LEARNING UNIT 2 IAS40 INVESTMENT PROPERTY Disclaimer The information contained in the summary is to highlight important aspects in applying the principles of the applicable statements. The summary is in no way an indication that only the matters mentioned are important to pass. Students must refer to their study guides and textbooks for an understanding of the learning unit. The summary below is primarily a revision tool to assist students in preparation of the exam. Recognition and measurement Recognition: It is probable that future economic benefits will flow to the entity; and The cost of the investment property can be measured reliably Definition and recognition criteria must be met. Initial Measurement: Measured @ cost price including transaction costs and directly attributable costs. Including: any directly attributable expenditure such as legal services, property transfer taxes and other transaction costs. Excluding: start-up costs, initial operating losses, wasted material, or unproductive labour costs. Subsequent costs Capitalise any subsequent costs only if recognition criteria are met. Transfers 4 scenarios see below Disposals / Additions Same rules as for PPE (learning unit 1) Impairments See learning unit 3 on impairments. COST MODEL (IAS 16 PPE) Subsequent Measurement:: Choose: FAIR VALUE MODEL (IAS 40 IP) *except for IAS 40.34: Properties held under an operating lease and classified as IP must use FV model. (leases not part of FAC3702)
Measurement models Cost model: Measure all IP at cost price accumulated depreciation and impairment losses (as for PPE). If held for sale then measure in terms of IFRS 5 (chap 5). Fair Value model: Measure all IP at fair value. 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. The fair value of IP reflects market conditions at the END of the reporting period. Fair value is time specific at a given date. Once classified as IP property is no longer depreciated, if using the fair value model. Changes in fair value are recognised in profit or loss i.e. through the statement of comprehensive income. Transfers Transfer of owner occupied property (PPE) to Investment property (IP) @ FV Apply IAS 16 up to date of change in use (date of transfer). Any difference between the CA and the FV is treated as a REVALUATION according to IAS 16. Property will be depreciated up to the date of transfer, and any impairment losses will be recognised to this date. CA @ date of transfer > FV @ that date - recognise the decrease in profit /(loss), unless it is reversal of a prior revaluation CA @ date of transfer < FV @ that date If a reversal of previous Impairment loss then recognise in profit /(loss) Any remaining portion of the increase is treated as a revaluation surplus (Credit to OCI) If cost model is applied transfers do not change the carrying amount of the property transferred or the cost of that property for measurement and disclosure purposes. Transfer of IP @ FV to PPE or inventory The property s deemed cost for subsequent accounting in accordance with IAS 16 shall be its FV at date of change in use. Transfer from inventory to IP @ FV Any difference between the FV of property at that date and its previous CA is recognised in profit or loss. *Please refer to the detailed transfer diagrams in your study guide.
Disclosure Statement of comprehensive Income profit / (loss) Rental income from IP direct operating expenses from IP that generated rental income during the period direct operating expenses from IP that did not generate rental income during the period Fair value adjustment Statement of Financial Position COST MODEL (IAS 16 PPE) FAIR VALUE MODEL (IAS 40 IP) Disclosure according to IAS16 PPE Disclose if there were any additions, transfers or FV adjustments. Please note that we use the word carrying amount and not cost price. This is the disclosure according to IAS40 INVESTMENT PROPERTY NOTE Investment property Land & Buildings Total Carrying amount at beginning of year (land xx + building xx) xxxx xxxx Additions: - acquisitions xxxx xxxx - subsequent expenditure capitalised xxxx xxxx Transfer to/from IAS 40 requires you to disclose the land and buildings as a total, but you need to show the marker how you calculated the total to be able to obtain your marks. Fair value adjustment xxxx xxxx Carrying amount at end of year xxxx xxxx This amount should be the same as the amount recorded in the PPE or Inventory note. This is easy marks, you need to get this in the exam. This is just disclosure. The FV Adjustment is the difference between the cost price of PY FV amount in the CA at beginning of year. Please note: There is NO DEPRECIATION for IP carried at the FV Model The fair value for Land and buildings were determined on XXXX, by an independent sworn appraiser. Examination tips: When the required information states that you need to disclose Investment Property, immediately when you receive your paper write down the format of the IP note as above.
