investment property - nelson cpa · 30-05-2013 · ‒if either property a or b (or both) are not...

1

© 2005-13 Nelson Consulting Limited 1

LAM Chi Yuen Nelson 林智遠MBA MSc BBA ACA ACS CFA CPA(US) CTA FCCA FCPA FCPA(Aust) FHKIoD FTIHK MHKSI MSCA

Investment Property (IAS 40)30 May 2013


After crediting:Fair value changes on

investment properties 6,109 2,960 (10,831) 8,564 (7,468)

For year ended 30 Dec. 2012HK$’M

Turnover 2,434Gross profit 1,865Profit before tax 10,114

2011HK$’M

528283

3,625

Cases First ……Case

2010HK$’M2,6711,351

(8,715)

2009HK$’M2,151

93110,223

2008HK$’M1,265

985(2,961)

179% Loss to profitProfit

to lossLoss to profit

2


Today’s Agenda

Amendments to IAS 12 Income Tax: Recovery of Underlying Asset

IAS 40 Investment Property

IFRS 13 Fair Value Measurement


1. Scope

• IAS 40 shall be applied in the recognition, measurement and disclosure of investment property.

• 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 leases.

3


• 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 appreciationor both, rather than for a) use in the production or supply of goods or

services or for administrative purposes; orb) sale in the ordinary course of business

2. Definitions

Examples 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


2. 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 Usage

Mode of Ownership

4


2. Definitions – Mode of Usage

• IAS 40 has contrasted an investment property with an owner-occupied property.

• 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


Mode of Usage


Refer 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; and

b) are expected to be used during more than one period.

Investment Property

Owner-occupied Property

Both for rental, how to distinguish?For example, how to distinguish:• A flat leased out for rental• A hotel

5



• 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 services..

Cash Flow Extent of Ancillary Services

Mode of Usage


Mode of Usage

2. Definitions – Mode of Usage• One of the key indicators in determining the

classification between investment property and owner-occupied property

Cash 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 Property

Owner-occupied property

6


Investment Property

Owner-occupied property

Ancillary services not significant

Significant ancillary Significant ancillary services provided


investment property

If 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 group

Cash Flow Extent of Ancillary Services

• provided by an entity to the occupants of a property it holds is also considered

owner-occupied property

e.g. a owner-managed hotel is not an investment property

Mode of Usage


2. 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 criteria

for use in exercising the judgement

Ancillary services not significant

Significant ancillary Significant ancillary services provided

Passive 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?

• Significant impact on hotel group

Mode of Usage

7


2. 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



• 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. The lessee uses the fair value model in accordance

with IAS 40 for the asset recognised.• This classification alternative is available on a

property-by-property basis• However, once this classification alternative is

selected for one such property interest held under an operating lease,

– all properties classified as investment property shall be accounted for using the Fair Value Model

Mode of Ownership

An entity has a choice

8


Mode of UsageExamples that are NOT investment property include:1. Owner-occupied property2. Property (completed or under development) intended

for 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 property


6. How’s the classification for existing investmentproperty being redeveloped for continued futureuse as investment property?

Still Investment Property

Example

Which IAS? IAS 16 & 17

IAS 2 IAS 11 IAS 17

IAS 16 & 17Still Investment Property



• 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 properties.

Example

9


• 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.

• 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 C.

2. Definitions – Mode of OwnershipExample



Melco Development Limited(新濠國際發展有限公司)Annual report 2012– Note 3

• Investment properties are initially measured at cost, including any directly attributable expenditure.

• Subsequent to initial recognition, investment properties are measured at their fair values.

– Note 19• The Group’s investment properties are situated on leasehold land in Hong

Kong and Macau held under long term and short term leases, respectively.• All of the Group’s property interests held under operating leases to earn

rentals or for capital appreciation purposes – are measured using the fair value model and– are classified and accounted for as investment properties.

Case

10



Galaxy Entertainment Group LimitedAnnual report of 2012 (note 3.8):

– Property that is held for long-term rental yields or for capital appreciation or both, and that is not occupied by the Group, is classified as investment property.

– Investment property comprises • land held under operating leases and • buildings held under finance leases.

– Land held under operating leases is classified and accounted for as investment property when the rest of the definition of investment property is met.

– The operating lease is accounted for as if it were a finance lease.

