Chapter 9 HKAS 40 Investment Property

1.      Objectives

1.1       Define an investment property (投資性房地產).
1.2       Explain the accounting treatment required by HKAS 40 in respect of investment property and the necessary disclosures.
1.3       Describe the recognition criteria for investment properties.
1.4       Describe the subsequent measurement under HKAS 40.
1.5       Outline presentation and disclosure requirements for investment properties.

2.      Definition

(A)      Investment property

2.1	DEFINITION
	Investment property is property (i.e. land and/or buildings) held to earn rentals or for capital appreciation or both, rather than for use or for sale in the ordinary course of business.

2.2       The following are examples of investment property:
(i)         land held for long-term capital appreciation rather than for short-term sale in the ordinary course of business.
(ii)        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.)
(iii)       a building owned by the entity (or held by the entity under a finance lease) and leased out under one or more operating leases.
(iv)       a building that is vacant but is held to be leased out under one or more operating leases.
2.3       The following items are not investment properties:
(i)         Owner occupied property. The property is being held for use (as a factory or office) and not for its investment potential. It should be accounted for under HKAS 16. Property occupied by another group company would come under this heading.
(ii)        Property held for sale in the normal course of business (e.g. a house builder) is inventories accounted for under HKAS 2.
(iii)       Property being constructed for third parties is accounted for as a construction contract under HKAS 11.
(iv)       Property being constructed or developed for future use as investment property. This will be accounted for as capital work in progress under HKAS 16 until the asset is finished and transferred to investment properties.

2.4

EXERCISE 1

Which of the following are investment properties? State which Standard applies to them. (a)        A field of land, purchased for its investment potential. (b)        A building occupied by a business as its head office, whose capital value is rapidly appreciating. (c)        A building which is surplus to requirements and is for sale. (d)        A building acquired under a finance lease for its investment potential.

Solution:

(B)       Dual use properties

2.4

Dual Use Properties

Some properties nay have a dual use, i.e. part of the property is used as investment property and part of the property is held for own use. HKAS 40 sets out requirements in respect of whether any part of a dual use property can be regarded as investment property. These requirements are that where properties have dual use, the investment property part will only be classified as investment property if one of the following conditions is met: (a)        the portions could be sold separately (or leased out separately under a finance lease); or (b)        the portion held for own use is an insignificant part of the property as a whole (in which case the whole property is classified as investment property).

2.5       This means, for example, that if 80% of the floor area is let out to tenants and 20% is used by the owners, and if the portion leased out could not be separately sold or let under a finance lease, the whole property will have to be classified as “own-use”, since 20% is not an insignificant amount.
2.6       No definition or guidance on the meaning of "insignificant" is given. In determining whether an amount is "insignificant" management should take qualitative factors into account as well as quantitative ones. For example, if the entity only retains the use of a basement to an office building, this may be regarded as insignificant, even though the same floor area might be regarded as not insignificant if it were prime office space in that building. However, management should develop criteria for determining "insignificant" to be applied objectively to each property when a portfolio of similar properties is held.

3.      Recognition

3.1	Recognition Criteria
	Investment property shall be recognised as an asset when, and only when: (i)         it is probable that the future economic benefits that are associated with the investment property will flow to the entity; and (ii)        the cost of the investment property can be measured reliably.

3.2       An entity evaluates under this recognition principle all its investment property costs at the time they are incurred. These costs include costs incurred initially to acquire an investment property and costs incurred subsequently to add to, replace part of, or service a property.

4.      Measurement

(A)      Measurement at recognition

4.1	Key Point
	An investment property shall be measured initially at its cost. Transaction costs shall be included in the initial measurement.

4.2       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.
4.3       The cost of a self-constructed investment property is its cost at the date when the construction or development is complete.
4.4       The cost of an investment property is not increased by:
(i)         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),
(ii)        operating losses incurred before the investment property achieves the planned level of occupancy, or
(iii)       abnormal amounts of wasted material, labour or other resources incurred in constructing or developing the property.
4.5       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 HKAS 17, i.e. the asset shall be recognised at the lower of the fair value of the property and the present value of the minimum lease payments.

