Government Accounting

&
Accounting for non-profit organizations
 Chapter 8
Investment Property 

Learning Objectives
1. Define investment property and give
examples.
2. State the initial and subsequent
measurements of an investment property.
3. Account for the impairment of investment
property, and the reversal thereof.
 Definition of terms
• Carrying amount – is the amount at which an asset is
presented in the statement of financial position.

• Cash Generating Unit – the smallest identifiable group of

assets held with the primary objective of generating a
commercial return that generates cash inflows from
continuing use that are largely independent of the cash
inflows from other assets or groups of assets.

• Cost – is the amount of cash or cash equivalents paid or the

fair value of other consideration given to acquire an asset at
the time of its acquisition or construction.
 Definition of terms
• Depreciation – is the systematic allocation of the
depreciable amount of an asset over its useful life.

• Impairment – a loss in the future economic benefits

or service potential of an asset, over and above the
systematic recognition of the loss of the asset’s
future economic benefits or service potential through
depreciation.
 Definition of terms
• Owner-occupied property – is 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.

• Recoverable amount – is the higher of a cash-

generating asset’s fair value less costs to sell and its
value in use.
 Investment Property
• Investment Property – is land and/or building held for
rentals or capital appreciation.
• Examples:
a. Land held for long-term capital appreciation rather than
for short-term sale in the ordinary course of operations.
b. Land held for a currently undetermined future use.
c. A building owned by the entity (or held by the entity
under a finance lease) and leased out under one or more
operating leases on a commercial basis.
d. A building that is vacant but is held to be leased out
under one or more operating leases.
e. Property that is being constructed or developed for
future use as investment property.
 Investment Property
• The following are NOT considered investment property:
• Biological assets and Mineral rights and mineral reserves
• Property held for sale in the ordinary course of operations
• Property being constructed on behalf of third parties.
• Property held for future development and subsequent use as
owner-occupied property.
• Property occupied by employees.
• Owner-occupied property awaiting disposal.
• Property that is leased to another entity under a finance lease.
• Property held to provide a social service and which also generates
cash inflows.
• Property held for strategic purposes.
• Property held for use in the production or supply of goods or
services or for administrative purposes.
 Initial Measurement
• IP shall be measured initially at its cost.

• Transaction costs shall be included in this initial

measurement.

• Cost includes purchase price and any directly

attributable expenditures, such as:
a. Professional fees for legal services;
b. Property transfer taxes; and
c. Other transaction costs.
 Initial Measurement
• Costs not included at initial recognition:

• a. Start-up costs unless they are necessary to

bring the property to the condition necessary for
it to be capable of operating in the manner
intended by management;

• b. Operating losses incurred before the

investment property achieves the planned level
of occupancy; or

• c. Abnormal amounts of wasted materials, labor

or other resources incurred in constructing or
developing the property.
 Initial Measurement
• An investment property is initially measured at
cost. The measurement of cost depends on the
mode of acquisition.

• Modes of Acquisition
a. Cash purchase – purchase price plus direct costs
necessary in bringing the asset to its intended
condition.
b. Installment purchase – cash price equivalent
c. Non-exchange transaction – fair value at
acquisition date
d. Self-construction – direct materials, labor, and
construction overhead
 A. Cash purchase
Example: Entity A purchased a land for capital appreciation
at a cash price of P1,000,000. Professional fees and transfer
taxes totaling to P50,000 were also paid.

The accounting entry to recognize the purchase shall be as

follows:

Investment Property, Land P 1,050,000

Cash-MDS, Regular P 1,050,000
To recognize purchase of land for capital appreciation
 b. Non-exchange Transaction
• Where an IP is acquired through a non-exchange
transaction, its cost shall be measured at its fair
value as at the date of acquisition.

• Non-exchange transactions may be through transfer

of property at no cost (donation), or by the exercise
of powers of sequestration.
 b. Non-exchange Transaction

Example: Entity A received an unconditional donation of a

piece of land with a fair value of P2,000,000.

The accounting entry to recognize the receipt of donated land

shall be as follows:

Investment Property, Land P 2,000,000

Income from Grants and Donations in Kind P 2,000,000
To recognize receipt of donated land
 C. Self-constructed Property.
• If an IP is self-constructed, whether by contract or
by administration, all costs related to the
construction shall be recognized as “Construction in
Progress” while it is not completed.

