IPSAS I 6 INVESTMENT PROPERTY A closer look

IPSAS I 6: INVESTMENT PROPERTY A closer look Presented by: Georgina Muchai Date: 19/8/2015 1

IPSAS 16 – INVESTMENT PROPERTY

Content – IPSAS 16 1. Introduction Objective and scope 2. Definitions 3. Recognition 4. Acquisition and Initial measurement 5. Measurement after recognition 6. Subsequent measurement 7. De recognition -Disposal 8. Disclosures 3

I. Scope An entity that prepares and presents financial statements under the accrual basis of accounting shall apply this standard in accounting for investment property. This entity applies to all public sector entities other than GBEs 4

I. Definitions Carrying amount- is the amount of an asset recognized in the statement of financial position Cost- Amount of cash and cash equivalents paid or the fair value of other consideration given to acquire an asset at the time of its acquisition or construction 5

I. Definition Investment property- a property(land or a building- or part of a building or both) held to earn rentals, or for capital appreciation or both rather than for: -use in the production of goods and services, or for administration purposes or(IPSAS 17) - For sale in the ordinary course of business(IPSAS 12) 6

I. Definition Owner – occupied property-is property held by (the owner or by the lessee under a finance lease or for use in the production of goods and services. 7

I. Examples within the public sector: A building owned by the entity or a lessee under a finance lease and leased out under one or more operating leases on a commercial basis. Land held for long term appreciation rather than sale in the ordinary course of operations 8

I. Examples Land held for a currently undetermined use. If the use is not currently determined the land is regarded as held for capital appreciation. 9

I. Are the following to be considered as investment property? Owner occupied property? (IPSAS 17) Property held for sale in the ordinary course of business? (IPSAS 12) Property being constructed for use by third parties(IPSAS 11) Property that is leased to another entity on a finance lease? (IPSAS 13) Property held by a social service to provide housing to low income families(IPSAS 17) 10

I. Question How would you classify a building that is used for both administrative purposes and leased out on commercial basis? If the portions could be sold separately or leased out separately, then they should be accounted for separately. If not an investment property will only be recognised when an insignificant portion is held for admin use. 11

2. Recognition Investment property shall be recognised as an asset when and only when, • it is probable that future economic benefits or service potential associated with the item will flow to the entity; and • the cost of the item can be measured reliably. 12

3. Measurement at recognition Investment property can either be purchased or constructed. Investment property shall be initially measured at cost. (Cost includes directly attributable expenses such as legal fees, property transfer taxes etc Where an investment property is acquired through a non exchange transaction, its cost shall be measured at fair value as at the date of acquisition. 13

4. Subsequent Measurement An entity shall choose as its accounting policy either the fair value model or the cost model and shall apply that policy to all its investment property. The standard requires all entities to determine the fair value of investment for measurement(fair value) or for disclosure(cost model) 14

4. Subsequent measurement Fair value model. An entity that chooses the fair value model, after initial recognition, shall measure all of its investment property at fair value A gain or loss arising from change in the fair value of investment property shall be recognised in surplus or deficit for the period in which it arises. 15

6. Subsequent measurement How do you measure fair value- Fair value is the price at which the property could be exchanged, between knowledgeable, willing parties in an arm’s length transaction. The fair value of investment property shall reflect the market conditions at the reporting date. 16

6. Subsequent measurement Cost- After recognition, an entity that chooses the cost model shall measure all of its investment property in accordance with IPSAS 17 requirements that is cost less accumulated depreciation and accumulated impairment losses. 17

7. Transfer of investment property Transfers to and from investment property shall made when and only when, there is a change in use evidenced by; - Commencement of owner occupation-IPSAS 17 - Commencement of development with a view to sale-IPSAS 12 - End of owner occupation- IPSAS 16 - Commencement of an operating lease to another party- IPSAS 16 18

7. Disposals An investment property shall be derecognized(eliminated from the statement of financial position) on disposal or when the investment property is permanently withdrawn from use and no future economic benefits or service potential are expected from its disposal Disposal may be by sale or entering into a finance lease. 19

7. Disposal Gains or losses arising from the retirement or disposal of investment property shall be determined as the difference between the net disposal proceeds and the carrying amount of the asset, and shall be recognised in surplus or deficit in the period of retirement or disposal. 20

9. Disclosures for both fair value model and cost model An entity shall disclose: - Whether it applies fair value or cost model - If fair value model is applied, whether and in what circumstances, property interests under operating leases are classified and accounted for as investment property 21

9. Disclosures -When classification between investment property and owner occupied property is difficult, the criteria it uses to distinguish investment property from owner occupied property. -The methods and significant assumptions applied in determining fair value. -The extent to which the fair value of investment property is based on a valuation by an independent valuer who holds a recognised and relevant professional qualification 22

9. Disclosures - If there has been no such valuation, that fact shall be disclosed. - The amounts recognised fin surplus or deficit for: Rental revenue from the investment property Direct operating expenses relating to investment property that generated revenue and investment property that did not generate revenue 23

9. Disclosures - Fair value model In addition to the above disclosures, an entity that has elected to use fair value model will also disclose: 1. A reconciliation showing the carrying amount of the investment property at the beginning of the period and at the end. 2. A reconciliation between the valuation obtained and the adjusted valuation included in the financial statements. 24

9. Disclosures - Cost model In addition to the above disclosures, an entity that has elected to use Cost model will also disclose: 1. The depreciation method used 2. Useful lives and the depreciation rates used 3. The gross carrying amount and the accumulated depreciation at the beginning and end of the period. 25

9. Disclosures - Cost model 4. The reconciliation of the carrying amount of investment property at the beginning showing additions, disposals, depreciation, impairment losses transfers to and from and other changes 26

Q&A 27

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