Learning Outcomes: Know different types of investments Understand the accounting treatments for the investment & investment property Understand the disclosure requirements relating to the investments Investment & Investment Property 1
A business entity may acquires various types of long term investments in the form: Debt securities – Investment in bonds Equity securities – Investment in a subsidiary Investment property – Land & building (not for use in operation) Introduction
Classification (Current vs Non-Current Assets) Depends on: Nature of investment Intention of the entity Ability to liquidate in short period FRS 101: Classify as current if: “…held primary for trading or for short-term and expected to be realised within 12 months” Cont.
Measurement of Cost: Cost – according to the historical cost principle Comprise of: price plus incidental costs If consideration include: Securities – fair values of securities issued Other assets – fair value of the assets given up Shares – fair value of shares Cont.
Journal entry for to record investment: Investment RMXXX Cash RMXXX Assets RMXXX Securities RMXXX (To record initial cost of investment) Cont.
FRS 140: Definition Property held to earn rentals or capital appreciation or both, rather than: use in production or supply of goods or services or for administrative purpose [owner-occupied property]; or sale - generates cash flows largely independently of other assets held Investment Property
Examples of IP: land held for appreciation a building owned and leased out under operating lease vacant building and held for leasing under operating lease Cont.
Examples of properties that are not IP: property held for sale [Inventories : FRS 102] property constructed / developed on behalf of 3rd party [Construction : FRS 111] owner-occupied property : OOP [PP&E : FRS 116] property being constructed / developed for future use as investment property [PP&E :FRS 116, until completion] Cont.
Transactions between Group In some cases, an entity owns property that is leased to, and occupied by, its parent or another subsidiary. The property does not qualify as investment property in the consolidated financial statements, because the property is owner-occupied from the perspective of the group. From the perspective of the entity that owns it, the property is investment property. Therefore, the lessortreats the property as investment property in its individual financial statements. Cont.
Recognition of IP: Recognizewhen and only when: probable inflows of economics benefit cost can be measured reliably The costs include costs incurred initially to acquire an investment property and costs incurred subsequently to add to or replace part of a property. Day-to-day costs are recognised in profit or loss as incurred (repairs and maintenance ) Cont.
Measurement of IP: Initial measurement:Measured initially at its cost: If purchased purchase price If constructed cost as at the date the construction completed Subsequent measurement: Methods/Models: Fair Value Model Cost Model Cont.
Fair Value Model: Need to be consistently apply to all IP Usually based on its market value current prices in an active market for similar property in the same location and condition and subject to similar lease and other contracts. A gain or loss arising from a change in the fair value of investment property shall be recognised in profit or loss for the period in which it arises. If unable to measure fair value : benchmark treatment as FRS 116 at cost less accumulated depreciation and impairment loss Cont.
Cost Model: Need to be consistently apply to all IP Benchmark treatment as FRS 116 at cost less accumulated depreciation and impairment loss Increase in value (revaluation) of the investment property are recognised as revaluation reserve/surplus Cont.
Example 1 JL&HCC, FRSM, 2nd edition, p.545 On.1.1.x1, ACE acquired a property for investment purpose. The cost of the building was RM10 million and the economic life was estimated to be 50 years. At the end of year x1 the fair value of the building was RM11.5 million. The fair value on 31.12.x2 was RM10.8 million. Required: Prepare the journal entries assuming; (a) the company adopts the fair value model to account for this property (b) the company adopts cost model Illustration
Journal Entries: (a) RM’000 RM’000 1.1.x1 Investment property 10,000 Cash/Liability 10,000 31.12.x1 Investment property 1,500 Income statement 1,500 31.12.x2 Income statement 700 Investment property 700 Solution
Journal Entries: (b) RM’000 RM’000 1.1.x1 Investment property 10,000 Cash/Liability 10,000 31.12.x1 Income statement 200 Acc. depreciation 200 31.12.x2 Income statement 200 Acc. depreciation 200 Cont.
Example 2 JL&HCC, FRSM, 2nd edition, p.545 HQ Bhd acquired land and building for RM24 million on 1.7.x1. Legal and other expenses incurred amounted to RM1 million. The building has 10 floors and nine of the floors were rented to its subsidiary and one floor was used by HQ Bhd. The fair value of the property as at 31.12.x1 was RM29 million and at 31.12.x2, RM27 million. The economic life of the property was determined as 20 years. HQ Bhd has adopted the fair value model. Required: Discuss the accounting treatment for HQ Group. The financial year end is 31 December. Illustration
HQ Bhd On 1.7.x1 the property can be classified as IP as only an insignificant portion of the property is owner-occupied. The asset is recognised at RM25 million On 31.12.x1 RM4 million (RM29m – RM25m) is recognised in income statement (gain). On 31.12.x2 RM2 million (RM29m – RM27m) is recognised in the income statement as a loss. Solution
HQ Group The asset does not qualify as IP and is accounted for under FRS 116 PPE In CFS the building has to be depreciated. Either cost model or revaluation model may be chosen depending on the HQ Bhd’s accounting policy Cont.
FRS 140 allows transfers to/from IP only when there is a change in use evidenced by: commencement of owner-occupation: IP to OOP commencement of development with a view to sell: Inventories to IP end of owner-occupation: OOP to IP commencement of an operating lease to another party: Inventories to IP end of construction or development: Under construction to IP Transfer
Example 3 JL&HCC, FRSM, 2nd edition, p.547 PQ Bhd has an investment property which is carried at fair value. The fair value as at 1.1.x4 was RM48 million and its remaining life on that date was 20 years. On 1.7.x4 PQ Bhd decided to convert the investment property to owner-accupied property. The fair value on that date was RM50 million. PQ will adopt the revaluation model and the property’s fair value on 31.12.x4 was RM57 million. Year end is 31 December. Required: Discuss the accounting treatment. Illustration
PQ Bhd On 1.7.x1 the IP was transferred to OOP at RM50m. RM2m (RM50m – RM48m) will be recognised as income in the income statement The deemed cost for OOP is RM50m and it is depreciated for 6 months. Depreciation charge: RM1.28m = RM50m/19.5 years x 6/12 Solution
The carrying value of OOP as at 31.12x4 will be RM48.72m and the fair value RM57m RM8.28m (RM57 – RM48.72m) is credited to revaluation reserve. On 31.12.x5, the property is depreciated based on RM57m spread over the remaining life of 19 years of RM3m. RM8.28m/19 years = RM433,789 is transferred from revaluation reserves to retained profits Cont.