 Hello, and welcome to this session. This is Professor Farhad and this session we're going to be looking at IAS 40, which is investment property. This topic is covered in international accounting and you need to know something about it for the CPA exam. As always, I would like to remind you, my viewers, to connect with me on a professional level via LinkedIn. If you don't have a LinkedIn account, I strongly suggest you create one. It's very important for your professional image and network ability. If you haven't subscribed to my YouTube, please subscribe to my YouTube. YouTube is where I house all my lectures. I have over 1500 accounting, tax, and auditing lectures. If you like my lectures, please like them, share them, put them in playlists, let the world know about them. If you're benefiting from them, there's a good chance that other people might benefit as well. This is my Instagram account. I'm trying to grow my Instagram account. This is my Facebook handle on Gumroad. I do have some premium CPA material and this is my website. IAS 40, investment property. The first thing is what is an investment property because we kind of know what property is, property, plant and equipment, land, building, so on and so forth. But what is investment? What is the purpose of this property is for investment? What does that mean? It means we buy a property such as land or building. It's not in property what we mean here. It's not movable. In other words, you cannot move the land in the building to somewhere else like a vehicle. And the purpose for this is to either random, random and collect money, rental income, or you want to, you bought them for speculative purposes. What speculative purposes? It's you're looking for capital appreciation. You bought something for 100,000 and you're hoping it's going to grow to 125 and you will sell it. This is what speculation is. Or it could be both. You're going to collect the rent now. Once the price is right, you would sell it and recognize, realize your gain. Now we have to understand investment property are not property, plant, and equipment because the definition of property, plant, and equipment is they are actively used in operation. Actively used means you are using this building to produce the units, the items that you are producing. You are using this building to house your operation. Well, that's not investment property. Okay. Investment property, they have no depreciation. PPNE depreciation. We depreciate PPNE. PPNE follows IAS-16. Also, that building is not used for administrative purposes. What is administrative purposes? They're housing your HR, you're housing your payroll, they're housing your headquarters. Well, if that's the case, that's it's used in operation. Therefore, it follow IAS-16. Also investment property, it's not something that's held for sale like inventory. Unless you are in the business of buying and selling land. If you are in the business of buying and selling land, then the land will be considered inventory and that will follow IAS-2. Okay. So it's not any of those. This is what investment property is. It's either held for rental, capital, or both. Recognition is important. So the recognition is what is the initial recognition when we first initially recognize the asset and what happened after we recognize it in subsequent year. The initial recognition is pretty straightforward just like the initial recognition for any asset that you purchase such as inventory, a financial instrument, so on and so forth. Initially, it's recorded at that magic word cost just like IAS-16. There's no startup cost if you incur any startup costs and there's no operating loss in pre-stage before you rent that property. What happened to subsequent recognition? Subsequent recognition is basically year 2, year 3, so on and so forth. In subsequent recognition, you have two options just like IAS-16. You can have the cost model which is basically reported at cost IAS-16. Now here's what you have to know about the cost model. Although you're using the cost model, you still have to disclose the fair value in the footnotes. So you still have to find out what's your fair value. Disclose it in the footnotes. Two is the fair value model and notice I did not call it the revaluation model. It's called the fair value. Obviously we don't depreciate those assets. The fair value, what you need to know about it, changes in fair value is recognized in current income and this is important because many people or many students think since it's the fair value, its property, it goes into OCI. No, it doesn't go into the revaluation surplus of OCI. It doesn't go there. Any changes in investment property goes into current income on your income statement and you don't need an external appraisal. You just follow IFRS 13 for that for that model. If you are constructing, before we proceed, US GAAP generally requires the use of the cost model. So this is the difference between IFRS and US GAAP. If you are constructing an investment property, you would report it at cost during construction because it's not ready. Once it's completed, you're supposed to report it at fair value unless it's not possible. You don't know the fair value. There's one model with some exception. In other words, once you select the fair value or the cost for one item, you have to select it for all your items. Transfer and your recognition. Transfer is when you take an investment property and turn it into property, plant, and equipment, or the opposite taken a property, plant, and equipment, and turn it into an investment property. When does the transfer occur? The transfer occur when there is a change in use. Basically, you are using it for a purpose, now that you change the purpose. For example, you went from investment to property, plant, to property, plant, and equipment or inventory. So you had an investment property. You had a building. You had a warehouse and you were renting the warehouse for someone. It was considered investment property. Then what you do? You decided to start operation and use that warehouse to store your own goods. Well, guess what? That warehouse becomes property, plant, and equipment, or you decided now to buy and sell warehouses that becomes inventory. So when that happened, you have to determine the change of the value, the fair value at the date of change. So the date of change, you'll figure out the fair value and any gain or loss goes to the profit or loss, which goes on the income statement. So if you go from investment to property, plant, and equipment, any change in the fair value goes into the income statement. Or it could be the opposite. You're going from property, plant, and equipment. You were producing something where you are using this building to house your operation. Then you decided to move out and rent the building, turn it into an investment property. Now any gain goes into OCI if that's the case. You follow IIS-16 and any loss goes into expats following IIS-16. And if you moved from property, plant, and equipment to inventory, so you had a warehouse and you decided to now, you know what? You're going to start to buy and sell warehouses. Now it's going to be inventory. Gain or loss goes to the profit because now it's becoming inventory. Inventory is part of your operating income. The recognition occur under two circumstances. The recognition is when you take it out. De-recognizing means you're no longer recognizing something. When you dispose of it, when you sell it, when you exchange it, or you permanently would draw it from use with no further benefit. Basically you take it out and you're no longer using it. That's considered your recognition. You have to move it. When you take it out, when you remove the asset, you either have a gain or a loss. And the gain is computed by taking the proceeds, let's assume it's cash, minus the book value or the carrying value, carrying value or book value of that asset. You either have a gain or a loss and goes into the income statement. It goes into the income statement. Now the best way to illustrate this is to actually show you an actual example how this all worked. So let's take a look at Hong Kong and Shanghai Hotel Limited. We're going to look at their incomes, part of their income statement, part of their balance sheet. And under balance sheet notice they have property, plant and equipment that's following IAS-16 and they have investment property following IAS-40. So notice here, this is what we are looking at in this session, IAS-40. We look at IAS-16 in the prior session. And notice 32 out of 43 million of their assets is tied up, I believe this is billion, is tied up in investment property. And that's understandable because they're buying different hotels and those are rental property. So notice here, investment property from year to year is changing because it's reported most probably at fair value. It seems it's fluctuating. And notice here the increase in fair value is reported on the income statement, not an OCI on the balance sheet. Let's take a look at one more example to see how this all fits. Supposed that Hong Kong, Shanghai were to purchase an investment property for 10 million, Hong Kong dollar, year one, January 1st. That increase to an appraised value to 11 million by the end of the year. So when we buy the asset we increase investment, we reduce cash by 10 million. At the end of the year we revalue it, investment property went up by a million and we report the gain of a million and that gain goes into the income statement. And this is basically in a nutshell, IAS 40. If you have any questions about this topic, please email me. If you happen to visit my website for additional lectures, please consider donating. Good luck and study hard for your CPA.