MFRS 140 INVESTMENT PROPERTY

RELATED STANDARDS MFRS 116 Property, plant and equipment MFRS 2 Inventories MFRS 141 Agriculture MFRS 5 Non-current assets held for sale and discontinued operations MFRS 117 Leases MFRS 123 Borrowing costs MFRS 136 Impairment of assets

RELATED STANDARDS MFRS 116 MFRS 140 MFRS 5 MFRS 2 MFRS 141

Measurement at recognition OVERVIEW MFRS 140 Objective and scope Definitions Recognition Measurement at recognition Transfers Derecognition Disclosures

OBJECTIVE AND SCOPE MFRS 140 identifies: what an investment property is, how it differs from property, plant and equipment (owner-occupied property); and what recognition, measurement and disclosure standards apply to investment properties.

OBJECTIVE AND SCOPE However, MFRS 140 does not deal with matters covered in MFRS 117 Leases, including: classification of leases as finance leases or operating leases; recognition of lease income from investment property (see also MFRS 118 Revenue); measurement in a lessee’s financial statements of property interests held under a lease accounted for as an operating lease; measurement in a lessor’s financial statements of its net investment in a finance lease; accounting for sale and leaseback transactions; and disclosure about finance leases and operating leases.

DEFINITIONS Carrying amount is the amount at which an asset is recognized in the statement of financial position. Cost is the amount of cash or cash equivalents paid or the fair value of other consideration given to acquire an asset at the time of its acquisition or construction or, where applicable, the amount attributed to that asset when initially recognized in accordance with the specific requirements of other MFRSs, e.g. MFRS 2 Share-based Payment. Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.

DEFINITIONS Investment property is property (land or a building – or part of a building – or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for: use in the production or supply of goods or services or for administrative purposes; or sale in the ordinary course of business. MFRS 140 para 5

DEFINITIONS Owner-occupied property is property held (by the owner or by the lessee under a finance lease) for use in the production or supply of goods or services or for administrative purposes.

DEFINITIONS MFRS 116 MFRS 2

DEFINITIONS In order to classify a property as investment property, an entity has to ensure that the property can fulfil both: The mode of usage (either to earn rental and/or for capital appreciation), and 2. The mode of ownership (either owned or held under a finance lease).

DEFINITIONS – MODE OF USAGE MFRS 140 has contrasted an investment property with an owner-occupied property. An owner-occupied property is not an investment property, but should be a property under MFRS 116, Property, Plant and Equipment is defined as property held (by the owner or by the lessee under a finance lease) for use in the production or supply of goods or services or for administrative purposes. MFRS 140 para 5

Owner-occupied property DEFINITIONS – MODE OF USAGE MFRS 116 definition of property, plant and equipment - Property, plant and equipment are tangible items that: are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and are expected to be used during more than one period. Both for rental, how to distinguish? For example, how to distinguish: A flat leased out for rental A hotel Investment property Owner-occupied property

DEFINITIONS – MODE OF USAGE Comparing with the definition of investment property that has the term “to earn rental”, the definition of property, plant and equipment also has a similar term “held …… for rental to others”. In order to distinguish them, an entity can consider a property from two correlated aspects: 1. The generation of cash flows, and 2. The significance of ancillary services.

Owner-occupied property DEFINITIONS – MODE OF USAGE one of the key indicators in determining classification between investment property and owner-occupied property. Investment property held to earn rentals or for capital appreciation or both therefore, generates cash flows largely independently of the other assets held by an entity. Owner-occupied property the production or supply of goods or services (or the use of property for administrative purposes) generates cash flows that are attributable not only to property, but also to other assets used in the production or supply process

DEFINITIONS – MODE OF USAGE MFRS 116 or MFRS 117

DEFINITIONS – MODE OF USAGE MFRS140 MFRS116

DEFINITIONS – MODE OF OWNERSHIP To meet the definition of investment property, a property must be owned by an entity or held by an entity under a finance lease Implies that a property interest held by a lessee under an operating lease cannot be classified as investment property since such property interest is neither owned nor held by a lessee under a finance lease.

DEFINITIONS – MODE OF OWNERSHIP However, MFRS 140 (amended) allowed that a property interest that is held by a lessee under an operating lease may be classified and accounted for as investment property if, and only if, the property would otherwise meet the definition of an investment property and the lessee uses the fair value model for the asset recognised.

