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Investment property is a property held to earn rentals and/or for capital appreciation, rather than for use in the production or supply of goods or services, for administrative purposes or for sale in the ordinary course of operation. This time, we compare the financial reporting requirements for investment property between MPSAS 16, MFRS 140 and Section 16 of MPERS.
For the purpose of this article, we compare the significant differences between the three standards. Entities in Malaysia apply either one of the standards, depending on the financial reporting framework adopted. Financial Reporting Frameworks in Malaysia discusses on how entities determine which financial reporting framework is applicable to them.
Let us now get into the details of the significant differences between the three standards.
Scoping and applicability of the standards
Generally, there is no significant difference noted with regard to the scope and applicability of the standards.
MPSAS 16, however, includes a guidance for a property held to provide service and generate cash inflows at the same time. It is common for public sector entities to hold a property to provide social service and generates cash inflows. The cash inflows are usually below market rate. In this situation, entities hold the property mainly to provide public service rather than for rental or capital appreciation. As such, entities treat the property in accordance with MPSAS 17 Property, Plant and Equipment instead of MPSAS 16. The revenue generated is incidental to the purpose for which the property is held.
Measurement of investment property
For the measurement requirements, we note the following differences:
Initial measurement of investment property
The three standards require entities to measure investment property initially at its cos. The cost of investment property is its purchase price and any directly attributable expenditure. Unlike the private sector, public sector entities may acquire an investment property through a non-exchange transaction. For example, a transfer of investment property from federal government at no charge for the purpose of renting it out. For this property, MPSAS 16 requires entities to recognise and measure it at its fair value. Entities determine the fair value at the date of acquisition. The fair value is the cost of the property and does not affect the subsequent measurement model.
Subsequent measurement of investment property
As for the subsequent measurement, MPSAS 16 and MFRS 140 provide an accounting policy choice to either use the fair value model or the cost model. Entities must apply the accounting policy chosen consistently to all of its investment property. Any changes from one model to another constitutes an accounting policy changes in which requires a retrospective application under MPSAS 3 and MFRS 108 Accounting Policies, Changes in Accounting Estimates and Errors.
Section 16, on the other hand, by default, requires entities to measure investment property at fair value. No accounting policy choice is available. However, if an entity cannot measure the fair value reliably on an ongoing basis, the entity accounts for it using the cost model. Entities account them using cost model until a reliable measure of fair value becomes available and reliably measured on an ongoing basis.
Under the fair value model, MPSAS 16 and MFRS 140 presume that entities can measure the fair value reliably on a continuing basis. Entities, however, can rebut to this presumption on initial recognition. This arises when there is clear evidence that the fair value is not reliably determinable on a continuing basis when an entity first acquires the property. The rebuttable presumption is, however, not available in Section 16 of MPERS.
Presentation and disclosures
MPSAS 16 and MFRS 140 require entities to disclose the fair value of investment property measured using the cost model. This means, although entities adopt the cost model, entities will still need to determine the fair value for disclosure purpose. This requirement is, however, not available in Section 16 of MPERS.
Additionally, Section 16 of MPERS requires entities to present an investment property not measured at fair value separately in the statement of financial position. This presentation requirement is not required in MPSAS 16 and MFRS 140.
We also note that MPSAS 16 and MFRS 140 require entities to disclose a reconciliation between the carrying amounts at the beginning and end of the period, showing among others, the following:
- Net gains or losses from fair value adjustments
- Transfers to and from inventories and owner-occupied property
- Other changes.
Entities also need to present the reconciliation for prior periods. The requirement to present the reconciliation for prior periods is, however, not applicable in Section 16. Accordingly, entities applying Section 16 do not need to prepare the reconciliation for prior periods.
The above sums up our observation on the significant differences in the financial reporting for investment property under the three standards.
We will continue to bring you comparison for other standards in future articles. In the meantime, you can read other relevant articles in the Financial Accounting section.