Case


2. Definitions - Partially Used Only

• Some properties comprise a portion held as investment property and another portion NOT held as investment property.

• If these portions:

Could be sold separately

Could not be sold separately

or leased out separately under a finance lease an entity accounts for the portions separately

the property is investment propertyonly if an insignificant portion is NOT held as investment property

11



An entity owns property that is leased to, and occupied by, its parent or another subsidiary The property does not qualify as investment property in the

consolidated financial statements, because the property is owner-occupied from the perspective of the group

But, from the perspective of the entity that owns it, the property is investment property if it meets the definition of investment property• The lessor treats the property as investment

property in its individual financial statements.

Consolidated

Individual



Can the following freehold properties be classified as investment property in individual level and in consolidation?

• Parent A’s property leased to Subsidiary B

• Subsidiary C’s property leased to Parent D

• Subsidiary E’s property leased to Subsidiary F

• Parent G’s property leased to Associate H

Example

Individual Consolidation

Yes No

Yes No

Yes No

Yes Yes

12


3. Recognition and Measurement

• Same as IAS 16 Property, Plant and Equipment• Investment property shall be recognised 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; andb) the cost of the investment property can be measured reliably.

Recognition criteriaInitial Cost Subsequent Expenditure


3. Recognition and MeasurementMeasurement at Recognition• An investment property shall be measured initially at its cost.• Transaction costs shall be included in the initial measurement.

(IAS 40.20)

• The initial cost of a property interest held under a lease and classified as an investment property– shall be as prescribed for a finance lease in IAS 17

– i.e. the asset shall be recognised at the lower of• the fair value of the property and• the present value of the minimum lease payments.

– An equivalent amount shall be recognised as a liability in accordance with that same paragraph. (IAS 40.25)

• Introduce the measurement base for investment property acquired from exchange• Same as IAS 16 Property, Plant and Equipment

13



If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up.

Commercial Substance

Fair Value of Exchanged Asset

Rule on Exchange of Assets RevisedSame amendment in Same amendment in

IAS 16 andIAS 38

Cost of PPE acquired in exchange is measured at fair value

But not required if:

In IAS 16 – the exchange transaction lack of

Commercial Substance, or

In IAS 18– it is an exchange for similar assets

– the Fair Value is not reliably measurable(both asset received and given up)



To determine Commercial Substance• considering the extent to which its future cash flows

are expected to change as a result of the transaction

Commercial Substance exists if:a) the configuration (risk, timing and amount) of

the cash flows of the asset received differs from that of the asset transferred; or

b) the entity-specific value of the portion of the entity’s operations affected by the transactionchanges as a result of the exchange; and

c) the difference in (a) or (b) issignificant relative to the fair valueof the assets exchanged.

Commercial Substance

14



• The fair Value of an asset is reliably measurable ifa) the variability in the range of various

reasonable fair value measurrments is not significant for that asset, or

b) the probabilities of the various estimates within the range can be reasonably assessed and used when measuring fair value.

• If an entity is able to measure reliably the fair value of either the asset received or the asset given up then the fair value of the asset given up is used

to measure the cost of the asset received• unless the fair value of the asset received is

more clearly evident. (IAS 40.30)Fair Value of

Exchanged Asset


4. Measurement after Recognition

Introduce Cost Model and choose either

Cost Model

Fair Value Model

IAS 40 implicitly implies that the choice can only be elected on the first-time adoption of IAS 40

The model chosen should be applied to all investment properties, except for1. Property held under operating lease

classified as investment properties 2. Investment property backing liabilities

that pay a return linked directly to thefair value of, or returns from specificassets including that investment property

3. Investment property with a fair value thatcannot be reliably determinable on acontinuing basis (i.e. inability to determinefair value reliably)

and

No choice,only fair value model

Choose a model for all such properties

No choice,only cost model

15



• However, even Cost Model is adopted, IAS 40 still requires all entities to determine the fair value of investment property ……• For disclosure purpose, the fair value of the investment property

has to be disclosed in notes to the financial statement!• In determining the fair value of investment property for both cost

model and fair value model an entity is only encouraged, but not required, to rely on a

professional valuer’s valuation

Cost Model

Fair Value Model

More Flexible?

Introduce Cost Model and choose either

and



Not WithinIAS 40

Properties held to earn rental,or for capital appreciation, or both?