DEFINITIONS – MODE OF OWNERSHIP This classification alternative is available on a property-by-property basis. However, once this classification alternative is selected for one such property interest held under an operating lease, all property classified as investment property shall be accounted for using the fair value model and all required disclosures should be made. MFRS 140 para 6

DEFINITIONS – PARTIALLY USED

DEFINITIONS – PARTIALLY USED

EXAMPLES OF IP MFRS 140 para 8 The following are examples of investment property: (a) 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. 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. MFRS 140 para 8

EXAMPLES OF NON-IP MFRS 140 para 9 The following are examples of items that are not investment property: (a) property intended for sale in the ordinary course of business or in the process of construction or development for such sale (see MFRS 102 Inventories), for example, property acquired exclusively with a view to subsequent disposal in the near future or for development and resale. (b) property being constructed or developed on behalf of third parties (see MFRS 111 Construction Contracts). (c) owner-occupied property (see MFRS 116), including (among other things) property held for future use as owner-occupied property, property held for future development and subsequent use as owner-occupied property, property occupied by employees (whether or not the employees pay rent at market rates) and owner-occupied property awaiting disposal. (d) property that is leased to another entity under a finance lease. MFRS 140 para 9

Meets definition of investment property STOP AND PAUSE Property description Meets definition of investment property Owned by the company and leased out under an operating lease Held under a finance lease and leased out under an operating lease Held under a finance lease and to be leased out in the future under an operating lease Held under a finance lease and leased out under a finance lease Owned by the company and leased out under a finance lease Owner-occupied property used in the production or supply of goods, services or for administrative purposes Held for sale in the ordinary course of business Held under operating lease A property comprising a piece of land and a building constructed on it leased out to a third party Property partly owner-occupied and partly leased out under an operating lease

Meets definition of investment property STOP AND PAUSE Property description Meets definition of investment property Owned by the company and leased out under an operating lease  Held under a finance lease and leased out under an operating lease Held under a finance lease and to be leased out in the future under an operating lease Held under a finance lease and leased out under a finance lease  Owned by the company and leased out under a finance lease Owner-occupied property used in the production or supply of goods, services or for administrative purposes Held for sale in the ordinary course of business Held under operating lease A property comprising a piece of land and a building constructed on it leased out to a third party operating lease, unless expected to pass to lessee at end of lease Property partly owner-occupied and partly leased out under an operating lease the 2 portions accounted for separately if they can be sold separately; if not, to be treated as PPE, unless the owner-occupied portion is insignificant.

RECOGNITION Investment property shall be recognized as an asset when, and only when: (a) it is probable that the future economic benefits that are associated with the investment property will flow to the entity; and (b) the cost of the investment property can be measured reliably. MFRS 140 para 16

MEASUREMENT AT RECOGNITION An investment property shall be measured initially at its cost. Transaction costs shall be included in the initial measurement. The cost of a purchased investment property comprises its purchase price and any directly attributable expenditure. Directly attributable expenditure includes, for example, professional fees for legal services, property transfer taxes and other transaction costs. MFRS 140 para 20-21

MEASUREMENT AT RECOGNITION The cost of an investment property is NOT increased by: (a) start-up 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), (b) operating losses incurred before the investment property achieves the planned level of occupancy, or (c) abnormal amounts of wasted material, labor or other resources incurred in constructing or developing the property. MFRS 140 para 23

MEASUREMENT AT RECOGNITION The 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 paragraph 20 of MFRS 117, i.e. the asset shall be recognized at the 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 in accordance with that same paragraph. MFRS 140 para 25

MEASUREMENT AFTER RECOGNITION Para 30: With the exceptions noted in para 32A (options) and 34 (operating lease), an entity shall choose as its accounting policy either the fair value model (para 33–55) or the cost model (para 56) and shall apply that policy to all of its investment property.

MEASUREMENT AFTER RECOGNITION An entity may (para 32A): (a) choose either the fair value model or the cost model for all investment property backing liabilities that pay a return linked directly to the fair value of, or returns from, specified assets including that investment property; and (b) choose either the fair value model or the cost model for all other investment property, regardless of the choice made in (a).

MEASUREMENT AFTER RECOGNITION MFRS 116!!!

