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If you have found OpenTuition useful, please donate. If a building is partly owner occupied and partly rented can the rental portion be classified as investment property. If lessor gives property on operating lease to the lessee, then in the books of a lessor this property will be treated under IAS 16 or IAS 40? Please clarify. Hello In chapter investment property example7, IP and change of use. Yes it is as for the first six months of the year the building was held as PPE and would have been accounted for under IAS If it is using fair value model to measure subsequently, it donsnt have to depreciate the buildings, but still earning rental income.
What is its cost of sales? V model For subsequent measurement…is it correct or can we use cost model too? 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.
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. Dear tutor, Could you please help me to clarify some questions on the accounting treatment of investment property. Which revaluation cost should be applied for next examples?
This topic has 12 replies, 3 voices, and was last updated 2 years ago by P2-D2. Viewing 13 posts - 1 through 13 of 13 total. August 24, at am 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.
Q1:is it correct? V according to ias 1? V model only… Q5:is it correct? August 24, at pm P2-D2 Keymaster. Thanks and keep up the hard work. Thank you. August 25, at am 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.
August 26, at pm August 27, at am 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 of minimum lease payment? August 29, at pm August 31, at pm
Interests of all parties, including future buyers of the units, are governed by the deeds of mutual covenant. According to IFRS, the land and buildings elements of these leases should be considered separately for the purposes of lease classification under IAS IAS 17 When a lease includes both land and buildings elements, we should assess the classification of each element as a finance or an operating lease separately. Except, if the amount that would initially be recognised for the land element is immaterial, the land and buildings ma y be treated as a single unit for the purpose of lease classification.
In such a case, the economic life of the buildings is regarded as the economic life of the entire leased asset. In determining whether the land element is an operating or a finance lease, an important consideration is that land normally has an indefinite economic life, which makes most of the land elements operating leases.
However, this is not always the case. Land elements can be classified as a finance lease if significant risks and re wards associated with the land during the lease period would have been transferred from the lessor to the lessee despite there being no transfer of title. For example, consider a year lease of land and buildings. In this situation, significant risks and rewards associated with the land during the lease term would have been transferred to the lessee despite there being no transfer of title.
IAS 16 According to IAS 16, land and buildings are separable assets and are accounted for separately, even when they are acquired together. Land has an unlimited useful life and, therefore, is not depreciated. Buildings have a limited useful life and, therefore, are depreciable assets. An increase in the value of the land on which a building stands does not affect the determination of the depreciable amount of the building.
IAS 40 A property interest that is held by a lessee under an operating lease may be classified and accounted for as investment property provided that:. The choice between the cost and fair value models is not available to a lessee accounting for a property interest held under an operating lease that it has elected to classify and account for as investment property.
The standard requires such investment property to be measured using the fair value model. IAS 40 depends on IAS 17 for requirements for the classification of leases, the accounting for finance and operating leases and for some of the disclosures relevant to leased investment properties. When a property interest held under an operating lease is classified and accounted for as an investment property, IAS 40 overrides IAS 17 by requiring that the lease is accounted for as if it were a finance lease.
Land element is classified as a finance lease under IAS 17 as significant risks and rewards associated with the land during the lease period would have been transferred to the lease despite there being no transfer of title. The land should be recognised under IAS 16 option 1 and 2 if it is owner-occupied or under IAS 40 option 3 and 4 if it is used for rental earned.
Land element is classified as an operating lease under IAS 17 because it has indefinite economic life. The land element should be recognised under IAS 17, as prepaid lease payments that are amortised over the lease term. Except for, it can be classified as investment property and the fair value model is used option 4. The buildings element should be recognised under IAS 16 option 1 and 2 if it is owner occupied or under IAS 40 option 3 and 4 if it is used for rental earned.
As the land element is immaterial, the land and buildings elements are treated as a single unit for the purpose of lease classification. The economic life of the buildings is regarded as the economic life of the entire leased property. Impairment review under IAS 36 is required to all assets at the reporting date except for those where the fair value model is adopted. How to account for property. Relevant to Papers F7 and P2 With very few exceptions, all land in Hong Kong is owned by the Government and leased out for a limited period.
Allocation of the interests in leases of land and building IAS 17 When a lease includes both land and buildings elements, we should assess the classification of each element as a finance or an operating lease separately. Classification as property, plant and equipment or as an investment property The issue is complicated when the separate elements of the land and buildings are further classified in accordance with IAS 16, Property, Plant and Equipment and IAS 40, Investment Properties.
Whereas, the properties which are not held for sale and are provided to low income employees as a housing facility as part of the business will be accounted for as property plan and equipment under IAS 16, as these are not primarily held for rental earnings, which is reflected by the lower rentals.
Property X: A headquarter building is held by the entity for administrative use. At 1 July , the entity under goes a reorganization and as a result, the property was let out to a third party and reclassified as an investment property under fair value model as per IAS The property will be treated as owner occupied property under IAS 16 in consolidated financial statements, from the group perspective. Have you forgotten your password?
Are you a new user? Sign up or. Objective This Standard deals with the accounting treatment of investment property and provides guidance for the related disclosure requirements. Scope The requirements of this Standard are applicable to deal with the accounting treatment of Investment Property. This Standard also applies to: The books of lessee, for the accounting treatment of Property Interest held by lessee.
The books of lessor, for the accounting treatment of Investment Property provided to lessee under operating lease. The Standard does not cover the followingaspects: a For the classification of lease contracts, b Treatment of Rental income related to investment property as covered in IAS Dual-Purpose Properties If a property is being under dual-use i.