No

Yes

Use IAS 40 to account for oneor more such properties?

Fair valuemodel under IAS 40

Any property held under operating lease?

No

YesNo

Choose to use Cost model?

Cost modelunder IAS 40

Yes

No

Yes

Properties under IAS 40

1. All liability-linked investment properties may be accounted for by a different model from all other investment properties

2. Properties with fair value not determined reliably at initial recognition is accounted for by using cost modelSourced: Intermediate Financial Reporting, 2nd (2012) by Nelson Lam & Peter Lau

16



Fair Value ModelAfter initial recognition, an entity that chooses • shall measure all of its investment property at fair value, except in

the cases that1. the fair value cannot be determined reliably, or2. the cost model is chosen for the investment property backing liabilities that pay a

return linked directly to the fair value of, or returns from specific assets including that investment property

• When a property interest held by a lessee under an operating lease is classified as an investment property the fair value model must be applied for all investment

properties• A gain or loss arising from a change in the fair value of

investment property shall be recognised in profit or loss for the period in which it arises

Depreciation?Tax Implication?



• Entity GV has 3 properties, leasehold property A, leasehold property B, and freehold property C

• All the properties are held to earn rental.• What is the implication of IAS 40 if GV chooses to account for A as

investment property?

Example

• Then, GV has no choice in accounting for the investment property.• It must adopt fair value model in accounting for all investment properties

including property A and C (subject to specific exceptions)• While property A is accounted for at fair value model under IAS 40,

property B can still be accounted for under IAS 17.

Fair Value Model

17


IAS 40, originally• Uses fair value, instead of open market value

– but in substance, they are similar– IAS 40 only encourages, but not requires, a profession valuation on

a fair value


Fair Value Model

• Fair value is defined as the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction– Same definition used in other IFRSs and IASs– But IAS 40 provides more explanations unique for a fair value of a property

• The fair value of investment property shall reflectmarket conditions at the end of the reporting period

Depreciation?

No depreciation required in IAS 40

Replaced by IFRS 13



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. (IAS 40.53)

• However, in exceptional cases, there is clear evidence when an entity first acquires an investment property (or when an existing property first becomes investment property after a change in use) that the fair value of the investment property is not reliably measureable on a continuing basis.– This arises when, and only when,

• the market for comparable properties is inactive (e.g. 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 (e.g., based on discounted cash flow projections) are not available. (IAS 40.53)

18



Fair Value Model• 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. (IAS 40.53)



Fair Value ModelInvestment property under construction• 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). (IAS 40.53)

19



Fair Value ModelInvestment property under construction• Once an entity becomes able to measure

reliably the fair value of an investment property under construction that has previously been measured at cost,

– it shall measure that property at its fair value. • Once construction of that property is complete,

– it is presumed that fair value can be measured reliably.• If this is not the case, in accordance with IAS 40.53,

the property shall be accounted for using the cost model in accordance with IAS 16. (IAS 50.53A)


Investment property under construction• The presumption that the fair value of

investment property under construction can be measured reliably can be rebutted only on initial recognition.

– An entity that has measured an item of investment property under construction at fair value may not conclude that the fair value of the completed investment property cannot be measured reliably. (IAS 40.53B)


Fair Value Model

20


4. Measurement after RecognitionCase

• Investment properties, principally comprising buildings and building improvements, are held for long-term rental yields or capital appreciation or both, and are not occupied by the Group.

• Investment properties that are currently being constructed or developed are – classified as investment properties and – stated at cost less accumulated

impairment losses.

Sands China Limited(Annual Report 2012)

Why is there no accumulated depreciation?



Fair Value Model

• If an entity has previously measured an investment property at fair value– it shall continue to measure the property at fair value until disposal or

cessation to be investment property, even if• comparable market transactions become less frequent or• market prices become less readily available. (IAS 40.55)

Once you chose Fair Value Model, you cannot fall back to Cost Model

21



After initial recognition, an entity that chooses

• shall measure all of its investment properties in accordance with the requirements of IAS 16 for that cost model other than• those that meet the criteria to be classified as held for sale (or are included

in a disposal group that is classified as held for sale) in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations

• then, those investment properties shall be measured in accordance with IFRS 5. (IAS 40.56)

Cost Model

Fair Value Model

Once you chose Fair Value Model, you cannot fall back to Cost Model



Annual Report 2012• Note 2.8

‒ Property that is held for long-term rental yields or for capital appreciation or both, and that is not occupied by the companies in the Group, is classified as investment property.

