Investment Property - Nelson CPA

1 1 2005-13 Nelson Consulting Limited1 LAM Chi Yuen Nelson MBA MSc BBA ACA ACS CFA CPA(US) CTA FCCA FCPA FCPA(Aust) FHKIoD FTIHK MHKSI MSCAI nvestment Property ( ias 40 )30 May 2013 2005-13 Nelson Consulting Limited2 After crediting:Fair value changes oninvestment properties6,1092,960 (10,831)8,564(7,468)For year ended 30 $ MTurnover2,434 Gross profit1,865 Profit before tax10,1142011HK$ M5282833,625 Cases First ..Case2010HK$ M2,6711,351(8,715)2009HK$ M2,15193110,2232008HK$ M1,265985(2,961)179%Loss to profitProfit to lossLoss to profit2 2005-13 Nelson Consulting Limited3 Today s AgendaAmendments to IAS 12 Income Tax: Recovery of Underlying AssetIAS 40 Investment PropertyIFRS 13 Fair Value Measurement 2005-13 Nelson Consulting Limited41. Scope ias 40 shall be applied in the recognition, measurement and disclosure of Investment Property .

2 However, ias 40 does not deal with matters covered in IAS 17 Leases, including:a) classification of leases as finance leases or operating leases;b) recognition of lease income from Investment Property (see also IAS 18 Revenue);c) measurement in a lessee s financial statements of Property interests held under a lease accounted for as an operating lease;d) measurement in a lessor s financial statements of its net Investment in a finance lease;e) accounting for sale and leaseback transactions; andf) disclosure about finance leases and operating 2005-13 Nelson Consulting Limited5 Investment Property is Property (land or a building or part of a building or both) held(by the owneror by the lesseeunder a finance lease) to earn rentals or for capital appreciationor both, rather than for a) use in the production or supply of goods orservices or for administrative purposes; orb) sale in the ordinary course of business2.

3 DefinitionsExamples of Investment Property under ias 40 include:1. Property leased out under operating leases2. Property held for long-term capital appreciation3. Property held for a currently undetermined future use4. Vacant Property to be leased out under operating leases 5. Property that is being constructed or developed for future use as Investment Property 2005-13 Nelson Consulting Limited62. Definitions In order to classify a Property as Investment Property , an entity has to ensure that the Property can fulfil both:1. The mode of usage (either to earn rental and/or for capital appreciation), and2. The mode of ownership (either owned or held under a finance lease).Mode of UsageMode of Ownership4 2005-13 Nelson Consulting Limited72. Definitions Mode of Usage ias 40 has contrasted an Investment propertywith an owner-occupied Property .

4 An owner-occupied Property is not an Investment Property , but should be a Property under IAS 16, Property , Plant and Equipment(see Chapter 3) is defined as Property held (by the owner or by the lessee under a finance lease) for use in the production or supply of goods or services or for administrative purposes. Mode of Usage 2005-13 Nelson Consulting Limited8 Mode of Usage2. Definitions Mode of UsageRefer back to IAS 16 for definition of Property , plant and equipment Property , plant and equipment are tangible items that:a) are held for use in the production or supply of goods or services,for rental to others, or for administrative purposes; andb) are expected to be used during more than one PropertyOwner-occupied PropertyBoth for rental, how to distinguish?For example, how to distinguish: A flat leased out for rental A hotel5 2005-13 Nelson Consulting Limited92.

5 Definitions Mode of Usage Comparing with the definition of Investment Property that has the term to earn rental , the definition of Property , plant and equipment also has a similar term held .. for rental to others . In order to distinguish them, an entity can consider a Property from two correlated aspects:1. The generation of cash flows, and2. The significance of ancillary FlowExtent of Ancillary Services Mode of Usage 2005-13 Nelson Consulting Limited10 Mode of Usage2. Definitions Mode of Usage One of the key indicators in determining the classification between Investment Property and owner-occupied propertyCash Flow held to earn rentals or for capital appreciation or both therefore, generates cash flows largely independently of the other assets held by an entity. the production or supply of goods or services (or the use of Property for administrative purposes) generates cash flows that are attributable not only to Property , but also to other assets used in the production or supply process Investment PropertyOwner-occupied property6 2005-13 Nelson Consulting Limited11 Investment PropertyOwner-occupied propertyAncillary services not significantSignificant ancillary Significant ancillary services provided2.