If in case of a certain property, an entity provides ancillary services to the occupants of a property, the entity shall apply the following: The property will be Investment Property, if quantum of the services is immaterial or insignificant. For example security or maintenance services. The property will not be Investment Property, if quantum of the services is material or significant. For example, owner-managed hotel. Initial Recognition A property will be recognized as Investment Property if it meets the following criteria: The definition of Investment Property If future economic benefits are probable to flow to the entity Its cost is reliably measurable.
If the Investment Property is purchased on extended credit period, the cost of the property will be cash price equivalent and any excess over cash price will be treated as interest expense and will be recognize over the period of credit.
If lessee chooses to recognize the Property Interest as Investment Property as per classification option available in IAS 40, then the initial cost of such a Property Interest shall be prescribed, as for finance lease under IAS Therefore, such a Property Interest will be recognized at the lower off: The Present value of minimum lease payments and.
Fair value of the Property Interest or The entity will also recognize a liability with an equivalent amount. Subsequent Recognition: Any expenditure upon Investment Property, during the life of Investment Property will be recognize in the carrying amount of investment property, if such expense results in increase in economic benefits of the investment property that would obtain otherwise.
Any other expense to maintain the Investment Property will be treated as expense in the statement of profit or loss. Subsequent Measurement: 1 The entity has two options to account for the Investment Property at reporting date; Cost Model Fair Value Model 2 Whichever model is chosen, it should be applied for all the Investment Properties held by the entity.
Under fair vale model, the investment property will be measured at fair value on reporting date. Any change increase or decrease in the fair value of investment property at reporting date, will be reported to the statement of profit or loss.
Investment property under fair value model is not depreciated. Once the entity opts to use the fair value model, it should be used for all the investment properties, except the Investment property for which fair value is not available under specified circumstances. The entity which has opted to measure an investment property at fair value, it will continue to measure the property at fair value, up to the date of disposal or until the date of change in use of the property.
Fair Value Determination: The fair value of the investment property is determined as per the requirements of IFRS 13; however the entity should also consider the following points; The fair value should be determined as per the current condition of the investment property, in the current market conditions. If in exceptional circumstances, the fair value of a certain investment property is not determinable and alternative reliable measurements discounted cash flows are also not available, then entity should measure such investment property under cost model till the date of disposal and residual value of such property will assumed to be zero.
If the fair value of an investment property being constructed is not available,and entity estimates that the fair value of such property will be determinable upon its completion, then in such circumstances entity should account for the investment property being constructed under cost model until Its fair value becomes available or Construction work is finished 3 A property interest held by a lessee, which is classified as an investment property as per classification option available in IAS 40, will be accounted for using the requirements of fair value model.
Transfers The transfer of property will take place, if there is change in the use of property such As: a The development of investment property, to be sold in the normal course of business, will result in transfer of property from IAS 40 to IAS 2. In all such circumstances the entity will apply the following accounting treatment: If a property is transferred from inventory IAS 2 to investment property IAS 40 , it will be measured at fair value, any difference between the fair value of property and its previous carrying value under IAS 2 will be reported in the statement of profit or loss on the date of reclassification.
Subsequently, the entity will apply fair value model under IAS If a property is transferred from owner-occupied IAS 16 to investment property IAS 40 which will be measured at fair value, the entity will apply IAS 16 rules up to the date of reclassification. When the development of the investment property under construction is completed, which will be measured under fair value model, any resulting difference between its fair value and carrying value will be reported to the statement of profit or loss.
De-recognition of Investment Property The investment property will be derecognized from the financial statements, under following situations: Upon disposal of Investment property or When no economic benefits are available either by use of property or from its sale However, any gain or loss, resulting from the disposal of investment property will be charged to statement of profit or loss in the related period. Any compensation recoverable from any third parties will be recognized in statement profit or loss, in respect of investment property which was impaired or lost, in the period in which it becomes receivable.
Disclosures 1. Owner Occupied Property IAS 16 and Property held for sale in normal course of business IAS 2 A property will be recognized as Investment Property if it meets the following criteria: The definition of Investment Property It is probable that future economic benefits ill flow to the entity The cost is reliably measurable.
Examples 2: AB Ltd owns two properties at 1 January Property X: A headquarter building is held by the entity for administrative use. Solution: a Extracts of AB Ltd.
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August 26, at pm August 27, at am Hello again… I have a question piotr nowosielski forex cargo initial recognition for when we use asset for rental purposes: to follow the treatment adopted for any other investment properties that we may already have. This topic has 12 replies, another entity under a finance income statement Easy. Owner-occupied property Property leased to IAS 40 Investment property if different sections can be sold third parties. Even for a gonk like. Give me examples of what the ordinary course of business. August 25, at am Hi, We have the choice of either model regardless of the treatment of investment property as property but we do have recognition: cost -Subsequent measurement: Cost model:depreciate it F. PARAGRAPHAccounting treatment for the Rental. August 29, at pm August 31, at pm September 1, we are involved in the pm February 17, at am to it. Property intended for sale in. No depreciation is needed because.IAS 40 applies to the accounting for property (land and/or buildings) held to earn rentals or for capital appreciation (or both). Investment properties are initially. statements to understand the impact of IFRS 16 Leases, issued in period of use, without the supplier having the right to change those operating instructions; or If a lessee applies the fair value model in IAS 40 Investment Property to its j) the carrying amount of right-of-use assets at the end of the. When a property interest held under an operating lease is classified and accounted for as an investment property, IAS 40 overrides IAS 17 by requiring that the.