‒ Investment property is carried at cost, including the related transaction costs, less accumulated depreciation and accumulated impairment losses, if any.

• Note 17‒ The valuation of the investment properties (including the related land use

rights) as at 31 December 2012 was RMB942.3 million (2011: RMB15.9 million), which was determined by the directors of the Company on an open market value basis.

Case

22


4. Measurement after RecognitionCase

• A retailing and real estate group stated in its annual report 2009:– Investment property is property held to earn rentals or for

capital appreciation or both. – The shopping centres owned by the Group are classified

as investment property.– Subsequent to initial recognition, they are measured at

historical cost less accumulated depreciation and any accumulated impairment losses.

– Their fair value is disclosed in the notes to the consolidated financial statements.

– Investment property is depreciated over the same useful life and according to the same rules as owner-occupied property.

Casino, Guichard-Perrachon


• Transfers to, or from, investment property shall be made when, and only when, there is a change in use, evidenced by:

Measurement at transfer?

a) Commencement of owner-occupation

b) Commencement of development with a view to sale

Change in use Transfer from investment property

a) End of owner-occupation

b) Commencement of an operating lease to another party

Change in use Transfer to investment property

Depend on the model the entity is using ……

Owner-Occupied Property

InventoriesInvestment

Property

Investment Property


Inventories

5. Transfer

23


• When an entity uses – transfers DO NOT change the carrying amount of the property

transferred and– they DO NOT change the cost of that property for measurement or

disclosure purposes.


Cost Model

5. Transfer


Fair Value Model

• For a transfer from investment property (i.e. the following cases) carriedat fair value


the property’s deemed cost for subsequent accounting in accordance with IAS 16 or IAS 2 shall be its fair value at the date of change in use. (IAS 40.60)

a) Commencement of owner-occupation

b) Commencement of development with a view to sale

Change in use Transfer from investment propertyOwner-Occupied

Property

InventoriesInvestment

Property

5. Transfer

24


5. Transfer

• GV has adopted IAS 40 and stated its investment properties at fair value even the properties are held under operating leases.

• On 1 Jan. 2005, GV’s investment property A held under operating lease was stated at fair value of $1,000. Its original cost was $800.

• On 10 Feb. 2005, the lease of property A expired and GV decided and began to hold it as its office.

• What is the accounting implication on the decision?

Example

• Property A would no longer be investment property and would be reclassified as owner-occupied property.

• Even property A is held under operating lease, such operating lease interest would still be accounted for as a finance lease continuously in accordance with IAS 17 and classified and measured as property, plant and equipment in accordance with IAS 16.

• The fair value at the date of change in use, i.e. 10 Feb. 2005 will be regarded as the deemed cost in property, plant and equipment.


Fair Value Model

• For a transfer to investment property (i.e. the following cases) and that investment property will be carried at fair value


a) End of owner-occupation

b) Commencement of an operating lease to another party

Change in use Transfer to investment property

Investment Property


Inventories

5. Transfer

25


Revaluation reserve is frozen and• accounted for in

accordance withIAS 16 subsequently

Investment Property


Fair Value Model

5. Transfer


apply IAS 16 up to the date of change in use. treat any difference at that date between its

• carrying amount under IAS 16, and• its fair value

in the same way as a revaluation under IAS 16 (IAS 40.61)

any difference between• the fair value of the property

at that date and• its previous carrying amount

shall be recognised in profit/loss(IAS 40.60)

Inventories Investment Property

• For a transfer to investment property (i.e. the following cases) and that investment property will be carried at fair value


5. Transfer• GV has adopted IAS 40 and stated its investment properties at fair value

even the properties are held under operating leases.• On 1 Mar. 2005, freehold property B stated at revalued amount of

$1,000 (originally used as its own office) has been leased out to derive rental income. Revaluation surplus recognised for B was $300 while B’s fair value at that date should be $1,200.

• What is the accounting implication on the decision?

