Investment Property- week 7

What is the definition for investment property?

Land or buildings held to earn rental gain or capital appreciaition

• rather than for administrative purposes or sale in the ordinary course of business

What is not investment property?

• Owner occupied property- property held for use in the production or supply of goods or services or for administrative purposes

• Property held as inventory

What are the two further complexities in classifying IvP?

1. Property with joint uses

2. Ancillary services

What is the complexity with property with joint uses?

• If each portion can be sold (or leased) seperately each portion is recognised seperately

• If each portion cannot be sold (or leased) separately the entire property is investment property if the OOP is insignificant or PPE if significant

What is the complexity with ancillary services?

• If the amount of ancillary services are insignificant - IVP

• If the amount of ancillary services are significant - OOP

When can we recognise Investment property?

• it is probable that future economic benefits will flow to the entity

• The cost of the investment property can be measured reliably

What is the initial measurement for investment property?

At its cost

What are the two subsequent methods of measuring investment property?

1. Cost model

2. Fair value model

when we measure at fair value is depreciation charged?

No

What are the transfers to/from IVP?

When there is a change in use

1. For rental gain and capital appreciation- IVP

2. For production of goods, rental income and admin purposes- OOP

3. For sale- inventories

When is an investment property derecognised?

• On disposal

• When permanently withdrawn from use

• no future economic benefits are expected from its disposal

Where are disposals taken?

Taken to the P&L

Where do all fair value gains/losses go?

To the SOPL

there is no revaluation surplus

How do we recognise and measure up to 20X8,

Green Tree PLC acquired a property on 1 January 20X8 at a cost of £4.2 million. It was immediately let out to a corporate tenant for a period of 1½ years until 30 June 20X9. On 1 July 20X9, the company took occupation of the property as its administrative headquarters. The fair values of the property were determined as follows On 31 December 20X8: £4.5 million On 1 July 20X9: £5.2 million On 31 December 20X9: £5.3 million The accounting policy of the company is to adopt the cost model for property, plant & equipment and the fair value model for investment property. The depreciation rate for property is at 4% per annum on a straight-line basis. The company’s reporting date is 31 December.

• 1 Jan recognised as investment property

• initially measured at a cost of £4.2 million

• 31 Dec 20X8 remeasured at the fair value of £4.5 million

• The change in fair value (4.5-4.2=0.3k) is recognised as a gain in the SOPL

• No depreciation as measured using the fair value model

How do we recognise and measure 20X9,

Green Tree PLC acquired a property on 1 January 20X8 at a cost of £4.2 million. It was immediately let out to a corporate tenant for a period of 1½ years until 30 June 20X9. On 1 July 20X9, the company took occupation of the property as its administrative headquarters. The fair values of the property were determined as follows On 31 December 20X8: £4.5 million On 1 July 20X9: £5.2 million On 31 December 20X9: £5.3 million The accounting policy of the company is to adopt the cost model for property, plant & equipment and the fair value model for investment property. The depreciation rate for property is at 4% per annum on a straight-line basis. The company’s reporting date is 31 December.

• 1 July 20X9 derecognised as IVP and recognised as OOP

• Remeasured at fair value (5.2-4.5 = 0.7) taken to SOPL as a gain

• Property is recognised as PPE with an initial value of £5.2 million

• Depreciation is 104,000

• Subsequent measurement using cost model is 5096,000

How would we account for this property,

Property A This property was acquired on 1 January 20X9 at a cost of £2,500,000, with the intention of using the property as the company’s administrative office. At acquisition, the cost of the land was estimated at £250,000, and the cost of the building was estimated at £2,250,000. The property has an estimated useful life of 40 years. On 31 December, an identical property situated alongside Property A was sold for £2,800,000

• Recognised as PPE as Owner occupied

• using the cost model so depreciation (land is not depreciated)

• depreciation is 56250 per annum

• CA= Cost - acc depp = 2443750

How would we account for this property,

This property was acquired on 1 May 20X9 at a cost of £4,200,000, with the intention of letting it out on a long-term basis. The property has an estimated useful life of 40 years. The property is specialised, and the directors believe that it will not be possible to obtain reliable values on a continuing basis.

Although the fair value model is used IAS40 requires properties for which no fair value can be obtained on a continuing basis to be measured using the cost model

• Cost - acc depp = CA

• 4.2m- 70,000 = 4.13m

What does IAS40 say about measurement when a property may not have a fair value?

Must be measured using the cost model if no fair value can be obtained on a continuing basis.

What is the alternative model used to measure Investment Property?

The fair value model

What is the alternative model to measure PPE?

The revaluation model

What is the common model used to measure both Investment Property and PPE?

The cost model

Is investment property a current or non current asset?

Non current asset