6 Definitions Mode of Usage Investment propertyIf owner-managed hotel was classified as Investment Property before, it should be reclassified as Property , plant and equipment(IAS 16) or lease(IAS 17) Significant impact on hotel groupCash FlowExtent of Ancillary Services provided by an entity to the occupants of a Property it holds is also consideredowner-occupied Property a owner-managed hotel is not an Investment propertyMode of Usage 2005-13 Nelson Consulting Limited122. Definitions Mode of Usage It may be difficult to determine whether ancillary services are so significant that a Property does not qualify as Investment Property for example, there may be a spectrum from one end to another: Then, judgement is required to determine Entities should develop consistent criteriafor use in exercising the judgementAncillary services not significantSignificant ancillary Significant ancillary services providedPassive investor Investment Property Use ias 40 Significant exposure to variation in the cash flows Owner-occupied Use IAS 16 How to determine those in between these 2 ends?

7 Significant impact on hotel groupMode of Usage7 2005-13 Nelson Consulting Limited132. Definitions Mode of Ownership To meet the definition of Investment Property , a Property must be owned by an entity or held by an entity under a finance lease Implies that a Property interest held by a lessee under an operating lease cannot be classified as Investment Property since such Property interest is neither owned nor held by a lessee under a finance lease. Mode of Ownership 2005-13 Nelson Consulting Limited142. Definitions Mode of Ownership ias 40 amended in December 2003 to allow that a Property interest that is held by a lessee under an operating lease may be classified and accounted for as Investment Property if, and only if:1. The Property would otherwise meet the definition of an Investment Property and2.

8 The lessee uses the fair value model in accordance with ias 40 for the asset recognised. This classification alternative is available on aproperty-by- Property basis However, once this classification alternative is selected for one such Property interest held under an operating lease, all propertiesclassified as Investment Property shall be accounted for using the Fair Value ModelMode of OwnershipAn entity has a choice8 2005-13 Nelson Consulting Limited15 Mode of UsageExamples that are NOT Investment Property include:1. Owner-occupied property2. Property (completed or under development) intendedfor sale in the ordinary course of business3. Property being constructed or developed for third parties4. Property leased out under finance lease5. Property that is being constructed or developed for future use as Investment property2.

9 Definitions Mode of Ownership6. How s the classification for existing investmentproperty being redeveloped for continued futureuse as Investment Property ?Still Investment PropertyExampleWhich IAS? IAS 16 & 17 IAS 2 IAS 11 IAS 17 IAS 16 & 17 Still Investment Property 2005-13 Nelson Consulting Limited162. Definitions Mode of Ownership GV Inc. has three properties in Hong Kong and overseas and uses them to earn rental. Except for Property C which is owned by GV, the other 2 properties, Property A and B are held by GV under operating leases. Evaluate the accounting implication of ias 40 on GV s 2005-13 Nelson Consulting Limited17 Property C meets the definition of Investment Property under ias 40 and GV must use ias 40 to account for it. Property A and B do not meet such definition since they are neither owned nor held by GV under a finance lease.

10 However, GV has a classification alternative under ias 40 to choose to account for either Property A or B (or both) as Investment Property . In consequence, GV can consider the following alternatives: If either Property A or B (or both) are not accounted for under ias 40 as Investment Property , GV will be required to use the fair value model in accordance with ias 40 to account for all properties classified as Investment Property , including Property C and Property A and/or B. The Property not classified as Investment Property should be accounted for by using IAS 17 Leases. If both Property A and B are not classified as Investment Property , GV will be required to account for Property A and B as a lease under IAS 17 and will choose between cost model and fair value model in accordance with ias 40 to account for Property Definitions Mode of OwnershipExample 2005-13 Nelson Consulting Limited182.