Example

• Property B would be reclassified as investment property.• In accordance with IAS 40, GV should apply IAS 16 on B up to the date

of change in use and treat any difference at that date between its carrying amount under IAS 16, and its fair value in the same way as a revaluation under IAS 16.• Thus, a revaluation surplus of $200 would be further recognised.• Total revaluation reserves would become $500 ($200 + $300)

• The revaluation reserves of $500 would be frozen and accounted for in accordance with IAS 16 subsequently.

26


5. Transfer

Galaxy Entertainment Group LimitedAnnual report of 2012 (note 3.8):

– If an investment property becomes owner-occupied,• it is reclassified as property, plant and equipment, and• its fair value at the date of reclassification becomes its cost

for accounting purposes.– If a property becomes an investment property because

its use has changed,• any difference resulting between the carrying amount and

the fair value of this property at the date of transfer is recognised in equity as revaluation of property, plant and equipment. – However, if the fair value gives rise to a reversal of the

previous impairment loss, this write-back is recognised in the consolidated income statement.

Case


6. Disposals

• An investment property shall be derecognised (eliminated from the statement of financial position):1. on disposal or2. when the investment property is permanently withdrawn from use

and no future economic benefits are expected from its disposal• Gains or losses arising from the retirement or disposal of investment

property shall be determined as the difference between1. the net disposal proceeds and2. the carrying amount of the asset,

and shall be recognised in profit or loss (unless IAS 17 requires otherwise on a sale and leaseback) in the period of the retirement or disposal

27


7. Disclosure

a) Disclosure for both Fair Value Model and Cost Model• whether the fair value model or the cost model is adopted• if fair value model is applied, whether property interests held under

operating leases are accounted for as investment property • if classification is difficult, the criteria to distinguish investment property

from owner-occupied property and from property held for sale in the ordinary course of business

• the methods and significant assumptions applied in determining the fair value of investment property

• whether (and the extent to which) the fair value of investment property is based on a valuation by a qualified independent valuer

• the amounts recognised in profit or loss, say for rental income from investment property, and direct operating expenses (including repairs and maintenance) arising from investment property

• the existence and amount of restrictions on the realisability of investment property or the remittance of income and proceeds of disposal

• contractual obligations to purchase, construct, or develop investment property or for repairs, maintenance or enhancements


7. Disclosure

b) Additional Disclosure for Fair Value Model• A reconciliation between the carrying amounts of investment property at

the beginning and end of the period similar to that of property, plant and equipment

• When a valuation obtained for investment property is adjusted significantly for the purpose of the financial statements, the entity shall disclose a reconciliation between the valuation obtained and the adjusted valuation included in the financial statements

• In the exceptional cases when there is inability to determine fair value reliably and cost model is applied to a particular investment property, additional disclosures are required

28


7. Disclosure

c) Additional Disclosure for Cost Model• the depreciation methods used; • the useful lives or the depreciation rates used;• the gross carrying amount and the accumulated depreciation (aggregated

with accumulated impairment losses) at the beginning and end of the period;• a reconciliation of the carrying amount of investment property at the

beginning and end of the period, similar to that of property, plant and equipment

• the fair value of investment property• In the exceptional cases when there is inability to determine fair value

reliably, additional disclosures are required


Today’s Agenda

Amendments to IAS 12 Income Tax: Recovery of Underlying Asset

29


Recovery of Underlying Asset(Amendments to IAS 12 Income Tax)


Introduction

• IAS 12 Income Taxes requires an entity to measure the deferred tax relating to an asset depending on whether the entity expects to recover the carrying amount of the asset through– use or sale.

• It can be difficult and subjective to assess whether recovery will be through use or through sale – when the asset is measured using the fair

value model in IAS 40 Investment Property. • The amendment provides a practical solution to

the problem – by introducing a presumption that recovery of

the carrying amount will, normally be, be through sale.

No such exemption for PPE using revaluation model under IAS 16

30


Recovery of Underlying Asset

• If a deferred tax liability or asset arises from investment property that is measured using the fair value model in IAS 40,– there is a rebuttable presumption that the carrying amount of the

investment property will be recovered through sale. • Accordingly, unless the presumption is rebutted,

– the measurement of the deferred tax liability or deferred tax asset shall reflect the tax consequences of recovering the carrying amount of the investment property entirely through sale. (IAS 12.51C)

i.e. no deferred tax is required when tax on sale is zero!