• Upon completion, these costs shall be transferred to

an “Investment Property” account when the criteria
for recognition of such are met.
 C. Self-constructed Property.
Example: Entity A constructed a building intended to earn rent
income. Contract price is P11,200,000, inclusive of VAT,
payable in two progress billings. Advance payment to contractor
is 15% of the contract price while retention fee is 10% of the
progress billing

The following are the illustrative accounting entries:

Advances to Contractors P 1,680,000

Cash-MDS, Regular P 1,680,000
To recognize payment of mobilization fee to contractor.
 C. Self-constructed Property.
CIP- Buildings and Other Structures P 5,600,000
Advances to Contractors P 1,680,000
Accounts Payable 3,920,000

To recognize first progress billing – 50% completed

(P11,200,000 x 50% = P5,600,000 – P1,680,000 = P3,920,000)

 C. Self-constructed Property.
Accounts Payable P 3,920,000
Guaranty/Security Deposits Payable P 560,000
Due to BIR 350,000
Cash-MDS, Regular 3,010,000
To recognize payment for first progress billing

*P5,600,000 * 10% = P560,000 (Retention Fee)

*W/tax assumed at P350,000
 C. Self-constructed Property.
Cash-Tax Remittance Advice P 350,000
Subsidy from National Government P 350,000
• To recognize constructive receipt of NCA for TRA

Due to BIR P 350,000

Cash-Tax Remittance Advice P 350,000
To recognize constructive remittance of withholding tax
through TRA
 C. Self-constructed Property.
CIP-Buildings and Other Structures P 5,600,000
Accounts Payable P 5,600,000
To recognize receipt of final progress billing

Accounts Payable P 5,600,000

Guaranty/Security Deposit Payable P 560,000
Due to BIR 350,000
Cash-MDS, Regular 4,690,000
To recognize payment of final progress billing
 C. Self-constructed Property.
Cash-Tax Remittance Advice P 350,000
Subsidy from National Government P 350,000
• To recognize constructive receipt of NCA for TRA

Due to BIR P 350,000

Cash-Tax Remittance Advice P 350,000
To recognize constructive remittance of withholding tax
through TRA
 C. Self-constructed Property.
Investment Property, Buildings P 11,200,000
CIP-Buildings and Other Structures P 11,200,000
To recognize IP based on the certificate of acceptance

Guaranty/Security Deposits Payable P 1,120,000

Cash-MDS, Regular P 1,120,000
To recognize refund of retention fee
(P560,000 + P560,000.00=P1,120,000.00)
C. Self-constructed Property (By Administration)
Entity A constructed a building by administration with total
costs of P1,048,000, consisting of construction materials
(inclusive of VAT), labor costs and various overhead
expenses amounting to P448,000, P350,000, and P250,000,
respectively.

Construction Materials Inventory P 448,000

Due to BIR P 24,000
Cash-MDS, Regular 424,000

To recognize payment of construction materials amounting to

P 448,000
C. Self-constructed Property (By Administration)
CIP-Investment Property, Buildings P 448,000
Construction Materials Inventory P 448,000
To recognize issue of construction materials amounting to
P 448,000

CIP-Investment Property, Buildings P 350,000

Due to BIR P 35,000
Cash-MDS, Regular 315,000
To recognize payment of labor costs amounting to P350,000
C. Self-constructed Property (By Administration)
CIP-Investment Property, Buildings P 250,000
Water Expenses P 10,000
Electricity Expenses 150,000
Salaries and Wages-Regular 90,000
To recognize payment of overhead expenses amounting to
P250,000

Cash-Tax Remittance Advice P 59,000

Subsidy from NG P 59,000
To recognize constructive receipt of NCA for TRA
C. Self-constructed Property (By Administration)
Due to BIR P 59,000
Cash-Tax Remittance Advice P 59,000
To recognize constructive remittance of taxes withheld through
TRA

Investment Property, Buildings P 1,048,000

CIP-Investment Property, Buildings P 1,048,000
To recognize investment property upon completion of
construction
d. Installment Payment

• If payment for IP is deferred, its cost is the cash

price equivalent. The difference between this amount
and the total payments is recognized as interest
expense over the period of credit.

• Example: Entity A purchased a land for capital

appreciation. Cash price is P1,120,000, 50% down
payment and the balance is payable in 10 equal
annual installments at 10% interest per year.
d. Installment Payment
Investment Property, Land P 1,120,000
Cash-MDS, Regular P 510,000
Due to BIR 50,000
Accounts Payable 560,000
To recognize initial down payment of P560,000

Accounts Payable P 56,000

Interest Expenses 5,600
Cash-MDS, Regular P 58,100
Due to BIR 3,500
To recognize payment of first annual installment
d. Installment Payment

Accounts Payable P 56,000

Interest Expenses 5,600
Cash-MDS, Regular P 58,100
Due to BIR 3,500
To recognize payment of second annual installment
 Subsequent Measurement
• Investment properties are subsequently measured at cost
less accumulated depreciation and accumulated
impairment losses (i.e., Cost Model).

• Note: The fair value model is not allowed for government

entities.

• Depreciation expense to be recognized shall be computed

in the same manner as that for PPE. (To be discussed in
Chapter 9-Property, Plant and Equipment)
Transfers To or From Investment Property
• Transfers to or from investment property shall be made
only when there is a change in use.

