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Pamantasan ng Lungsod ng Valenzuela

College of Business and Accountancy
Department of Accountancy

INTERMEDIATE ACCOUNTING 1 (FAR 3)

Accounting for Investment Property

INVESTMENT PROPERTY
- Property held by owner or by the lessee under a finance lease to earn rentals or capital appreciation or both.
- Investment property includes the following:
a. Land held for long-term capital appreciation.
b. Land held for a currently undermined use.
c. Building owned by the reporting entity leased out under an operating lease.
d. Building that is vacant but is held to be leased out under an operating lease.
e. Property that is being constructed or developed for future use as investment property.
- Only land and building can qualify as investment property.

The property held by an owner for use in the production or supply of goods or services, or for administrative purposes is known as
owner-occupied property.

Investment Property Held by Lessee

- IFRS 16 requires a lessee to recognize a “right of use” and a lease liability.
- “Right of use” is initially recognized at cost which includes the following:
a. The present value of the lease payment.
b. Lease payment made to the lessor at or before commencement date less any lease incentives.
c. Initial direct cost incurred by the lessee.
d. Estimate of cost dismantling and restoring the underlying asset for which the lessee has a present obligation.
- Regarding with subsequent measurement, paragraph 34 of IFRS 16 provides that, if the lessee applies the fair value model in
measuring investment property, the lessee shall also apply the fair value model to the right of use of asset that meets the
definition of investment property.

Partly Investment and Partly Owner-occupied

- If the portion of the property could be sold or leased out separately, an entity shall account the portions separately as investment
property and owner-occupied property.
- If the portion of the property could not be sold separately, the property is accounted as investment property only if an
insignificant portion is held for manufacturing or administrative purposes.

Property Leased to an Affiliate

- Perspective of the owner individual entity – investment property.
- For consolidated financial statement purposes – owner-occupied property.

Problem 1: Investment Property

Uranus Corporation and its subsidiaries own the following properties that are accounted for in accordance with international
accounting standards:
1. Land held by the parent for undetermined use 5,000,000
2. A vacant building owned by the parent and to be
leased out under an operating lease 3,000,000
3. Property held by a subsidiary, a real estate firm,
in the ordinary course of business. 2,000,000
4. Property held by the parent for use in production. 4,000,000
5. Building owned by subsidiary and for which the subsidiary
provides security and maintenance services to the lessees. 1,500,000
6. Land leased by the parent to a subsidiary under operating lease 2,500,000
7. Property under construction for use as investment property. 6,000,000
8. Land held for future factory site. 3,500,000
9. Machinery leased out by the parent to an unrelated party
under an operating lease. 1,000,000
Required:
a. Compute the total investment property that should be reported in consolidated statement of financial position of Uranus
Corporation and its subsidiaries.
b. Indicate the classification of the assets that are excluded from investment property.

RECOGNITION OF INVESTMENT PROPERTY

- Investment property shall be recognized as an asset when and only when:
a. It is probable that the future economic benefits that are associated with the investment property will flow to the entity.
b. The cost of the investment property can be measured reliably.

MEASUREMENT OF INVESTMENT PROPERTY

- Initial measurement
Cost of Purchased = Purchase Price + Directly Attributable Expenditure
- Subsequent measurement
Accounting for Trade and Other Receivables FAR 3

a. Fair Value Model

b. Cost Model

Problem 2. Cost Model Versus Fair Value Model

Neptune Company ventured into construction of a condominium in Taguig City.

The board of directors decided that instead of selling the condominium, the company would hold this property for purposes of
earning rentals targeting the high-ranking business officers around BGC and Makati.

The construction was completed and in service as of January 1, 2021. The cost of the construction was P 50,000,000.

The property has a useful life of 25 years with a residual value of P 5,000,000.

An independent valuation expert provided the following fair value at each subsequent year-end:
December 31, 2021 55,000,000
December 31, 2022 53,000,000
December 31, 2023 60,000,000

Required:
Prepare journal entries for 2021, 2022 and 2023:
a. The investment property is accounted for under the cost model.
b. The investment property is accounted for under the fair value model.

TRANSFER OF INVESTMENT PROPERTY

Transfer to and from investment property shall be made only when there is a change of use evidences by:
a. Commencement of owner occupation or development with view to owner-occupation – transfer from investment property to
owner-occupied property.
b. Commencement of development with a view to sale – transfer from investment property to inventory.
c. End of owner occupation – transfer from owner-occupied property to investment property.
d. Inception of an operating lease to another entity – transfer from owner-occupied property to investment property.