This presumption is rebutted if the investment property – is depreciable and – is held within a business model whose objective is to

consume substantially all of the economic benefits embodied in the investment property over time, rather than through sale.

If the presumption is rebutted, the requirements of IAS 12. 51 and 51A shall be followed.


Effective Date and Transition

• An entity shall apply the amendments for annual periods beginning on or after 1 January 2012.

• Earlier application is permitted. • If an entity applies the amendments for an earlier

period, it shall disclose that fact.

31


Amendments to IAS 12Case

• Note 2 states “Amendments to HKAS 12 Income Taxes” as follows:– Amendments to HKAS 12 titled “Deferred Tax: Recovery of Underlying

Assets” have been applied in advance of their effective date (annual periods beginning on or after 1 January 2012). • Under the amendments, investment properties that are measured using

the fair value model in accordance with HKAS 40 “Investment Property” are presumed to be recovered through sale, unless the presumption is rebutted in certain circumstances.

Financial Statements 2010


Amendments to IAS 12Case

• Note 2 states “Amendments to HKAS 12 Income Taxes” as follows:– As a result, the Group’s investment properties that are measured using the fair

value model have been presumed to be recovered through sale for the purpose of measuring deferred tax liabilities and deferred tax assets in respect of such properties. • This resulted in deferred tax liabilities being decreased by HK$3,409

million and HK$3,616 million as at 1 January 2009 and 31 December 2009 respectively, with the corresponding adjustment being recognised in retained profits.

– In the current year, no deferred tax has been provided for in respect of changes in fair value of such investment properties, whereas previously deferred tax liabilities were provided for in relation to the changes in fair value of such investment properties.• The application of the amendments has resulted in profit for the year being

increased by HK$426 million.

Financial Statements 2010

32


Today’s Agenda

IFRS 13 Fair Value Measurement


Fair Value Measurement(IFRS 13)

33


1. Introduction

• IFRS 13 is a single standard to address the measurement fair value used in many other IFRSs:a. defines fair value;b. sets out in a single IFRS a framework for

measuring fair value; andc. requires disclosures about fair value

measurements. (IFRS 13.1)

Definition of Fair Value

Single Framework for Single Framework for FV Measurement

Disclosure


2. Definition of Fair Value

• In many IFRSs, fair value shares a similar definition. • In IFRS 13, a new definition is adopted ……


34



• Fair value is defined as – 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. (IFRS 13.9)

– i.e. an exit price• It is a market-based measurement, not an

entity-specific measurement• Historically, fair value is normally defined as:

– The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.




• Fair value is defined as – 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. (IFRS 13.9)

– i.e. an exit price• It is a market-based measurement, not an

entity-specific measurement• Historically, fair value is normally defined as:

– The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.


The IASB considered the previous definition of fair value:a. did not specify whether an entity is buying or selling the asset;b. was unclear about what is meant by settling a liability because it did

not refer to the creditor, but to knowledgeable, willing parties; andc. did not state explicitly whether the exchange or settlement takes

place at the measurement date or at some other date (IFRS 13.BC30)

35


3. Fair Value Measurement

• IFRS 13 explains that a fair value measurement requires an entity to determine the following:a. the particular asset or liability being measured;b. for a non-financial asset, the highest and best use

of the asset and whether the asset is used • in combination with other assets or • on a stand-alone basis;

c. the market in which an orderly transaction would take place for the asset or liability; and

d. the appropriate valuation technique(s) to use when measuring fair value.

• The valuation technique(s) used should maximise the use of relevant observable inputs and minimise unobservable inputs.

• Those inputs should be consistent with the inputs a market participant would use when pricing the asset or liability. (IFRS 13.IN10)

Single Framework for Single Framework for FV Measurement

Fair Value Hierarchy (3 levels)



Measurement Date

For Particular Asset or Liability

Orderly Transaction

Market Participants

ExitPrice

Principal Market

Most Advantageous

Market

Fair value

Sourced: Intermediate Financial Reporting, 2nd (2012) by Nelson Lam & Peter Lau

36



• A fair value measurement is for a particular asset or liability. • Therefore, when measuring fair value

– an entity shall take into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date.