• a. Commencement of owner-occupation, for a transfer

from IP to owner-occupied property;
• b. Commencement of development with a view to sale,
for a transfer from IP to inventories;
• -------
• c. End of owner-occupation, for a transfer from owner-
occupied property to IP; or
• d. Commencement of an operating lease (on a
commercial basis) to another party, for a transfer from
inventories to IP.
 Transfers To or From Investment Property
• A government entity accounts for transfers to or from
investment property at cost. Accordingly, no gain or loss
shall arise from the transfer, except when the transferred
asset is impaired.

Example: On January 1, 2015, Entity A decided to

occupy a building currently used as an IP. The building
has a cost of P20,000,000, original useful life of 10 years,
accumulated depreciation of P9,500,000, allowance for
impairment of P500,000, residual value of 5% of the cost
and remaining useful life of 5 years.
 Transfers From Investment Property to Owner-
occupied
• January 1, 2015

Buildings P20,000,000
A/D -IP, Buildings 9,500,000
A/I Losses-IP, Buildings 500,000
A/D-Buildings P 9,500,000
A/I Losses-Buildings 500,000
Investment Property, Buildings 20,000,000
To recognize transfer from IP to owner-occupied property
 Transfers From Investment Property to Owner-
occupied
• January 31, 2015

Depr.-Buildings and Other Structures P 158,333.33

A/D-Buildings P 158,333.33

To recognize depreciation of building for the month of

January 2015
(P 20,000,000 – [(1,000,000/10 )x 1/12] = P 158,333.33)
 Transfer from Investment Property to Inventories…. To be
continued April 5

• When an entity converts its IP to Inventories, the latter shall be

recognized at the carrying amount of the former and shall be
measured in accordance with PPSAS 12-Inventories.

• Example: On January 1, 2015, Entity A decided to subdivide,

develop and sell a land currently held as an IP. The land has a cost
of P20,000,000.

• January 1, 2015
Merchandise Inventory, Land/Reclaimed Land- P 20,000,000
Investment Property, Land P
20,000,000
To recognize transfer from IP to Inventories
Impairment

A property is said to be impaired when its carrying amount in

the Statement of Financial Position exceeds its recoverable
service amount or recoverable amount due to fall in market
value of an asset.
 Impairment
passage of time or normal use

Significant changes with an adverse effect on the entity have

taken place during the period, or will take place in the near
future, in the technological, market, economic, or legal
environment in which the entity operates

Evidence is available of obsolescence or physical damage of an

asset

• A decision to halt the construction of the asset before it is

complete or in a usable condition
 Impairment
The computation for impairment loss is shown in the
formula below:

Impairment Loss = Carrying Amount less Recoverable

Amount

Carrying amount = Cost less Accumulated Depreciation

and Accumulated Impairment Loss
 Impairment
The computation for impairment loss is shown in the
formula below:

Recoverable Amount = Higher of Fair Value less Cost to

sell and Value in Use

Value in Use = Present Value of the Asset’s estimated

future cash flows
(Future Value x Present Value Factor = Present Value)
Impairment
Impairment
 Impairment

If there is any indication that an asset may be

impaired, the recoverable amount shall be
estimated for the individual asset.

If it is not possible to estimate the recoverable

amount of the individual asset, an entity shall
determine the recoverable amount of the cash
generating unit to which the asset belongs (the
asset’s cash-generating unit).

https://www.youtube.com/watch?
v=pROOxBNiizA
 Derecognition
• An investment property is derecognized when it is
disposed or when it is permanently withdrawn
from use and no future economic benefits or
service potential is expected from its disposal.

• The difference between the net disposal proceeds

(if any) and the carrying amount is recognized as
gain or loss in surplus or deficit.
 Derecognition
• Example: A building held as IP is sold to another entity for
P5,000,000. It had a cost of P4,000,000, accumulated
depreciation of P500,000 and allowance for impairment of
P100,000.

Cash-Collecting Officers P 5,000,000

A/D-Investment Property, Buildings 500,000
A/I Losses-IP, Buildings 100,000
Investment Property, Buildings P4,000,000
Gain on Sale of Investment Property 1,600,000
To recognize the gain on the disposal of the IP
Compensation from third parties
• Compensation from third parties for an investment
property that was impaired, lost or given up shall
be recognized in surplus or deficit when the
compensation becomes receivable.
 Compensation from third parties
• Example: A building held as IP was razed by fire. It had
a cost of P4,000,000, accumulated depreciation of
P500,000 and allowance for impairment of P100,000.
 Compensation from third parties
• Example: A building held as IP was razed by fire. It had
a cost of P4,000,000, accumulated depreciation of
P500,000 and allowance for impairment of P100,000.
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