The disclosure of the deferred tax note is on the statement of financial position approach. DEFERRED TAX NOTE Investment property: Land Fair value adjustments ( XXX x 28% x 66,6%) Investment property: Building Accelerated tax allowances [(Historical Cost - Tax base) x 28%] Fair value adjustments ( XXX x 28% x 66,6%) Deferred tax asset/liability xxx xxx xxx xxx Always remember to indicate if this is a deferred tax asset or liability. This is points in the exam that you need to get. Deferred tax COST MODEL Land No deferred tax IAS 12.15 (b) (ii) FAIR VALUE MODEL 66.6% x 28% on the fair value adjustment IAS 12 Administration building(acquired before 1 April 2007) Manufacturing building or commercial building (acquired on/after 1 April 2007) No deferred tax IAS 12.15 (c) (ii) Deferred tax provided for on the temporary difference between the tax base and the carrying amount of asset @ 28%. 66.6% x 28% on the fair value adjustment IAS 12 [if the presumption is applied] 66.6% x 28% on the fair value adjustment IAS 12 [if the presumption is applied] 28% on the difference between the base cost and the tax base (recoupment of tax allowances) NON-DEPRECIABLE ASSET Only land is non-depreciable Realise only with the sale of the land Provide for deferred tax at 18.6% (66.6% X 28%) on the fair value adjustment above the base cost
DEPRECIABLE ASSET (No depreciation is written off according to IAS 40, but an asset with a limited expected useful life is still seen as a depreciable asset) Example : an investment property according to the fair value model Business model is to consume the economic benefits over time (thus through use) Presumption is rebutted Provide for deferred tax at 28% on the fair value adjustment above base cost Example : an investment property according to the fair value fair value model Presumption that recovery of the amount will normally be through sale Provide for deferred tax at 66.6% x 28% on the fair value adjustment above the base cost and at 28% on the recoupment of previous tax allowances (base cost tax base) Capital Gains tax (CGT) general rules CGT is applicable to assets acquired after 1 October 2001. Proceeds Base cost Tax base Proceeds above cost is taxed at 66.6% x 28% (CGT rate) Proceeds below cost = recoupment of tax allowance at 28% Non - depreciable assets Eg land Scenario: Assume land was purchased at a cost of R100 000. Cost model No tax implications - IAS 12.15 Exempt CA TB TD DT Cost 100 000 100 000 0 Exempt
Fair value model Tax implications of a fair value adjustment are as follows: Above cost Base cost = Tax base Below cost difference difference CA above cost is taxed at 66.6% x 28% (CGT rate) no tax implications = IAS 12.15 Exempt Scenario: Assume land was purchased at a cost of R100 000. The FV of the land was R120 000. R120 000 R100 000 R0 R20 000 R 0 CA above cost is taxed at 66.6% x 28% (CGT rate) no tax implications = IAS 12.15 Exempt CA RS TB TD DT Cost 100 000 Exempt Fair value 20 000 20 000 0 120 000 20 000 100 000 20 000 (3 730) 20 000 x 66.6% x 28% = 3 730
FAC 3702 / Learning unit 2 Deferred tax principles Depreciable assets and SARS grants an allowance Eg Manufacturing buildings The tax implications are dependent on the recovery of the carrying amount of the asset. An entity may recover the carrying amount through use or through sale. PRESUMPTION -Recovery through sale Cost model Deferred tax at 28% Fair value model Deferred tax at 28% on allowance BUT at 66.6% x 28% on the FV adjustment above cost Scenario: Year 1: Assume a machine was purchased at a cost of R100 000. The machine is depreciated over 20 years. Beginning of year 2 FV= R125 000. Tax allowance = 10% not apportioned CA RS TB TD DT CA TB TD DT Cost 100 000 0 100 000 Cost 100 000 100 000 Dep/T all (5 000) 0 (10 000) Dep/T all 0 (10 000) 95 000 0 90 000 5 000 (1 400) 100 000 90 000 10 000 (2 800) 28% Dep/T all (5 000) 0 (10 000) Fv adj 25 000 0 28%x66.6% 95 000 0 80 000 10 000 (2 800) 125 000 90 000 35 000 (7 462) Dep/T all 0 (10 000) 28% 125 000 80 000 45 000 (10 262)
