PSAK 13 (Revised 2007): Investment Property

PricewaterhouseCoopers

Kristie’s Real Estate KRE

• Real estate management and development service

• Also owns hotels and department stores

• Domiciled in Germany

• Has 3 subsidiaries: – A, supplier of industrial products

– B, financial services entity that is involved in real estate development

– C, manages a chain of hotels and receives management fees for operating its chains

IDENTIFYING INVESTMENT PROPERTY

Question 1 • Entity A, a subsidiary of KRE, is a supplier of industrial

products. In 20X2, the entity purchased a plot of land on the outskirts of a major city. The area has mainly low cost public housing and very limited public transport facilities. The government has plans to develop the are as an industrial park in five years time and the land is expected to greatly appreciate in value if the government proceeds with the plan. How should management classify such a property that is held for undetermined future use? a) Property, plant and equipment b) Investment property c) Inventory

Question 2 • Entity B, a subsidiary of KRE, is a financial service entity

that is involved in real estate development. Entity A has purchased land through the exercise of a purchase option that had been acquired some years a go. The purchase price was €10m and the land’s fair value as determined by an independent valuer is €23,7m. The entity is undecided about whether to develop the land and for sale, but will determine a use within the next accounting period. How should management recognize land held for a currently undetermined future use? a) Property, plant and equipment b) Investment property c) Inventory

Key Learning Points

• Land whose future use has not yet been determined, treatment as investment property is the effective default category under PSAK 13

• However, where the final use has not been decided and each potential use does not meet the IP definition, the property should be classified according to its potential use

Question 3

• KRE owns an office building in Frankfurt. Nine of the ten floors are used as KRE’s head office, while the 10th floor is rented out to a third party. How do you think that KRE should account for its office building? a) As owner-occupied under PSAK 16

b) As investment property under PSAK 13

c) Nine floors of the building as owner occupied under PSAK 16 and the remaining floor as investment property under PSAK 13

Question 4

• Let’s now assume that a restriction in the title deeds of the office building in Frankfurt prevents KRE from selling (or leasing out under a finance lease) the individual floors separately

• How do you think that KRE should now account for this building? a) As owner occupied under PSAK 16

b) As investment property under PSAK 13

c) Nine floors of the building as owner occupied under PSAK 16 and the remaining floor as investment property under PSAK 13

Key Learning Points: Multi purpose property

• Separate accounting can only be applied if it is possible for the portions to be sold (or leased) separately

Owner Occupied

PSAK 13 Rental Income

PSAK 16

Question 5

• Which two of the following should KRE classify as investment property

a) KRE’s owned office building where KRE provides security and maintenance services to the lessees

b) A hotel owned and managed by KRE

c) A hotel owned by KRE but leased to and managed by a third party

Key Learning Point: Service provided to occupants of property

Rental

PSAK 13 Rental

PSAK 16 Service

Service

Question 6

• Entity C, a subsidiary of KRE, manages a chain of hotels and receives management fees for operating its chain, except of the hotel owned by KRE. KRE’s hotel owned is leased to A for 2,000,000 a month for a period of 5 years. Any profit or losses from operating KRE’s hotel rest with A. The hotel that KRE owns has an estimated remaining useful life of 40 years.

• Should a hotel owned by KRE that was leased to its subsidiary be classified as investment property in the consolidated financial statements?

Key Learning Points: property occupied by affiliates

Occupied by Group’s FS Entity’s own FS

Parent or Subsidiary Owner-occupied Investment property

Associate/JV Investment property Investment property

RECOGNITION AND MEASUREMENT

Question 7

• KRE acquires a department store which meets the criteria for an investment property. Which one of the expenditure below do you think that KRE should NOT include in the cost of this investment property?

a) Monthly duty costs (taxes on purchase of the property)

b) Monthly payroll of KRE’s entire property department

c) Fees for external legal advice on the preparation of the purchase contract

Question 8

• Which two of the following subsequent expenditures on a KRE office block with eight floors do you think that KRE should capitalize as part of investment property?

a) Constructing two additional floors

b) Replacing damaged door handles

c) Installing a new, more efficient water system

Key Learning Points

• IP is initially measured at cost, which includes transaction costs for purchased properties

• Subsequent expenditure should be expense as incurred, unless it is probable that the expenditure will generate future economic benefits and its cost can be measured reliably

• The costs of the day to day servicing of the investment property are expensed

Question 9 • If it becomes apparent that an entity can no longer

obtain reliable fair value information for an investment property carried at fair value, the entity should subsequently account for the property under the cost model of PSAK 16

• In which of the following two circumstances would this occur? a) When comparable market transactions are infrequent

and no alternative estimates of fair value are available b) When the variability in the range of reasonable estimates

is so great and the probability of the various outcomes is so difficult to assess that no single fair value estimate can be determined reliably

c) When there is no active market for IP

Question 10

• KRE measures all its hotels, which are accounted for as investment property, at fair value. Because of an economic downturn currently affecting the region where one of its hotels is located, comparable market transactions have become less frequent

• How do you think KRE should measure this hotels? a) It should continue to measure at fair value

b) It should measure it under PSAK 16

Question 11

• KRE owns an investment property that consists of land a building (a department store) in the center of a major city. The carrying value of the property is 80 (land=60 and building=20)

• Management commission a firm of property valuers to value the property. The valuation report provides the following results:

• Existing use basis – 85 (land 65, building 20)

• Highest and best use basis – 100 (land 100, building 0)

Question 11 - continued • The highest and best use valuation assumes

redevelopment of the site. This will involve demolishing the current building and constructing an office tower, which would be leased to tenants

• Management does not intend to redevelop the property, but would like to recognize the higher value (100). However management proposes that the value be allocated as land 80 and building 20, because the existing building will still be used for the foreseeable future

• Should management attribute any value to a building if the fair value of the property is determined on the basis of redevelopment of the site?

Key Learning Points

• In the absence of current prices on an active market for similar property, fair value should be determined from a variety of sources

– Active market for different investment property

– Future cash flows

– Recent prices on less active markets

• Market value assumes the highest and best uses basis, this may not always be its existing use

DISCLOSURES

PSAK 13 Disclosure Requirement

• Extent of involvement of independent professional valuers with recent experience in the location and category of investment property, or

• If there has no independent valuation, disclosure of that fact