#1CAT CHARREDACCOUNTS OF AL CA THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Investment property - LKAS 40#2CAT THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Investment property ABC Company OFFICE Use as its own office premises PPE XYZ Company Leased out to third parties Balance sheets of the companies Difference in Characteristics IP CALKAS 40: Overview THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Objective Scope Definition Recognition Measurement at initial recognition Measurement subsequent initial recognition Fair value model Cost model Transfers Disposals and derecognition Disclosures 4 3#3CALKAS 40: Objective THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Set out the requirements for the accounting treatment and disclosures for investment property (IP) CA T THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Scope - Includes: Property held for capital appreciation or to earn rentals, where the property is owned by the entity or held by it under a lease Property leased out by the entity under an operating lease Excludes: Does not deal with other aspects of leased property dealt with in LKAS 17 - Biological assets (IAS 41) Mineral rights and mineral reserves such as oil, natural gas similar non-regenerative assets 6 5#4CAT THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Definition Property (land or 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 for: (a) Use in the production or supply of goods or services or for administrative purposes; or (b) Sale in the ordinary course of the business CAT CA Definitions THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Property held by a lessee under an operating lease May be as an IP, a lessee under an operating lease, if and only if: Rest of the definition of IP is met Lessee uses 'Fair value" (FV) model in LKAS 40 The asset should be recognized at the lower of the FV of the property and PV of minimum lease payments 7 ? 8#5CAT THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Definitions Example Star Hotels Company owns a hotel that it leases out under an operating lease to a hotel management group. The hotel is situated on a land leased by the government to the entity under 99 years lease agreement and no transfer of title to the entity at the end of the lease. The hotel building's useful life is expected to be approximately 40 years. There are no provisions in the lease to return the land with the building intact at the end of the 99 year lease. Land • Operating lease (LKAS 17) Investment property - only if it meets the definition of IP and the entity has chosen the FV model Building Meets the definition of investment property (LKAS 40) CAT THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Definitions 9 Owner-occupied property Property held by the owner (or by a lessee under a finance lease) for use in the production of supply of goods or services or for administrative purposes. Does not generate cash flows independently of the other assets of the entity 10#6CATA THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Examples of Investment property • LAND UNDER CONSTRUCTION • • Held for long-term appreciation in value Land whose future use has not been determined (assumed for capital appreciation) • . Owned or held under finance lease and leased out under an operating lease Vacant building, but held to be leased out Being constructed or developed for future use as investment property CAT THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA What are not investmenr properties? PROPERTY FOR SALE • • Ordinary course of business ;or for development and resale UNDER CONSTRUCTION Owner occupied property Third parties Property occupied by employees Property leased under a finance lease 11 12#7CA T THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Investment property Owner occupied Held for rental income / capital appreciation Can be sold out separately / separately leased out under finance lease LKAS 16 CA T THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Investment property Significant LKAS 16 LKAS 40 Owner occupied Held for rental income/capital appreciation Cannot be sold out separately / leased out under finance lease Insignificant LKAS 40 13 14#8T CA Investment property – Group level THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Group of companies One group entity leases property to another group entity Investment property at the entity level At the consolidation level - PPE (LKAS 16) From the group's point of view - Owner occupied Property leased to an associate / JV - IP CAT THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Investment property? Scenario Yes / No Property 'Mount' - a block of flats being developed and intended for sale in the ordinary course of business No Property 'Soon' - Entity A constructs an office block which will be used as offices by Entity A on completion No Property "Green" - an office block owned by an entity within the group and leased to an associated company Yes A plot of land held for a currently undetermined future use Yes A property acquired for a capital appreciation but used by No Entity as its head office 15#9CA T THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Consolidation financial statement Entities D, E and F are all subsidiaries of 'Duo' group. Which property should be classified as IP in the consolidated financial statements of Duo Group Property Yes/No An office block owned by Entity F and leased under an operating lease to Entity D who subleases it to an associated company under LKAS 28 Yes An oilfield owned by Entity E and leased to a third party under an operating lease No A dockyard complex owned by Entity D and leased to a third party under an operating lease. Entity D manages the operation of the offloading and transportation infrastructure within the complex No CA THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Consolidation financial statement Which item may be classified as IP in the consolidated financial statements of a group? Property Yes/No Land and buildings held under a finance lease and sublet to a