IAS 40 Investment Property IAS 40 Investment Property St d Student - PowerPoint PPT Presentation

IAS 40 Investment Property IAS 40 Investment Property St d Student t Names deleted Company LOGO Accounting 440 Accounting 440

Agenda 1. What is IAS 40 2. Difference between IFRS and US GAAP 3 E 3. Examples in Calculations l i C l l ti 4 Ratios and Conclusion 4. Ratios and Conclusion

Definition of Investment Property Investment property is property (land/building/part of a building or both) held ( g p g ) (by the owner or the lessee under a finance lease) to earn rental, capital appreciation, or both. [IAS 40.5]

IAS 40 Investment Property RENTAL/APRECIATION/or BOTH To earn THE THE LESSEE OWNER (under Finance Lease) ) TEXT TEXT Held by LAND/BUILDING/PART OF BLDG

Example of investment Property • Land held for long-term capital Land held for long term capital • Property held for use in the Property held for use in the production or supply of goods or appreciation services or for administrative • Land held for undecided future purposes use • property held for sale in the • Building leased out under an • Building leased out under an ordinary course of business or in di f b i i operating lease the process of construction of development for such sale (IAS 2 • Vacant building held to be leased Inventories); out under an operating lease • property being constructed or property being constructed or developed on behalf of third parties (IAS 11 Construction Contracts); • owner-occupied property (IAS 16 Property, Plant and Equipment), i including property held for future l di t h ld f f t use as owner-occupied property http://www.iasplus.com/standard/ias40.htm

Investment Property RECOGNITION MEASUREMENT DISCLOSURE METHODS, AS AN ASSET AS AN ASSET FAIR VALUE FAIR VALUE or COST COST ASSUMPTIONS (IAS 40.16) (IAS 40.20 and 33-65) PROFIT/LOSS AMNT (IAS 40.75-79)

Recognition of investment Property Investment property should be recognized as an ASSET � it is probable that the future economic benefit will flow in � it is probable that the future economic benefit will flow in � the cost of the property can reliably be measured (IAS 40.16)

Measurement Basis for Investment Property http://www.iasplus.com/dttpubs/0703ifrsusgaap.pdf

Measurement Basis for Investment Property Investment property is initially measured at cost. IAS 40 permits enterprises to choose between: FAIR VALUE MODEL FAIR VALUE MODEL COST MODEL COST MODEL � One method must be adopted for all of the entity’s investment property � One method must be adopted for all of the entity s investment property. � Change is permitted only if it results in a more appropriate presentation. � Highly unlikely to change from fair value method to cost model.

Measurement Basis for Investment Property � With FAIR VALUE → Gain or Loss � Otherwise upfront payment → Prepayment http://proquest umi com/pqdweb?index=5&did=1131034501&SrchMode= http://proquest.umi.com/pqdweb?index=5&did=1131034501&SrchMode= 1&sid=1&Fmt=3&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1200806319&clientId=7528 http://www.iasplus.com/dttpubs/0703ifrsusgaap.pdf

Measurement Basis for Investment Property • Remeasured market value, which is the amount for which the property can be exchanged in that period. • HISTORICAL COST • <ACCUMULATED DEPRECIATION> • <ACCUMULATED IMPAIRMENT LOSS> • Differs from Revaluation Method • = INVESTMENT PROPERTY for property/plant/equipment • • NO Revaluation Surplus account • GAIN and LOSS arises • NET INCOME affects

Balance Sheet: Land Case Year 1:Land held for long term capital appreciation – 100K IFRS US.GAAP T Tew's Burger Inc, Balance Sheet ' B I B l Sh t T Tew's Burger Inc, Balance Sheet ' B I B l Sh t Assets C urrent Assets Year 1 Year 2 Assets Year 1 Year 2 C ash 50 50 C ash 50 50 I Inventory 50 50 50 50 Inventory I 50 50 50 50 ‐‐‐ ‐‐‐ Investment Property ‐ Land 100 105 Non ‐ current asset ‐ Land 100 100 Total Inventory Property 100 105 Total Non ‐ current Assets 100 100 205 T 205 Total Assets T Total Assets l A 200 200 l A 200 200 200 200 Dr. Investment Property-Land 5K No Entry Cr. Gain 5K Stockholder's Equity Stockholder's Equity C ommon stock 51 51 C ommon stock 51 51 R etained E arning 50 55 R etained E arning 50 50 106 Total E quity Total E quity 101 101 101