• Such characteristics include, for example, the following:a.the condition and location of the asset; andb.restrictions, if any, on the sale or use of the asset. (IFRS 13.11)

For Particular Asset or Liability



• IFRS 13 also assumes that the orderly transaction to sell the asset or transfer the liability can take place either:1. In the principal market for the asset or liability; or2. In the absence of a principal market, in the most advantageous

market for the asset or liability (IFRS 13.16)

Orderly Transaction

Principal Market

Most Advantageous

Market

Principal market is defined as – the market with the greatest volume and

level of activity for the asset or liability.Most advantageous market is defined as

– the market that maximises the amount that would be received to sell the asset or minimises the amount that would be paid to transfer the liability, after taking into account transaction costs and transport costs.


37


4. Application to Specific Situations

• In applying the fair value measurement, IFRS 3 introduces the concepts of highest and best use and valuation premise for non-financial assets, but it also explains that they would not apply to financial assets or to liabilities.

• Together with the application to non-financial assets, IFRS 3 addresses application to at least three groups of items:1. Application to non-financial assets;2. Application to liabilities and an entity’s own equity instruments; and3. Application to financial instruments within a portfolio, i.e. the financial

assets and financial liabilities with offsetting positions in market risks or counterparty credit risk.



Application to Non-financial Assets• In a fair value measurement of a non-financial asset, IFRS 13 requires

an entity to take into account a market participant’s ability to generate economic benefits by using the asset, or selling it to another market participant that would use it, in its highest and best use (IFRS 13.27)– Highest and best use is defined as

• the use of a non-financial asset by market participants that would maximise the value of the asset or the group of assets and liabilities (e.g. a business) within which the asset would be used.

38



Application to Non-financial Assets• The highest and best use of a non-financial asset must be physically

possible, legally permissible and financially feasible:1. Physically possible – physical characteristics of the asset that market

participants would consider, for example the location or size of a property.2. Legally permissible – legal restrictions on the use of the asset that

market participants would consider, for example, the zoning regulations applicable to a property.

3. Financially feasible – adequate income or cash flows to produce an investment return that market participants would require from an investment in that asset put to that use.


5. Fair Value at Initial Recognition

• IFRS 13 specifies the consideration when fair value is required or permitted to use in initial recognition of an asset or a liability.– IFRS 13 has not specified whether fair value should be used for initial

recognition of an asset or a liability– An asset or a liability is initially recognised at a basis in accordance with the

corresponding IFRS and. • Historically, IFRS commonly addresses that the fair value on initial

recognition is normally the transaction price. • However, IFRS 13 uses the phrase “in many cases” to substitute the

word “normally” in describing the relationship between the fair value and transaction price. – The change represents that a fair value is defined as

a current exit price in IFRS 13 – but a transaction price is considered as an entry price.

39


6. Valuation Techniques

• In selecting and using valuation techniques in fair value measurement, an entity is required to use– Valuation techniques that are appropriate in the

circumstances and for which sufficient data are available to measure fair value.

– The techniques maximising the use of relevant observable inputs and minimising the use of unobservable inputs. (IFRS 13.61)

• IFRS 13 – sets out three valuation approaches to guide the

selection and use of valuation techniques; – imposes requirements on the inputs to be used in each

technique and then it in turn also affects the selection and use of valuation techniques.



• IFRS 13 sets out the following three valuation approaches to guide the selection and usage of valuation techniques and 1. Market approach,2. Cost Approach, and3. Income Approach.

• An entity is required to use valuation techniques consistent with one or more of the valuation approaches to measure fair value.

40



• Market approach is defined as a valuation technique– that uses prices and other relevant information

generated by market transactions involving identical or comparable (i.e. similar) assets, liabilities or a group of assets and liabilities, such as a business.

• Cost approach is defined as a valuation technique– that reflects the amount that would be required

currently to replace the service capacity of an asset (often referred to as current replacement cost).

• Income approach is defined as valuation techniques – that convert future amounts (e.g. cash flows or income

and expenses) to a single current (i.e. discounted) amount.

– The fair value measurement is determined on the basis of the value indicated by current market expectations about those future amounts.



• In fair value measurement, – an entity is not only required to use the valuation

techniques consistent with one or more of the three valuation approaches, but also required to use the techniques,1. Maximising the use of relevant observable inputs

and2. Minimising the use of unobservable inputs (IFRS

13.67)

41



• Present value techniques are the valuation techniques consistent with income approach to measure fair value and are specified in the application guidance of IFRS 13.