Measurement of transfers
1. Transfers between investment property, owner-occupied property and inventory, initially measured at cost, shall be made at
carrying amount.
2. Transfer from investment property carried at fair value to owner-occupied property or inventory shall be accounted at fair
value.
3. Transfer of owner-occupied property to investment property to be carried at fair value, any difference between carrying
amount and fair value shall be accounted for as revaluation of PPE.
4. Transfer of inventory to investment property to be carried at fair value, remeasurement to fair value shall be included in
profit or loss.
5. Completed investment property to be carried at fair value, difference between fair value and carrying amount shall be
included in profit or loss.

CASH SURRENDER VALUE

Cash surrender value – the amount which the insurance firm will pay upon the surrender and cancelation of policy.
The following requisites give rise to cash surrender value:
1. The policy is a life policy.
2. Premiums for three years must have been paid.
3. The policy is surrendered at the end of the third year or anytime thereafter.

Problem 3. Cash Surrender Value

Granola Company insured the life of the president for P2,000,000, the entity being the beneficiary of an ordinary life policy. The
annual premium is P60,000.

The policy was dated January 1, 2020 and carried the following cash surrender value:

End of Policy Year Cash Surrender Value

2020 -
2021 -
2022 60,000
2023 84,000
2024 116,000

Required: Prepare journal entries from January 1, 2020 to July 31, 2024.

- END OF COURSE FILE -

References
Valix, C. T., Peralta, J. F., & Valix, C. A. (2020). Intermediate Accounting Volume One. GIC Enterprises & Co., Inc.

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Accounting for Trade and Other Receivables FAR 3

ANSWERS:

Problem 1

1. Land held by parent for undetermined use 5,000,000

Vacant building 3,000,000
Building owned by a subsidiary occupied by lessees 1,500,000
Property under construction for use as investment property 6,000,000
Total investment property 15,500,000

2. a. The property held by a subsidiary in the ordinary course of business is included in inventory.

b. The property held by parent for use in production is owner-occupied property and therefore part of property, plant and
equipment.

c. The land leased by parent to a subsidiary under an operating lease is owner-occupied property for purposes of
consolidated financial statements. However, from the perspective of separate financial statements of the parent, the land is
an investment property.

d. The land held for future factory site is owner-occupied property and therefore part of property, plant and equipment.

e. The machinery leased out to an unrelated party is part of property, plant and equipment because investment property
includes only land and building, and not movable property like machinery.

Problem 2

Cost Model

2020 Investment property 50,000,000

Cash 50,000,000

Depreciation 1,800,000
Accumulated depreciation 1,800,000
(50,000,000 – 5,000,000 / 25)

2021 Depreciation 1,800,000

Accumulated depreciation 1,800,000

2022 Depreciation 1,800,000

Accumulated depreciation 1,800,000

Fair Value Model

2020 Investment property 50,000,000

Cash 50,000,000

Investment property 5,000,000

Gain from change in fair value (55 – 50) 5,000,000

2021 Loss form change in fair value 2,000,000

Investment property (55 – 53) 2,000,000

2022 Investment property 7,000,000

Gain from change in fair value (60 – 53) 7,000,000

Problem 3

2020
Jan. 1 Life Insurance 60,000
Cash 60,000

2021
Jan. 1 Life Insurance 60,000
Cash 60,000

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Accounting for Trade and Other Receivables FAR 3

2022
Jan. 1 Life Insurance 60,000
Cash 60,000

Dec. 31 Cash surrender value 60,000

Life Insurance 20,000
Retained earnings 40,000

2023
Jan. 1 Life Insurance 60,000
Cash 60,000

Dec. 31 Cash surrender value 24,000

Life Insurance 24,000

Balance – December 31, 2022 84,000

Balance – December 31, 2021 60,000
Increase in cash surrender value 24,000

2024
Jan. 1 Life Insurance 60,000
Cash 60,000

Jun 30 Cash surrender value 16,000

Life insurance 16,000

Balance – December 31, 2023 116,000

Balance – December 31, 2022 84,000
Increase in cash surrender value for 2023 32,000

Increase from January 1 to June 30, 2023 (1/2 x 32,000) 16,000

July 31 Cash 2,000,000

Cash surrender value 100,000
Life Insurance (60,000 x 6/12) 30,000
Gain on sale of life insurance settlement 1,870,000