Income Statement: Land Case IFRS Tew's Burger Inc. Income Statement Year 2 Year 1 Sales 150 150 COGS 50 50 Gross 100 100 Gain 5 0 Net Income 105 100 US. GAAP US GAAP More conservatism Tew's Burger Inc. Income Statement If loss on land is significant, the book value of the land will be the fair market value If loss on land is significant, the book value of the land will be the fair market value (Stice, Stice. Intermediate Accounting-Ch11) Year 2 Year 1 Sales 150 150 COGS 50 50 Gross 100 100 Net Income 100 100

Year 1 Balance Sheet: Building Case Building held for rental 50 K Salvage Value 0 K Expected life 25 yr IFRS US.GAAP Annual Depreciation 2 K Tew's Burger Inc, Balance Sheet Tew's Burger Inc, Balance Sheet Assets Assets Year 1 Year 2 Year 1 Year 2 Cash 50 50 Cash 50 50 Inventory 50 50 Inventory 50 50 ‐‐‐ ‐‐‐ Investment Property ‐ Building 50 55 Non ‐ current Asset ‐ Building 50 50 Accumulated Depreciation ‐ 2 ‐ 4.21 Accumulated Depreciation ‐ 2 ‐ 4 Total Investment Property 48 50.79 Total Non ‐ current Assets 48 46 148 150.79 Total Assets Total Assets 148 146 Dr. Investment Property-Bldg 5K No Entry Cr. Gain 5K Stockholder's Equity Stockholder's Equity Year 2 Common stock 51 51 Common stock 51 51 Retained Earining 50 52.79 Retained Earining 50 50 Book Value 48 K Appreciation 5 K 101 103.79 Total Equity Total Equity 101 101 Year 2 Fair Market Value 53 K Historical cost Historical cost 50 K 50 K Salvage Value 0 K Book Value 48 K Expected life 24 yr Annual Depreciation 2 K Annual Depreciation 2.21 K

Depreciation - Building • IFRS (Straight-line method) • Year 1 Dr. Depreciation Expense - Building 2 • Cr. Accumulated Depreciation 2 • • Year 2 Dr. Investment Property - Building 5 p y g • Cr. Gain 5 • Dr. Depreciation Expense - Building 2.21 • Cr. Accumulated Depreciation 2.21 • U.S GAAP (Straight-line method) • Year 1 Dr. Depreciation Expense - Building 2 • Cr. Accumulated Depreciation 2 • • Year 2 Dr. Depreciation Expense - Building 2 • Cr. Accumulated Depreciation 2 •

Income Statement: Building Case IFRS Tew's Burger Inc. Income Statement Year 2 Year 1 Sales 150 150 COGS 50 50 Gross 100 100 Depreciation Expense Depreciation Expense ‐ 2 2 -2.21 2 21 Gain 5 0 Net Income 102.79 98 US GAAP Tew's Burger Inc. Income Statement Year 2 Year 1 Sales 150 150 COGS 50 50 Gross 100 100 Depreciation Expense Depreciation Expense ‐ 2 2 ‐ 2 2 Net Income 98 98

Financial Ratio Analysis – Land Case Sales ASSET TURNOVER = Total Assets l Efficiency Efficiency IFRS IFRS US GAAP US. GAAP (Asset Turnover Ratio) Year 1 Year 1 = 150/200 = 150/200 0.75 0.75 = 150/200 = 0.75 Year 2 = 150/205 = 0.73 = 150/200 = 0.75

Financial Ratio Analysis – Land Case Net Income RETURN ON INVESTMENT = T t l A Total Assets t Profitability IFRS US. GAAP (ROI) Year 1 Year 1 = 100/200 = 100/200 0.50 0.50 = 100/200 = 0.50 Year 2 = 105/205 = 0.51 = 100/200 = = 100/200 = 0 50 0.50

Investment Property Disclosure (IAS 40.75) � Whether a fair value or cost model method is used � Methods and significant assumptions applied (to determine the fair value or no valuation) determine the fair value or no valuation) � The amount recognized in profit or loss Additional Disclosure Disclosure for Cost Method Disclosure for Cost Method for FAIR VALUE (IAS 40.76) 6) (IAS 40.79) � R � Reconciliation amount ili ti t � Depreciation method � Addition resulting from � Useful life & depr. rate acquisition of business � Assets classified as combination bi ti held for sale � Unprofessional valuation � Reconciliations