ACCOUNTING FOR INVESTMENT- IAS 40

1. ACCOUNTING FOR INVESTMENT- IAS 40 EPSILON F

2. Objective To prescribe the accounting period treatment and disclosures for investment property. Definitions Owner-occupied property - Property held for use in the production or supply of goods or services or for administration purposes. Investment property-This is property such as land and building(or its part or both) that is held: • To earn rentals • For capital appreciation that is to make money on increasing prices on a real estate market.

3. Or both Investment property is not held for: • Production or supply of goods or services.(IAS 16) • Administrative purposes.(IAS 16) • Sale in the ordinary course of business.(IAS 2)

4. Issues Relevant to Classification of Property as Investment property • Temporary use of land destined for future use as investment property for agricultural activity • Temporary use of land destined for future use as investment property for agricultural activity • Classification of hotels • Group complexity • A situation of entities that are property developers with history in the field for developing properties for sale decide to rent properties due to depressed prices until market picks up

5. Measurement at Initial Recognition • Investment property should be recognized as an asset when it is probable that the future economic • Benefit associated with the property will flow to the entity and that the cost can be measured reliably. • They are recognized when in the financial statement for the first time at cost. • Transactional cost shall be included in the initial measurement. • Direct expenses include professional fees, property transfer taxes.

6. Initial cost of property interest held under a lease shall be recognized at lower of the fair value of the • Property and the present value of the minimum lease payments. An equivalent amount shall be • Recognized as a liability. • Investments are measured using fair value model or cost model.

7. Transfers This is the transfer of an asset to or from investment property. Only done where there is a change in use. Example: When you start using your building for your own headquarters and you rented it out previously, then you an transfer it from investment property to Plant, Property and Equipment (PPE) under IAS 16. • IP to owner occupied (IAS 16)- Fair value at date of change. • IP to inventory (IAS 2)- Fair value at date of transfer.

8. For the above this is whereby one had investment property e.g. land, buildings or part of a building, then it was moved over to owner occupied.

9. If it was investment property, whatever it is then subsequently, you go with the d=fair value at the date of the change in ownership or the date of transfer to inventory. • The gains on losses go to the profit/loss and then whatever the fair value is for the IAS 16, it is then depreciated. • The inventory, the IAS 12, that is the cost of the inventory, when you are valuing it, use the lower of the cost and the net realisable value. • The key bit is that if it was investment property, then get it up to fair value, treat it on the IAS 40, the gains in the loss to profit or loss then treat it under the new standard. • In the following,

10. Owner occupied (IAS 16) to IP- Revalue under the IAS 16 and treat it as investment property. • Inventory (IAS 2) to IP- Fair value on change and gain/loss to profit/loss. • The key bit here is to treat it as a normal on their IAS 16 and the IAS 2 so the main one that we focus on is the IAS 16. Again, what you need to do there is before you transfer it, revalue it under IAS 16. This means that under IAS 16, any gains go to other comprehensive income and they are not up to date. Fair value is then the new value of your investment property and then subsequently, any gains or losses on fair value go to profit/loss statement.

11. Example: Investment property and change of use. Fredrick owns a property that it is using as its head office. At 1st January 2015, its carrying value is was Ksh 20million and its remaining useful life was 20 years. On 1st July 2015, the business was reorganised, cheaper premise were found for use as its head office. It was therefore decided to lease the property under an operating lease. The property was valued by a qualified professional, who assessed the property value at Ksh 21 million on 1st July and at Ksh 21.6million on 31st December 2015. Explain the accounting treatment of the property in the financial statement for the year ended 31st December 2015.

12. Solutions Head office- IAS 16 (PPE) Depreciate the Ksh 20 million over the remaining 20 years. So 1 million per annum. Note that the reorganisation was on 1st July which is mid-year. Precisely 6 months. So it was 6 months as PPE and 6 months as investment property. PPE (IAS 16) Cost- 20 million Depreciation- 0.5 million Carrying value- 19.5 million.  19.5m- 21m -1.5m gain ( goes to OTI (other comprehensive incomes)) 19.5 million was valued upwards to 21.0 million. IP (IAS 40) FV @ 31st December 2015- Ksh 21.6 million (goes to SFP) Gain- Ksh 0.6 million. (21.6-21.0= 0.6) Gain goes to the statement of profit and loss)

13. De-recognition Of Investment Property • This is whereby an investment property is eliminated on disposal or when the property is permanently withdrawn from use and no future economic benefits are expected from its disposal. • Gains or losses incurred from de-recognition of investment property shall be determined as the difference between the net disposal proceeds and the carrying amount of the asset and shall be recognized in profit or loss. • Compensation from third parties for investment property that was impaired, lost or given up shall be recognized in profit or loss when the compensation becomes receivable.

14. Cost Model • The cost model is used as an accounting policy to report carrying an amount of property, plant, and equipment (fixed assets) in the balance sheet. • It requires an asset to be carried at its initial cost (also referred to as historical cost) less any accumulated depreciation and impairment losses. • The revaluation of assets is not allowed, but some accounting standards allow recovery of impairment losses recognized in the past.

15. Disclosure using Cost Model • In cases where an entity use cost model the following is disclosed: • Depreciation of the property • Explanation as to why fair value can’t be obtained reliably • Disposal of investment property not carried at fair value • It is a reconciliation between carrying amount at the beginning and the end of the period indicating: • Fair value of investment property if unable to determine reliably add descriptions and explanations • Foreign exchange effects on transactions • Depreciation and information about impairment losses • Other changes

16. Fair Value Model • This is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (IFRS 13) • Investment properties are revalued to fair value at each reporting date • Gains and losses on revaluation we recognize through profit & loss • When transferring: • Investment property to owner- Measure at fair value at date of change • Investment property to industry- Measure at fair value at date of transfer

17. Fair value model • Owner occupied (IAS 16) to investment property - Revalue under IAS 16 then treat as investment property • Inventory (IAS 2) to investment property – Fair value on date of change and gain/loss to profit or loss

18. Example: Adlington owns a property that is using as its head office. At 01/01/15 its carrying value was $20 million and its remaining useful life was 20 years. On 01/07/15 the business was reorganized cheaper premises were found for use as a head office. It was therefore decided to lease the property under an operating lease. The property was valued by a qualified professional who assessed the property’s value at $21 million on 01/07/15 and $21.6 million on 31/12/15. Explain the accounting treatment of the property in the financial statements for the year ended 31/12/15