• The application guidance of IFRS 13 sets out – the general principles in using present value

techniques and– the consideration of risk and uncertainty.

• IFRS 13 also specifies the following two present value techniques:1. Discount rate adjustment technique; and2. Expected present value technique.

In order to understand them, IFRS 13 also explains the portfolio theory, unsystematic (diversifiable) risk, systematic (non-diversifiable) risk ……



Summary of Discount Rate Adjustment Technique and Expected Present Value Technique

Cash flows Discount rate1. Discount rate

adjustment technique

Contractual, promised or most likely cash flows.

Discount rate derived from observed rates of return for comparable items traded in the market

2. Expected present value technique –risk-adjusted expected cash flow method

Expected cash flows that are risk-adjusted

Risk-free rate

3. Expected present value technique –expected rate of return method

Expected cash flows that are not risk-adjusted

Discount rate adjusted to include the risk premium that market participants require


42


7. Fair Value Hierarchy

• To increase consistency and comparability in fair value measurements and related disclosures, IFRS 13 establishes a fair value hierarchy that categorises the inputs to valuation techniques used to measure fair value into the following three levels:– Level 1 inputs– Level 2 inputs– Level 3 inputs



• Level 1 inputs – Quoted prices (unadjusted) in active

markets for identical assets or liabilities that the entity can access at the measurement date.

• Level 2 inputs – Inputs other than quoted prices

included within Level 1 that are observable for the asset or liability, either directly or indirectly.

• Level 3 inputs – Unobservable inputs for the asset or

liability.

Level 1 Inputs

Level 2 Inputs

Level 3 Inputs

43



No

Yes

Quoted price in active market? Level 1 Inputs

Significant unobservable

inputs?Level 2 Inputs

Level 3 Inputs

Adjusted?Yes

Yes

No

NoObservable inputs?

No

Yes



8. Significantly Decreased Activities

• When there has been a significant decrease in the volume or level of activity when compared with normal market activity for the asset or liability, or similar assets or liabilities,– further analysis of the transactions or quoted

prices is needed.• A decrease in the volume or level of activity on

its own may not indicate that a transaction price or quoted price does not represent fair value or that a transaction in that market is not orderly.

44


9. Disclosure

• The disclosures about fair value measurements in IFRSs vary even many IFRSs at least require information about the methods and significant assumptions used in the measurement, and whether fair value was measured using observable prices from recent market transactions. – In consequence, in addition to establish a

framework for measuring fair value in IFRS 13, the disclosures about fair value measurements are also enhanced and harmonised in IFRS 13.

Disclosure


9. Disclosure

Objectives and General Principles for Disclosure• An entity is required to disclose information that helps users of its

financial statements assess both of the following:1. For assets and liabilities that are measured at fair value on a

recurring or non-recurring basis in the statement of financial position after initial recognition,

a. The valuation techniques, andb. Inputs used to develop those measurements.

2. For recurring fair value measurements using significant unobservable inputs (Level 3),

• the effect of the measurements on profit or loss or other comprehensive income for the period (IFRS 13.91)

Disclosure

45


9. Disclosure

Objectives and General Principles for Disclosure• To meet the above objectives, an entity is required

to consider all the following:1. The level of detail necessary to satisfy the disclosure

requirements;2. How much emphasis to place on each of the

various requirements;3. How much aggregation or disaggregation to

undertake; and4. Whether users of financial statements need additional

information to evaluate the quantitative information disclosed.

Disclosure


IFRS 13: Effective Date

• An entity shall apply IFRS 13 for annual periods beginning on or after 1 January 2013.

• Earlier application is permitted. • IFRS 13 shall be applied prospectively as of the beginning of

the annual period in which it is initially applied.• The disclosure requirements of IFRS 13 need not be applied in

comparative information provided for periods before initial application of IFRS 13. (IFRS 13.C1)

46


LAM Chi Yuen Nelson 林智遠[email protected]/trainingwww.Facebook.com/NelsonCPA



Q&A SessionQ&A Session

LAM Chi Yuen Nelson 林智遠[email protected]/trainingwww.Facebook.com/NelsonCPA


investment property - nelson cpa · 30-05-2013 · ‒if either property a or b (or both) are not...

Documents