I N V E S T M E N T P R O P E R T Y
...nvestment property acquired through replacement, eg. Partitioning, doors, windows etc. The replacement costs are taken up in carrying amount as incurred, however, the cost of items being replaced are derecognised Start-up costs, unless its necessary to bring the property to the level where it could provide "investment" returns, i.e. a state of tenantable condition Operating losses incurred before the investment property achieves its planned level of occupancy Abnormal amounts of wasted materials, labour or other resources incurred in constructing or developing the property Measurement after Recognition Once an entity has chosen its accounting policy of recognition, it will have to apply that model i.e. Fair Value or Cost model to all its investment property, with exceptions as stated in paragraphs 32A and 34 of the Standard. However, on sale of an investment property, the fair value of the property at that date becomes its cost, at which the sale/purchase transaction effects. What is Fair Value? As defined by the Standard, Fair value is the amount at which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction. Fair value excludes an estimated price inflated or deflated by special terms or circumstances such as atypical financing, sale and leaseback arrangements, special considerations or concessions granted by anyone associated with the sale. This means that fair value is determined without deducting any transaction costs for the sale or disposal of investment property. THE "FAIR VALUE" MODEL Once this model is chosen for measurement of investment property, the entity will have to measure all of its investment property under this model. Fair value is based on market conditions, therefore at the reporting date, the Fair value should be assessed on current market basis. Any gain or loss arising from a change in fair value of investment property shall be recognised in profit or loss for the period in which it arises Considerations taken into account when valuing an investment property on "fair value" basis: a.) what is the price of a similar property in the same location with similar lease contracts Example: Property A and Property B are commercial properties, identical in structure, and built in the same year. Both properties are located in the main street of an urban centre with Property A having 5 year lease contract (furnished), at a rental income of $5,000 per month fixed for the initial 3 years. The property was purchased in July 2003 at $300,000 principal, with interest and other costs amounting to $45,000. Current market value (July 2005) of the property is determined at $450,000. Accordingly, if property B 's fair value is to be determined in July 2005, it would be $450,000. b.) variations allowed to (a) above, would include: same type of property in a different location, with same or difference lease contracts, and supplementary conditions attached, for example: Property A's details as in example (a) above. Property B is identical to property A in structure, however, is located on the corner of two roads, in a sub-urban centre and has 3 year (renewable) lease contract at 6-monthly fixed rate rental (July-Dec at one rate determined on commencement of contract, then Jan-Jun at a rate determined in Dec., and so forth). Property B has a clear view of the Bay area, and is in walking distance to the major hospital and university. In determining property B's fair value at the current date, the entity will have to consider the given factors and make cost adjustments to reflect market conditions for a fair value of the property. Assets of an entity are not recognised separately if they form part of the investment property, for example: a.) Equipment such as air conditioning, fans, lifts etc. installed in an investment property form an integral part of it, therefore will be included in the fair value of the investment property, and will not be recognised separately as Property, Plant & Equipment. b.) If the lease contract includes furniture, then the fair value of the furniture would be recognised with the investment property rather than valued separately c.) Fair value of an investment property does not include prepaid or accrued lease income. It is separately recognised as a liability or asset. d.) Future capital investments in an investment property has no effect on determining the fair value of the investment property at a current reporting date. Future expenditure will be considered in future. Inability to Determine Fair Value Reliably An entity can reliably determine the fair value of an investment property on a continuing basis. However, in exceptional cases, there is clear evidence when an entity first acquires an investment property that the fair value of the investment property is not reliably determined on a continuing basis, this also applies to an existing property first becomes an investment property following the completion of construction or development, or after a change in use. Only when comparable market transactions are infrequent an entity shall measure that investment property using the Cost model in AASB116. The residual value of the investment property shall be presumed to be zero. COST MODEL An entity that chooses Cost model shall measure all of its investment property in accordance with AASB 116’s requirements. The cost model specified in AASB 116 Property, Plant and Equipment under which an investment property is measured after initial measurement at depreciated cost. TRANSFERS Transfer to, or from investment property can be made when there is a change in use and evidenced by: a) commencement of owner-occupation b) commencement of development with a view to sale c) end of owner-occupation d) commencement of an operating lease to another party e) end of construction or development For example: When an entity decides to dispose an investment property without development, it continues to treat the property as an investment property until it is derecognised a. In the cost model, transfer between investment property, owner-occupied property, and inventories does not change the carrying amount of the property transferred and the cost of property for measurement or disclosure purposes. b. For a transfer from investment property carried at fair value to owner-occupied property, the property’s deemed cost shall be at its fair value at the date of change in use in accordance with AASB 116 c. When an owner-occupied property becomes an investment property, which are carried at fair value, an entity shall apply AASB 116 up to the date of change in use. d. For transfers from inventories to investment property that carried at fair value any differences between the fair value of the property at that date and its previous carrying amount should be recognized in profit or loss. DISPOSAL An investment property shall be derecognised on disposal when the investment property is permanently withdrawn from use and no future economic benefits are expected from its disposal. The disposal of an investment property may be by sale or by entering into a finance lease. 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 AASB 117 requires otherwise on a sale and leaseback) in the period of the retirement or disposal. Compensation from third parties for investment property that was impaired, lost or given up shall be recognized in profit or loss when compensation becomes receivable. DISCLOSURE Fair Value Model and Cost Model In accordance with AASB 117, the owner of an investment property provides leaser’s disclosures about lease into which it has entered. An entity shall disclose: a) whether it applies the fair value or the cost model b) if applies to fair value, whether and in what circumstances property interest held under operating lease are classified and accounted. c) When classification is difficult, the criteria it uses to distinguish investment property from owner-occupied property. d) The methods and significant assumptions applied in determining the fair value of the investment property. Include a statement whether the determination of the fair value was supported by market evidence or based on other factors. e) The extent to which the fair value of investment property is based on a valuation by an independent valuer. f) The amounts recognized in profit of loss, eg. Rental in...