FV MODEL VS. REVALUATION MODEL

MEASUREMENT AFTER RECOGNITION Properties held to earn rental, or for capital appreciation, or both? Any property held under operating lease? Use MFRS140 to account for one or more such properties? Properties under MFRS140 Choose to use cost model? Not within MFRS140 FV model under MFRS140 Cost model under MFRS140

FAIR VALUE MODEL After initial recognition, an entity that chooses the fair value model shall measure all of its investment property at fair value, except in the cases described in para 53 (inability to determine FV). When a property interest held by a lessee under an operating lease is classified as an investment property under para 6, para 30 is not elective; the fair value model shall be applied. MFRS 140 para 33-34

FAIR VALUE MODEL A gain or loss arising from a change in the fair value of investment property shall be recognized in profit or loss for the period in which it arises. The fair value of investment property shall reflect market conditions at the end of the reporting period. MFRS 140 para 35

FAIR VALUE MODEL If an entity has previously measured an investment property at fair value, it shall continue to measure the property at fair value until disposal (or until the property becomes owner-occupied property or the entity begins to develop the property for subsequent sale in the ordinary course of business) even if comparable market transactions become less frequent or market prices become less readily available. MFRS 140 para 55

COST MODEL After initial recognition, an entity that chooses the cost model shall measure all of its investment properties in accordance with MFRS 116’s requirements for that model, other than those that meet the criteria to be classified as held for sale (or are included in a disposal group that is classified as held for sale) in accordance with MFRS 5 Non-current Assets Held for Sale and Discontinued Operations. Investment properties that meet the criteria to be classified as held for sale (or are included in a disposal group that is classified as held for sale) shall be measured in accordance with MFRS 5. MFRS 140 para 56

SWITCHING THE MODELS Can we actually switch from cost model to fair value model or vice versa from fair value model to cost model? The answer is YES, but only if the change results in the financial statements providing better, more reliable information about company’s financial position, results and other events.

TRANSFERS Transfers to, or from, investment property shall be made when, and only when, there is a change in use, evidenced by: (a) commencement of owner-occupation, for a transfer from investment property to owner-occupied property; (b) commencement of development with a view to sale, for a transfer from investment property to inventories; (c) end of owner-occupation, for a transfer from owner-occupied property to investment property; or (d) commencement of an operating lease to another party, for a transfer from inventories to investment property. MFRS 140 para 57

TRANSFERS For a transfer from investment property carried at fair value to owner-occupied property or inventories, the property’s deemed cost for subsequent accounting in accordance with MFRS 116 or MFRS 102 shall be its fair value at the date of change in use. MFRS 140 para 60

TRANSFERS If an owner-occupied property becomes an investment property that will be carried at fair value, an entity shall apply MFRS 116 up to the date of change in use. The entity shall treat any difference at that date between the carrying amount of the property in accordance with MFRS 116 and its fair value in the same way as a revaluation in accordance with MFRS 116. MFRS 140 para 61

TRANSFERS For a transfer from inventories to investment property that will be carried at fair value, any difference between the fair value of the property at that date and its previous carrying amount shall be recognized in profit or loss. MFRS 140 para 63

TRANSFERS MFRS 140 para 65 When an entity completes the construction or development of a self-constructed investment property that will be carried at fair value, any difference between the fair value of the property at that date and its previous carrying amount shall be recognized in profit or loss.

Cost Model From To Treatment PPE IP No Change in cost Inventory

IP at Fair Value From To Treatment PPE at cost IP Value IP at date of transfer in accordance with MFRS 116 (revaluation) Inventory Change to P&L PPE No Change in value

TRANSFERS

DERECOGNITION An investment property shall be derecognized (eliminated from the statement of financial position) on disposal or when the investment property is permanently withdrawn from use and no future economic benefits are expected from its disposal. Gains or losses arising from the retirement or disposal 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 (unless MFRS 117 requires otherwise on a sale and leaseback) in the period of the retirement or disposal. MFRS 140 para 66 & 69

DERECOGNITION 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. MFRS 140 para 72

DISCLOSURES MFRS 140 para 75 An entity shall disclose: whether it applies the fair value model or the cost model. 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. (c) 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.

DISCLOSURES the methods and significant assumptions applied in determining the fair value of investment property, including a statement whether the determination of fair value was supported by market evidence or was more heavily based on other factors (which the entity shall disclose) because of the nature of the property and lack of comparable market data. the extent to which the fair value of investment property (as measured or disclosed in the financial statements) is based on a valuation by an independent valuer who holds a recognized 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.

DISCLOSURES (f) the amounts recognized 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 recognized 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).

DISCLOSURES the existence and amounts of restrictions on the realisability of investment property or the remittance of income and proceeds of disposal. (h) contractual obligations to purchase, construct or develop investment property or for repairs, maintenance or enhancements.