FAC 3702 / Learning unit 2 Fair value model Tax implications of a fair value adjustment are as follows: Fair value = R125 000 Base cost = R100 000 Tax base = R80 000 difference difference R25 000 at 66.6% x 28% (CGT rate) = R4 662 R20 000 x 28% = R5 600 DEFERRED TAX NOTE Investment property: Accelerated tax allowances [(Historical Cost - Tax base) x 28%] 5 600 Fair value adjustments ( XXX x 28% x 66,6%) 4 662 Deferred tax Liability 10 262
FAC 3702 / Learning unit 2 Recovery through use PRESUMPTION REBUTTED Cost model Deferred tax at 28% Fair value model Deferred tax at 28% on allowance AND on the FV adjustment above cost CA RS TB TD DT CA TB TD DT Cost 100 000 0 100 000 Cost 100 000 100 000 Dep/T all (5 000) 0 (10 000) Dep/T all 0 (10 000) 28% 95 000 0 90 000 5 000 (1 400) 100 000 90 000 10 000 (2 800) Dep/T all (5 000) 0 (10 000) FV adj 25 000 0 28% 90 000 0 80 000 10 000 (2 800) 125 000 90 000 30 000 (8 400) Dep/T all 0 (10 000) 28% 125 000 80 000 40 000 (11 200)
FAC 3702 / Learning unit 2 Depreciable assets and SARS does not grant an allowance Eg Office/Admin building The tax implications are dependant on the recovery of the carrying amount of the asset. An entity may recover the carrying amount through use or through sale. PRESUMPTION Recovery through sale Cost model No deferred tax IAS 12.15 Exempt Fair value model Deferred tax at 28% x 66.6% on the FV adjustment above cost Year 1: ABC purchased an office block. Building cost = R1 020 000. Buildings are depreciated over 20 years. SARS does not allow a tax allowance on the building. Year 2: Assume the fair value adjustment for the year for the buildings it is R100 000. CA RS TB TD DT CA TB TD DT Cost 1 020 000 0 1 020 000 Cost 1 020 000 1 020 000 Dep/T all (51 000) 0 0 exempt Dep/T all 0 0 969 000 0 1 020 000 (51 000) 0 1 020 000 1 020 000 0 0 Dep/T all (51 000) 0 0 exempt FV adj 100 000 0 918 000 0 1 020 000 (102 000) 0 1 120 000 1 020 000 100 000 (18 648) Dep/T all 0 0 1 120 000 1 020 000 (100 000) (18 648) 28% x 66.6%
FAC 3702 / Learning unit 2 Recovery through use PRESUMPTION REBUTTED Cost model No deferred tax IAS 12.15 Exempt Fair value model Deferred tax at 28% on the FV adjustment above cost CA RS TB TD DT CA TB TD DT Cost 1 020 000 0 1 020 000 exempt Cost 1 020 000 1 020 000 Dep/T all (51 000) 0 0 Dep/T all 0 0 969 000 0 1 020 000 (51 000) 0 1 020 000 1 020 000 0 0 Dep/T all (51 000) 0 0 exempt RS 100 000 0 28% 969 000 0 1 020 000 (102 000) 0 1 120 000 1 020 000 100 000 (28 000) Dep/T all 0 0 1 120 000 1 020 000 (100 000) (28 000) 28%
FAC 3702 / Learning unit 2 Hints and tips Exam technique Read the question carefully. Draw a timeline of events and clearly mark the events occurring. This will assist you in determining when and how the events occur and assist in presenting a logical solution. There is NO DEPRECIATION ON investment property held at FV MODEL Remember to disclose the narrative information underneath your note: The fair value for Land and buildings were deternubed on XXXX, by an independent sworn appraiser Remember to disclose the fair value adjustment in the: - Investment property note and - Statement of comprehensive income Abnormal credit terms If payment for an investment property is deferred, its cost is the cash price equivalent (ie the present value of future cash flows). The difference between this amount and the total payments is recognised as interest expense over the period of credit. Know the 4 types of transfers: 1 Investment property PPE 2 Investment property Inventory 3 PPE Investment property 4 Inventory Investment property When calculating def tax on Investment Property @ FV Model: Divide your calculation into: - Normal = Accelerated Tax allowance - FV Adjustment Remember to indicate on your Def tax note, Def tax asset or Liability