(B)       Measurement after recognition

4.6       Under HKAS 40, there is a free policy choice made for the investment property as a whole between the cost model and the fair value model, with the exception of:
(i)         those investment properties that back liabilities which pay a return directly linked to the fair value of, or returns from, specified assets including that investment property. In this case, a separate fair value or cost policy choice can be made for this subset of investment property;
(ii)        those investment property which it is established when the property was first acquired that the fair value is not reliably determinable on a continuing basis. In this case the HKAS 16 cost model shall be used for that individual property until its disposal; and in all other cases;
(iii)       where an entity decides to account for any of its properties held under operating leases as investment property. In this case, the fair value model must be used for that lease and for all of the entity’s other investment properties, other than the two exceptions highlighted immediately above.

(a)       The cost model

4.7	Cost Model
	After initial recognition, an enterprise that chooses the cost model should measure all of its investment property using the benchmark treatment in HKAS 16 “Property, Plant and Equipment”, that is at cost less depreciation and impairment losses.

4.8       An enterprise that chooses the cost model should disclose the fair value of its investment property.

(b)       Fair value model (公允價值模式)

4.9	Fair Value Model
	Under fair value model, the initial recognition and measurement will still be at cost. Subsequent measurement will be at fair value. All gains and losses on revaluation will be reported in the income statement as part of the profit or loss for the period. Also, no depreciation is required to charge to profit or loss.

4.10     Fair value will normally be the market price. There should be no deduction for transaction costs.
4.11     Recognising gains and losses in the income statement is revolutionary. Previously, these gains were taken to reserves and not claimed as realized profits. The profit or loss on disposal of an investment property will be based upon the carrying value in the balance sheet.
4.12     Fair value will normally be obtainable by reference to current prices on an active market for similar properties in the same location. If no such market exists then the following values should be considered:
(i)         current prices on an active market for properties of a different nature, condition or location, adjusted to reflect those differences;
(ii)        recent prices in less active markets;
(iii)       discounted cash flow projections based on reliable estimates of future cash flows.
4.13     If it is impossible to measure fair value reliably, then the cost-based model should be adopted.
4.14     The adoption of the fair value model or the cost model will be a policy choice. Therefore, once either model has been chosen, any change from one to the other needs to meet the requirements of HKAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”. In particular, a voluntary change can only be made if it will result in a more appropriate presentation. HKAS 40 states that this is highly unlikely in the case of a change from the fair value model to the cost model.
4.14     HKAS 40 states that an entity is encouraged, but not required, to determine the fair value of investment property on the basis of 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.

(C)       Transfers

4.15     Transfers to or from investment property can only be made if there is a change of use. There are several possible situations:
(i)         Transfer from investment property to owner-occupied property.
Use the fair value at the date of the change for subsequent accounting under HKAS 16.
(ii)        Transfer from investment property to inventory.
Use the fair value at the date of the change for subsequent accounting under HKAS 2 “Inventories”.
(iii)       Transfer from owner-occupied property to investment property to be carried at fair value.
HKAS 16 (cost less depreciation) will have been applied up to the date of the change. On adopting fair value there will normally be an increase in value. This will be taken to the revaluation reserve in accordance with HKAS 16. If the fair value valuation causes a decrease in value, then it should be charged to the statement of comprehensive income.

The only exceptions to these treatments will arise if the property has previously been revalued upwards, when a decrease may be against the resultant revaluation surplus, or when an impairment loss has previously been recognized, when an increase may be recognized in the statement of comprehensive income.
(iv)       Transfer from inventories to investment property to be carried at fair value.
Any differences in the carrying amount will be recognised in the statement of comprehensive income.

 

5.      Disclosure Requirements

5.1       Enterprises using both the cost model and the fair value model should disclose the following amounts included in the income statement:
(i)         rental income
(ii)        operating expenses for investment properties
(iii)       restrictions on the realisability of investment property or the remittance of income and proceeds of disposal
(iv)       obligations to purchase, construct or develop properties.
5.2       Enterprises using the fair value model should also disclose:
(i)         methods and assumptions used in determining fair value
(ii)        the use of professional valuers
(iii)       additions and disposals during the period
(iv)       net gains or losses from fair value adjustments
(v)        transfers to and from investment property.
5.3       Enterprises using the cost model should disclose:
(i)         depreciation methods
(ii)        useful lives or depreciation rates
(iii)       movements on cost and depreciation during the year
(iv)       the fair value of the investment property (or an explanation of why it cannot be obtained).

The decision tree below summaries which HKAS apply to various kinds of property.