 1he only exceptions to these treatments 2ill arise if the property has previously been revalued up2ards0 2hen a decrease may be against the resultant revaluation surplus0 or 2hen an impairment loss has previously been recogniCed0 2hen an increase may be recogniCed in the statement of comprehensive income. 1ransfer from inventories to investment property to be carried at fair value. !ny differences in the carrying amount 2ill be recognised in the statement of comprehensive income.

(iv)

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isc(os&re #e)&irements
Enterprises using both the cost model and the fair value model should disclose the follo2ing amounts included in the income statement3 (i) rental income (ii) operating expenses for investment properties (iii) restrictions on the realisability of investment property or the remittance of income and proceeds of disposal (iv) obligations to purchase0 construct or develop properties. Enterprises using the fair value model should also disclose3 (i) methods and assumptions used in determining fair value (ii) the use of professional valuers (iii) additions and disposals during the period (iv) net gains or losses from fair value ad?ustments (v) transfers to and from investment property. Enterprises using the cost model should disclose3
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(i) (ii) (iii) (iv)

depreciation methods useful lives or depreciation rates movements on cost and depreciation during the year the fair value of the investment property (or an explanation of 2hy it cannot be obtained).

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1he decision tree belo2 summaries 2hich H !" apply to various 5inds of property.
"tart

*s the property held for sale in the ordinary course of business7

Ees Ase H !" 2

,o *s the property o2ner. occupied7 Ees Ase H !" 14 (cost model or revaluation model)

,o *s the property being constructed or developed7 Ees Ase H !" 14 (cost model or revaluation model) until completion

,o 1he property is an investment property

Dost model 6hich model is chosen for all investment properties7 >air value model

Ase H !" 14 (cost model) 2ith disclosure from H !" #$

Ase H !" #$

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