DISCLOSURES – FAIR VALUE MODEL In addition to the common disclosures, an entity that applies the fair value model shall disclose a reconciliation between the carrying amounts of investment property at the beginning and end of the period, showing : additions, disclosing separately those additions resulting from acquisitions and those resulting from subsequent expenditure recognised in the carrying amount; additions resulting from acquisitions through business combinations; assets classified or included in a disposal group classified as held for sale; MFRS 140 para 76

DISCLOSURES – FAIR VALUE MODEL net gains or losses from fair value adjustments; the net exchange differences arising on translation of financial statements into a different presentation currency, and on translation of a foreign operation into the presentation currency of the reporting entity; transfers to and from inventories and owner-occupied property; and other changes.

DISCLOSURES – FAIR VALUE MODEL When a valuation obtained for investment property is adjusted significantly for the purpose of the financial statements, the entity shall disclose a reconciliation between the valuation obtained and the adjusted valuation included in the financial statements, showing separately and any significant adjustments. MFRS 140 para 77

DISCLOSURES – FAIR VALUE MODEL In exceptional cases, when an entity can only measure investment property using the cost model in MFRS1116, the reconciliation shall disclose amounts relating to that investment property separately from amounts relating to other investment property. Plus, an entity shall disclose: a description of the investment property; an explanation of why fair value cannot be determined reliably; if possible, the range of estimates within which fair value is highly likely to lie; and MFRS 140 para 78

DISCLOSURES – FAIR VALUE MODEL on disposal of investment property not carried at fair value: the fact that the entity has disposed of investment property not carried at fair value; the carrying amount of that investment property at the time of sale; and the amount of gain or loss recognised.

DISCLOSURES – COST MODEL MFRS 140 para 79 In addition to the common disclosures, an entity shall disclose: the depreciation methods used; the useful lives or the depreciation rates used; the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at beginning and end of the period; a reconciliation of the carrying amount of investment property at the beginning and end of the period, showing the following: additions, disclosing separately those additions resulting from acquisitions and those resulting from subsequent expenditure recognised as an asset; additions resulting from acquisitions through business combinations;

DISCLOSURES – COST MODEL assets classified as held for sale or included in a disposal group classified as held for sale in accordance with IFRS 5 and other disposals; depreciation; the amount of impairment losses recognised, and the amount of impairment losses reversed, during the period in accordance with IAS 36; the net exchange differences arising on the translation of the financial statements into a different presentation currency, and on translation of a foreign operation into the presentation currency of the reporting entity; transfers to and from inventories and owner-occupied property; and other changes; and

DISCLOSURES – COST MODEL the fair value of investment property. In the exceptional cases, when an entity can only use the cost model because it cannot determine the fair value of the investment property reliably, it shall disclose: a description of the investment property; an explanation of why fair value cannot be determined reliably; and if possible, the range of estimates within which fair value is highly likely to lie.

DISCLOSURES

EXERCISES Question: Change in use of investment property Company C moves out from a building previously used as its head office and leases it to a third party. At that date, the building, whose carrying amount (at cost less depreciation) was RM80 000, was fair valued for the first time under MFRS 140 at RM100 000. Assuming that Company C adopts the fair value model for its investment property, how should the difference between the fair value of the building and its previous carrying amount be recognised? (a) Credited to equity as a revaluation gain. (b) Credited to income statement as a fair value gain.

EXERCISES Answer: Change in use of investment property The correct answer is (a). Under MFRS 140 (para?), when an owner-occupied property becomes an investment property under MFRS 140, any fair value gain or loss at that date would be treated as a revaluation under MFRS 116. It would be credited to equity, net of any attributable deferred taxes. On subsequent disposal of the property, and only then, the revaluation surplus should be transferred to retained earnings without impact in the income statement.

EXERCISES Question: Treatment of investment property in consolidated financial statements Company Alfa owns a hotel and leases it out under an operating lease agreement to Company Omega, an associated undertaking of Alfa. Omega is a hotel management company and operates the hotel. How would the hotel be treated in Alfa’s individual and consolidated MFRS financial statements? As property, plant and equipment under MFRS 116 in both sets of financial statements. As investment property under MFRS 140 in both sets of financial statements. As investment property under MFRS 140 in the individual financial statements and as property, plant and equipment under MFRS 116 in the consolidated financial statements.

EXERCISES Answer: Treatment of investment property in consolidated financial statements The correct answer is (b). The relevant guidance is provided by MFRS 140 (para?). As Alfa does not control Omega, this investee it is not considered part of the group for consolidation purposes, therefore the hotel is not owner-occupied from the perspective of Alfa’s group as a whole. The hotel is occupied by Omega and is to be treated as operating lease in the associate’s financial statements. If the arrangement was a finance lease the hotel would not be considered an investment property in any of the financial statements referred to above (Alfa’s individual and consolidated and Omega’s financial statements).

END OF CHAPTER