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Hello dear tutor…
I hope that you are well…
I know that:
Investment property is a land or building OWNED but NOT used ie owned for one of the following purposes(or both):
1-capital appreciation(increase in F.V)
2-rental income(operating lease)I have some questions on accounting treatment of investment property as follows:
1-For capital appreciation:
-Initial recognition:@cost
-Subsequent measurement:
Cost model:depreciate it
F.V model:do not depreciate it-changes in F.V goes to sop&l.Q1:is it correct?
Q2:why should we depreciate it in cost model but donot depreciate it in F.V model?(in my opinion as we said it is NOT used in the definition so we shouldnt depreciate it in both method)
Q3:do we need a seperate line in SOP&L for changes in F.V according to ias 1?
Q4:if we use cost model for subsequent measurement,there will be no changes in F.V…so this doesnot meet our intenion?
2-for rental income(operating lease):
-initial recognition:@lower of F.V and P.V of minimum lease payment
-subsequent measurement:it is said that we can use F.V model only…Q5:is it correct?
Q6:does this part(use a building for operating lease to other) have the same accounting treatment to the accounting treatment of IAS 17 lease for lessor(as it seems initial recognition is the same)?
Q7:should we depreciate the asset use lower of economic life and lease term(as required by IAS 17)?if yes,so why we depreciate it(when it is not used as what it said in the definition)
I am sorry if i ask you many questions,but i have studied this standard from iasplus.com and your notes and these areas were really vague for me…
Thank you in advance
Q1. Yes we have a choice of model but most entities would adopt the fair value model and recognise gains/losses through profit or loss.
Q2. We do not depreciate it under the fair value method so that the treatment is similar to that for an investment in shares. If a business has spare cash available to invest in the short term it can either purchase shares or property, so it is ideal if the treatment is similar.
Q3. If the changes were material it would be disclosed separately, otherwise it doesn’t matter. It would usually go in an investment income category or similar.
Q4. If we use the cost model, there are still changes in the fair value as the value of property will go up and down over time. The fair value is disclosed in the notes to the accounts if we adopt the cost model. Our intention is still to hold th property for investment purposes, we;ve just decided to adopt an alternative accounting policy, which is probably much simpler to apply as we don’t’ need to establish a fair value each reporting date.
Q5. No. For an operating lease from the lessor perspective the entries are just the reverse of those for the lessee. So the lessor will DR Bank CR Rental income.
Q6. If we lease a building under an operating lease then it would be classified as investment property.
Q7. If it is investment property then we have the choice of policy as we’ve discussed above.
Don’t worry about all the questions. I hope I’ve answered them all for you and that you’re a bit clearer on your issues.
I didn’t write the original notes but am in the process of finishing an updated set of notes and videos.
Thanks and keep up the hard work.
Thank you for your helps…
It was excellent especially answer to Q2&4…so i have no problem with capital appreciation…But i have one more question about properties for rental purposes.:
I have studied some where that if it is for rental purposes, we should only use F.V model For subsequent measurement…is it correct(or can we use cost model too)?and if yes…so there is no depreciation as you said above?
Thank you
Hi,
We have the choice of either model regardless of the way we use the investment property but we do have to follow the treatment adopted for any other investment properties that we may already have.
There is never any depreciation charged if we use the fair value model.
Thanks
Hello again…
I have a question about initial recognition for when we use asset for rental purposes:
Should we recognise at cost initially or at lower of F.V & P.V of minimum lease payment?
Thanks
I am sorry…
I have studied the standard and found my answer:
Investment property is initially measured at cost, including transaction costs. Such cost should not include start-up costs, abnormal waste, or initial operating losses incurred before the investment property achieves the planned level of occupancy. [IAS 40.20 and 40.23]Thank you again…
Glad you found the information you needed. The measurement you refer to with regards the lower of FV and PVMLP is what the lessor initially recognises the leased asset held under a finance lease.
Thanks
Dear tutor,
Could you please help me to clarify some questions on the accounting treatment of investment property.
For example, we buy property 1st of November at market Value 100 USD, tax, legal fees and else related cost- 5USD.
so our initial cost will be 105USD.
company uses Faire value model.Which revaluation cost should be applied for next examples?
A) 31 of December market price for this property still 100USD (same as it was when we bought it)
B) 31 of December market price for this property still 105USD
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