10/25/2012. Today s Agenda. Objective. MHM Executive Education Series: IAS 40 - Investment Property

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1 MHM Executive Education Series: IAS 40 - Investment Property Presented by: Keith Peterka Shareholder, Mayer Hoffman McCann P.C. October 25, 2012 Today s Agenda IAS 40 Investment Properties U.S. GAAP Project Status on Investment Properties Objective IAS 40 identifies what an investment property is, how it differs from property, plant and equipment (owneroccupied property); and what recognition, measurement and disclosure standards apply to investment properties. 1

2 What is an Investment Property? Investment property is property (land or a 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 than for: A. Use in the production or supply of goods or services or for administrative purposes; or B. Sale in the ordinary course of business. What is an Investment Property? Operating Lease Option Property held by lessee under operating lease may be classified and accounted for as investment property if: Property otherwise meets the definition of investment property, and Lessee uses the fair value model This classification alternative is available on a property-by-property basis. Investment Property Investment property is held to earn rentals or for capital appreciation or both. Therefore, an investment property generates cash flows largely independently of the other assets held by an entity. This distinguishes investment property from owner-occupied property. The production or supply of goods or service,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. IAS 16 Property, Plant and Equipment applies to owner-occupied property. 2

3 Investment Property or Not? Land held for long-term capital appreciation rather than for short-term sale in the ordinary course of business? Property acquired exclusively with a view to subsequent disposal in the near future or for development and resale? Land held for a currently undetermined future use? Property that is leased to another entity under a finance lease? Investment Property or Not? Land held for long-term capital appreciation rather than for shortterm sale in the ordinary course of business? Investment Property. Property acquired exclusively l with a view to subsequent disposal in the near future or for development and resale? Not Investment Property. Land held for a currently undetermined future use? Investment Property*. Property that is leased to another entity under a finance lease? Not Investment Property. Definitions Carrying amount is the amount at which an asset is recognised in the balance sheet. Cost is the amount of cash or cash equivalents paid Cost is the amount of cash or cash equivalents paid or the fair value of other consideration given to acquire an asset at the time of its acquisition or construction. 3

4 Definitions Fair value is 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. Owner-occupied property is 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. Investment Property - Recognition Investment property shall be recognised as an asset when, and only when: 1) It is probable that the future economic benefits that are associated with the investment property will flow to the entity; and 2) The cost of the investment property can be measured reliably. Investment Property - Recognition Investment property is recognized initially at cost applying the cost model of IAS 16 Property, Plant and Equipment including what is capitalized in cost and the principles p for non-monetary transactions. Leased investment property is measured according to IAS 17 Leases. 4

5 Investment Property - Recognition After initial recognition, an entity has a choice of methods to account for investment property: 1. Fair Value Model (FVM), or 2. Cost Model (CM) Must apply one model to all of its investment property (Accounting Policy Decision). Subsequent Measurement Fair value model (FVM): Assets are measured at fair value. Changes in fair value are recognized in profit or loss in period of change. No depreciation is recorded. Fair values continue to be used even if difficult to measure reliably. - Fair value is determined in accordance with IFRS An entity is encouraged, but not required, to measure the fair value of investment property on the basis of a valuation by an independent valuation professional who holds a recognized and relevant professional qualification and has recent experience in the location and category of the investment property being valued. Fair Value Measurement - Illustration Property is acquired on September 24, 2009 for $400K. Fair Value December 31, 2009 $350K Fair Value December 31, 2010 $390K Fair Value December 31, 2011 $410K 5

6 Fair Value Measurement - Illustration 2009 Loss on Investment Property $50K Investment Property $50K (400K 50K = 350K) 2010 Investment Property $40K Gain on Investment Property $40K (350K+40K = 390K) 2011 Investment Property $20K Gain on Investment Property $20K (390K+20K = 410K) Fair Value Model There is a rebuttable presumption that an entity can reliably measure 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 (or when an existing property p first becomes investment property p after a change in use) that the fair value of the investment property is not reliably measurable on a continuing basis. This arises when, and only when, the market for comparable properties is inactive (eg there are few recent transactions, price quotations are not current or observed transaction prices indicate that the seller was forced to sell) and alternative reliable measurements of fair value (for example, based on discounted cash flow projections) are not available. Fair Value Model If an entity determines that the fair value of an investment property under construction is not reliably measurable but expects the fair value of the property to be reliably measurable when construction is complete, it shall measure that investment property under construction at cost until either its fair value becomes reliably measurable or construction is completed (whichever is earlier). If an entity determines that the fair value of an investment property (other than an investment property under construction) is not reliably measurable on a continuing basis, the entity shall measure that investment property using the cost model in IAS 16. The residual value of the investment property shall be assumed to be zero. The entity shall apply IAS 16 until disposal of the investment property 6

7 Cost Model of Measurement Applies cost model described in IAS 16 Assets reported at cost less accumulated depreciation and accumulated impairment losses Depreciation expense recognized each period Transfers Transfers to, or from, investment property shall be made when, and only when, there is a change in use, evidenced by: A. Commencement of owner-occupation, for a transfer from investment property to owner-occupiedoccupied property. B. Commencement of development with a view to sale, for a transfer from investment property to inventories. C. End of owner-occupation, for a transfer from owner-occupied property to investment property; or D. Commencement of an operating lease to another party, for a transfer from inventories to investment property. Transfers Cost Model Cost Model From To Treatment PPE IP No change in cost Inventory IP No change in cost IP PPE No change in cost IP Inventory No change in cost 7

8 Transfers Fair Value Model IP at fair value From To Treatment PPE at cost IP Value IP at date of transfer in accordance with IAS 16 (revaluation) Inventory IP Change to P & L IP PPE No change in value IP Inventory No change in value Derecognition Derecognize Investment Property On disposal when sold or transferred under a finance lease, or On retirement when permanently removed from use and no benefits are expected from its disposal. Gains and losses on disposal generally recognized in profit or loss. Disclosures 8

9 US GAAP Investment Property In October 2011, the FASB proposed guidance that would have required entities that meet certain criteria to measure their investment properties at fair value through net income. The primary objectives of the project were: a. Align U.S. GAAP with IFRS in connection with the FASB and IASB s joint lease accounting project b. Narrow the diversity in practice related to accounting and reporting by certain real estate entities US GAAP Investment Property At the FASB s meeting on August 8, 2012, the Board discussed the next steps on its project on investment property entities. The FASB did not make a final decision on the path forward, and tentatively decided not to continue developing an entity-based approach for investment property. Questions? 9

10 Speaker Biography Keith Peterka, CPA Shareholder Mayer Hoffman McCann P.C With more than 19 years of experience in public accounting, Keith performs national firm responsibilities for IFRS, fair value accounting and auditing, revenue recognition and business combinations. He has also developed national training programs for accounting pronouncements and complex accounting topics. Keith is a subject matter expert for IFRS, SEC reporting and fair value accounting in MHM s Professional Standards Group. He also is a member on the IFRS Foundation's Small & Medium-sized Entities (SMEs) Implementation Group. 10

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