Recognition of Investment Property

Keywords: Mazars, Thailand, Accounting, TFRS, NPAEs, Investment Property

26 July 2019

• Investment property is property (land or a building or part of a building or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both. Owner-occupied property is property held for use in the production or supply of goods or services or for administrative purposes.

Examples of investment property are as follows:

(a) Land held for long-term capital appreciation

(b) Land held for a currently undetermined future use.

(c) Building owned by the entity or held by the entity under a financial lease and leased out under one or more operating lease

(d) Vacant building held to be leased out under an operating lease

(e) Property that is being constructed or developed for future use as investment property

Some properties comprise a portion that is held to earn rentals or for capital appreciation and another portion that is held for use in the production or supply of good or services or for administrative purposes. If these portions could be sold separately or leased out separately under a finance lease, an entity accounts for the portions separately.

If the portions could not be sold separately, the property is investment properly only if an insignificant portion is held for use in the production or supply of goods or services or for administrative purposes (Paragraph 202 of TFRS for NPAEs).

• Recognition

Investment property shall be recognised as an asset when

1. It is probable that the future economic benefits that are associated with the property will flow to the entity and;

2. Cost of the property can be reliably measured.

• Measurement at recognition

An investment property shall be measured initially at its cost. Transaction costs shall be included in the initial measurement. The cost of a purchased investment property comprises its purchase price and any directly attributable expenditure. Directly attributable expenditure includes, for example, professional fees for legal service, property transfer taxes and other transaction costs.

Scenario

On 30 June 2018, Company A acquired a building at Baht 6 million. The building is expected to have a useful life of 20 years.

Company A uses 60% of the building space for its own business operations, whilst it has entered into a rental agreement with a third party for the remaining 40% and earns rental income of Baht 1.5 million in 2018.

Issue

How should these transactions be treated in the financial statements for the year ended 31 December 2018?

Response

As noted above, Company A can capitalise and recognise the portion of the building as investment property in relation to the rented area of 40%. Therefore, the Company would recognise an investment property at Baht 2.4 million in the financial statements in 2018 and depreciate it over the useful economic useful life. In addition, rental income of Baht 1.5 million should be recognised as income in the statements of income.

The remaining 60% of the building would be classified as a standard property asset and depreciated over its useful economic life.

Reference: TFRS for NPAEs