FRS 201: INVESTMENT PROPERTY LECTURE 10
FRS 201 • Prescribed the actg treatment and disclosure wrt to investment property • Specifically, it focus on the recognition, measurement and disclosure of investment property
Definition: Investment Property Para 5: …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: (a) Use in the production or supply of goods or services or for administrative purposes (b) Sale for ordinary course of business
Lease (FRS 117) Operating lease and Finance lease Distinguishing factor…. whether risks and rewards incidental to ownership of a leased asset lie with lessor or lessee If the lease transfers substantial risks and rewards to lessee it is finance lease, otherwise it Is an operating lease such that legal and beneficial owner is the lessor.
Cash Flows Investment property generates cash flows largely independently of other assets held by an entity. This distinguishes investment property from owner occupied property (the latter held for prod. or supply of gds or services or adm. purposes)
Examples of Investment Property Para 8: (a) Land held for long-term capital appreciation X for short term sale (b) Land held for currently undetermined use (c) Building owned by an entity (or finance lease) leased out under 1 or > operating lease (d) Building that is vacant held to be leased out as 1 or > operating lease
Examples: Not Investment Property Para 9: (i) Property intended for sale in ord. course of business (ii) Property develop on behalf of 3rd party (iii) Owner occupied property (iv) Property constructed and developed for future use as investment property (v) Property leased to another entity under finance lease
Property held as investment property and others Para 10 and 11: If the two portions could be sold separately (or under finance lease, could be leased out separately) entity to account them separately, The property is investment property only if insignificant portion held for other purposes (prodn, supply of gds or services, adm, ancillary services)
Continue…Para 14 Judgement needed to determine whether a property qualifies as investment property. E.g. Owner of a hotel transfers some of responsibilities to 3rd parties under mgt contract. Terms may vary widely such that it may result the owner becoming passive investor in one end of the spectrum and in another end outsourcing day to day function but retaining sig. exposure to the variation in cash flow from hotel operation. Is the property, investment property?
Continue ….Para 14 An entity to develop criteria so that it can exercise judgement consistently …
Para 15 If subsidiary leased its property to parent or other subsidiaries in the group, in consolidated f/s the property x qualify as investment property bec. owner-occupied However in lessor owns f/s it is treated as investment property if the property meets investment property criteria.
Recognition Para 16: Investment property recognised as ASSET when: (i) Probable future economic benefit associated with investment property will flow to the entity (ii) Cost of investment property can be measured reliably
Investment Property Costs Para 17: Investment property costs – Evaluated at time they’re incurred E.g.: Cost of property acquisition, Cost subsequently incurred to add, replace part or service a property. Can you identify in specific what these costs are?
Continue Para 18 In reference to Para 16(b), costs of day to servicing are not capitalised in bal. sheet (in carryg amt of investment property costs) but charge to P&L as incurred. Why ? E.g. Costs of labour and consumables; costs of minor parts; ‘repairs and maintenance’ costs
Para 19 Entity acquired the property which include replacement parts that are a replacement (e.g. interior wall may be replacement of original walls). Based on Para 17 recognition rule, cost of replacing part of an existing investment property recognises in CA of investment property and derecognised accordingly
Measurement at Recognition:Determination of IP cost (1) Initially at cost (include transaction costs) (2) Purchase costs of investment include (a) Purchase price and (b) Directly attributable expenditure (professional fees for legal services, property transfer taxes and other transaction costs)
Para 22: Construction of Investment Property Cost of self-constructed investment property is cost at date when construction or development is complete and the property become Investment Property. Prior to this date entity applies FRS 116: PPE
Costs X be added to IP cost (1) Start up costs (Unless necessary for IP purposes) (2) Operating losses incurred b4 IP achieves planned level of occupancy (3) Abnormal amt of wasted material, labour or other resources in construct. IP
IP costs under finance lease Para 25 & 26: Asset recognised at Lower of (i) FV of property and (ii) PV of the minimum lease payments (include premium lease payment but this amt excluded from liab) Equivalent amt will be recog. as liability Property interest held under a lease that later classified as investment property, item accounted at FV is the lessee interest in property and not underlying property
Para 27: IP acquired in exchange for non-monetary and/ monetary asset Exchange of non-monetary asset with another : (i) IP costs measured at FV unless (a) Exchange transactions lack substance (b) Asset received or asset given up x measure reliably (if one of them available to use it as the cost of asset received Para 29) Otherwise (ii) At cost – the CA of the asset given up
Para 28: Exchange transaction commercial substance To consider extent to which future c/flow expected to change as a result of transaction. Commercial substance exists if: (a) Configuration (risk, timing, amt) of c/flow of assets received differs from assets transferred (b) Entity’s operations affected by the exchange transactions (c) a and b significant relative to FV of assets exchanged Exchange transaction has commercial substance when Portion of the entity’s operations affected by exchange transaction reflect post tax c/flows