subsidiary company which uses it for administrative purposes No An interest in a holiday complex held under an operating lease that is sublet to and managed by a third party Yes Land and building held under an operating lease and sublet to an entity within the same group which uses it as its head office No 18#10CATA THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Recognition Recognition principles are similar to those for all other assets When it is probable that future economic benefits associated with the property will flow to the entity and the cost of the property to the entity can be reliably measured Considering all costs incurred relating to investment property, both costs incurred initially to acquire IP and subsequent costs incurred. Subsequent cost: Costs of servicing and maintenance >Whether these costs add economic benefits? CA TA THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Example Recognition ➤ Mega Ltd develops office buildings for rental. Subsequent to completion of a building it incurs expenses such as security, utilities and marketing that must be incurred before the building has secured a reasonable level of occupancy. The usual time between the building's completion and securing a reasonable number of tenants is approximately 3 months How to treat these expenses? Should be expensed as incurred and relate to maintaining the building and attracting the tenants 19 20#11CAT THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Recognition Example Bee Ltd acquired a property that required renovation. This was considered in agreeing the price for the property. Subsequently, cost of Rs 10 million was incurred by Bee Ltd for the renovation work How to recognize renovation expenses? Should be capitalised Additional future benefits, can be reliably measured 21 TA CA Measurement at initial recognition THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Owned property Initially at cost ◆ Purchase price Directly attributable expenses The following costs cannot be capitalised: Costs relating to market studies undertaken before the purchase of property Internal indirect costs (in-house lawyer's expenses) Start-up costs (unless they are necessary to bring the property to the condition necessary...) Operating losses incurred before the IP achieves its planned level of occupancy Abnormal costs 22#12CA Measurement at initial recognition THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Property held under a lease LKAS 40 sets out the accounting for IP that is held under a finance lease. If required criteria are met for an operating lease to be considered as IP - accounted for as if it is a finance lease Initial cost-LKAS 17 A finance leased asset should be recognised at the asset's fair value or, if lower, at the present value of the minimum lease payments Equivalent amount is recognised as a liability T CA Questions THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Hand-out 1 Questions 1 & 2 23 24#13CA Answers THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Question 1 Costs Payable on acquisition PV of future payment Directly attributable - refurbishment & redevelopment Borrowing costs Cost to be capitalized as Investment property Rs million 52 48 50 5 155 Purchase price and directly attributable costs T CA Answers THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Question 2 Costs Rs million Cost of acquisition of property 160 Demolition and site preparation 15 Construction costs (excluding Rs 12 million 168 labour cost) Cost to be capitalized as Investment 343 property 25 26#14CA Subsequent measurement THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Fair value model Operating leases classified as "IP" - no option, must apply FV External valuer - encourages, not required CA Fair value model THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Cost model Shall disclose the FV 27 FV reflects rental income from current leases and other assumptions that market participants would make about future rental income based on current condition Fair Value - SLFRS 13 the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date" Rebuttable presumption that FV can be measured reliably 28#15CA Fair value model THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Assets and liabilities that are separately recognised in the balance sheet should not be double-counted (Integral plant and equipment such as lifts or air conditioning) Fully furnished office is leased - furniture is included in the FV Gains and losses - profit or loss for the period 29 CA Fair value model - Exceptions THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Investment properties under construction for which the FV cannot be reliably measured at present, expects to measure at FV later Investment properties for which, in exceptional cases and on initial recognition only, the FV cannot be measured reliably on a continuing basis Use "Cost model" 30#16CA Cost model THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Should show Investment property at: Cost - accumulated depreciation – accumulated impairment losses Similar to cost model under LKAS 16 CA Transfers THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Should only be made when, and only when, there is a change of use Investment property Owner occupied property 31 If FV - Deemed cost for subsequent accounting At the commencement of owner occupation - PPE 32#17CA Transfers THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Investment property To be developed for sale If FV - Deemed cost (@ the date of transfer) for subsequent accounting At the date of commencement of development with a view to sale T CA Transfers THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Owner occupied When owner occupation ceases Investment property If at FV, LKAS 16 up to the date of transfer At the date of transfer - FV as per LKAS 16 33 34#18CA Transfers THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Property held as Inventory T CA Transfers THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Investment property If Fair Value to be applied: • Difference between FV and the previous carrying value at the date of transfer - P&L (sale of inventory) Transfer of investment property at cost model Will not change the carrying amount of property transferred No revaluation gains / losses No changes to the cost of the property for measurement and disclosure purposes 35 36#19CA Transfers THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Transfers do not take place • . • Investment property sold without development Investment property developed for continuing future use as investment property Property being developed for future use as an investment property T CA Disposals and derecognition THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA • Derecognise 37 When disposed Permanently withdrawn from use Gain/loss on disposal = Net disposal proceeds - carrying amount Gain / losses to be recognized in profit or loss 38#20CATA CA Demolition cost THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Example • A Ltd purchased a land with a building that is unusable for total consideration of Rs 200 million. The building is demolished after purchase and a new building will be constructed instead. . The total cost paid to a 3rd party to demolish - Rs 10 million. . • Both the land and the new building meet the definition of IP and A Ltd uses the cost model under LKAS 40. It is determined that any other market participant acquiring the land would demolish the current building ■ Building does not meet the definition of an asset (no economic benefits) The economic rationale behind the purchase was to acquire land rather than land and building ■ All consideration paid (Rs 200 million) should be allocated to the land ■ Demolishing cost - site preparation cost and would be capitalised CAT CA Disclosure THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Extensive disclosure requirements (in additional to IAS 1, for leased properties) FV model - disclosure requirements of SLFRS 13 and LKAS 40 • - Cost model fair value disclosure, 39 40#21CA Questions THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Hand-out 1 Questions 3, 4 & 5 T CA Answers THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Question 3 Property A Cost Model Property B FV Model Property C FV Model 41 42#22CA THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Question4 Answers Property A Total FV - Y/E 31/12/2015 Explanation 40 B (9) C D (6) 25 (140-100) Change in fair value Loss from the date of transfer Sold Loss on FV T CA Answers THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Question5 Property Balance (Rs million) Income/ (expense)- Rs million At 1/1/2015 258 Old furnishing derecognized (23) (23) Cost of new furnishing 62 Sub total 297 Fair value income (balance) 42 42 As at 31/12/2015 339 Net income reported within Profit / loss 19 43 44#23LKAS 40 - Investment property Questions Hand-out 1 Question 1 Jasmin (Pvt) Ltd acquired an interest in land and building for Rs 52 million payable on acquisition. Further Rs 60 million to be paid after 5 years. The present value of this is to be considered as Rs 48 million. Jasmin (Pvt) Ltd redeveloped the site into apartments for rental under operating leases and wishes to classify in its balance sheet as investment property. The following costs have been incurred: . • Directly attributed cost of refurbishment and redevelopment - Rs 50 million Labour cost paid during the site strike - Rs 3 million Rs 5 million interest on money borrowed to finance the redevelopment accruing over the construction period Costs of Rs 2 million incurred in the 3 months prior to the development becoming fully tenanted. What is the total cost to be recognized initially as investment property in the balance sheet of Jasmin (Pvt) Ltd? Question 2 Mount View (Pvt) Ltd acquired land and building at a cost of Rs 160 million (including Rs 10 million legal and other acquisition costs). It redeveloped the site into apartments for rental under operating leases and wishes to classify the development in its balance sheet as investment property. The following costs have been incurred: Demolition and site preparation - Rs 15 million Construction costs from a labour strike). Rs 180 million (including Rs 12 million for labour costs arising Additionally, Rs 5 million was received as income for a short period prior to construction when the site was used as a car park. What is the amount should be recognized initially as investment property in the balance sheet of Mount View (Pvt) Ltd?#24LKAS 40 - Investment property Questions Hand-out 1 Question 3 See View Ltd has interests in three investment properties: Property A- was constructed by See View Ltd - the fair value of this property is not reliably determinable on a continuing basis . - Property B It is held by See View Ltd under a finance lease; and · Property C is held by Sea View Ltd under an operating lease Assuming all three properties have been properly classified as investment property, which model should be used for the measurement of them after initial recognition Question 4 During the year ended 31 December 2015, an entity held interest in four investment properties at fair value. Relevant financial information is set out below: Property A B C D FV @ 1/1/2015 FV at transfer Proceeds of sale FV @ 31/12/2015 100 n/a n/a 140 98 89 n/a 80 210 118 n/a 218 n/a n/a n/a 112 During the year: . Property B became an owner occupied and was transferred to property, plant and equipment Property C was sold What amount should be included in profit or loss as the fair value change of investment properties for the year ended 31 December 2015? Question 5 Regent Ltd owns an investment property which leases on a furnished basis and account for it using the FV model. At 1 January 2015 the property had a carrying value of Rs 258million including Rs 23 million relating to furnishings. During 2015 Regent Ltd replaced the furnishings at a cost of Rs 62 million. At 31 December 2015 the fair value of the furnished property was Rs 339 million. What amount should be replaced within profit or loss for the year ended 31 December 2015 for this property?