Property Funds

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 todays 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 entitys 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 PL.

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