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Property Funds

Property Funds. GSCCA / GIFA Update 2006. Property Standards - IFRS. IAS 2 – Inventories* IAS 11 – Construction Contracts* IAS 16 – Property, Plant & Equipment* IAS 40 – Investment Property * Not covered as part of today’s presentation. IAS 40 - Investment Property.

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Property Funds

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  1. Property Funds GSCCA / GIFA Update 2006

  2. Property Standards - IFRS • IAS 2 – Inventories* • IAS 11 – Construction Contracts* • IAS 16 – Property, Plant & Equipment* • IAS 40 – Investment Property • * Not covered as part of today’s presentation

  3. IAS 40 - Investment Property • “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, rather than for: • Use in the production or supply of goods or services for administrative purposes; or • Sale in the ordinary course of business

  4. IAS 40 – Not Investment Property • property held for sale in the ordinary course of business or in the process of construction or development for such sale • property being constructed or developed on behalf of third parties or for future use as investment property • owner occupied properties

  5. Recognition Date • it is probable that the future economic benefits that are associated with the investment property will flow to the enterprise • The cost of the investment property can be measured reliably • possible to split asset into components of “property under construction”, “investment property” etc if could be sold separately eg cinema complex under construction next to completed retail complex.

  6. The Problem with Probable • contingent purchases • eg. Ownership transfer when construction finished Not investment property until constructed finished • eg, ownership transfer when minimum occupancy levels achieved 75% Occupancy level per contract – depends on expectations of economic, environmental and other considerations to conclude • Option to acquire property between defined dates • Matter of judgement to determine if “probable” criteria met. If not probable, is it a derivative instrument

  7. Derivative definition - IAS 39 • A derivative is a financial instrument or other contract within the scope of this Standard with all three of the following characteristics: • a)     its value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract (sometimes called the ‘underlying’); • (b)     it requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors; and • (c)     it is settled at a future date.

  8. If not probable, is it a derivative ? • IAS 39 does not apply to financial instruments to acquire physical assets • exception of contracts that were entered into and continue to be held for the purpose of the receipt or delivery of a non-financial item in accordance with the entity’s expected purchase, sale or usage requirements.

  9. Accounting Treatment • No real guidance in IFRS on accounting treatment • Look to other GAAPs for guidance • Flexibility to fair value / cost less impairment

  10. The problem with reliably measured • eg final purchase price contingent on occupancy rate • eg valuation based on independent valuation at future date eg on completion of construction of cinema.

  11. Transaction costs • Can transaction costs incurred by the purchase of an Investment property be considered in determining the subsequent fair value of an investment property when applying the fair value model ?

  12. Transaction costs • No, the purchase transaction costs incurred may not be separately considered in determining the fair value of an investment property for accounting purposes. • Day One – transaction costs are capitalised • Day Two – transaction costs are effectively written off as an unrealised loss to the P&L.

  13. Borrowing costs – Investment properties under construction • IAS 23 – Borrowing costs shall be recognised as an expense in the period they are incurred, except for borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset shall be capitalised as part of the cost of that asset. The amount of borrowing costs eligible for capitalisation shall be determined in accordance with this IAS 23.

  14. Valuation Approaches • Cost Model – depreciated less impairment • Fair Value Model • Independent Valuations • Frequency • Qualification

  15. Deferred Tax Liability • Do tax-efficient property groups need to recognise deferred tax on unrealised gains ? • Yes, some flexibility to disclose that offset against property value in consolidated financial statements if intention to sell company and not property

  16. Questions

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