B301 Unit 4 Investment properties and investment in securities

HKSSAP 13 Investment properties                                                            Top

• An investment property is an interest in land and/or buildings where:
  • construction work and development have been completed and
  • held for the increase in value, sometime rented out temporarily at market rate.
• Accounting treatment:
  • carried at open market value
  • lf > 15% of area or value of the property occupied by companies in the same group, that part occupied should be treated as a depreciable asset and the remainder should be treated as investment property.
  • Leases for 20 years or less:
    • If an investment property is held on a lease with an unexpired term of 20 years or less, the property should be subject to annual depreciation in the profit and loss account for matching purposes.
    • The value held on short-term leases should generally be decreased year by year.
    • The fall in the value is debited against the investment property revaluation reserve (through the equity), and the rental income is taken into the P & L a/c.
• Exemptions:
  • insurance companies;
  • charitable organizations;
  • government-subvented organizations;
  • non-profit making organizations and
  • certain unlisted companies.
• Changes in value of properties
  • Any change in the value should be accounted for in an "investment property revaluation reserve" a/c (IPRR) but not included in P & L a/c.
  • If a net deficit results in IPRR a/c, the balance should be charged to P & L a/c.
  • If the market value increases in the future, the deficit will be reversed to a surplus and it should be credited to the P & L a/c up to the amount of the deficit previously charged.

• Surpluses or deficits on revaluation of investment properties
  • In HK -- dealt with on a portfolio basis. The surplus for an investment property can be set off against the deficit of another investment.
  • However, IAS25 (Accounting for Investment) -- dealt with on an individual asset basis.
• A valuation should be carried out:
  • annually by persons holding a recognized professional qualification and having recent post-qualification experience in the location and category of the properties concerned
  • at least every 3 years by an external valuer with similar qualifications

Open market value

Defined by the Hong Kong Institute of Surveyor, means the best price at which an interest in a property might reasonably be expected to be sold at the date of valuation assuming:

• a willing seller;
• a reasonable period in which to negotiate the sale taking into account the nature of the property and the state of the market;
• that values will remain static during that period;
• that the property will be freely exposed to the open market; and
• that no account will be taken of any additional bid by a purchaser with a special interest.

Disclosure requirements

• Classified as non-current assets.
• Followings to be disclosed in notes:
  • the accounting policies for carrying amount, changes in value and revaluation surplus on the sales of investment properties;
  • the carrying amount of investment properties;
  • the balance on the IPRR and its movement;
  • any surplus or deficit on revaluation taken to the P & L a/c;
  • the profit or loss on disposal of any investment properties;
  • the gross rental income from investment properties;
  • significant restrictions on the realizability and the remittance of income and proceeds from disposal of investment properties;
  • if stated at revalued amounts:
    • frequency of revaluation
    • date of the latest revaluation
    • the names and qualifications of valuers, and the bases of valuation.

HKSSAP 24 Investment in securities (1999)                                            Top

• Scope: applies to investments in debt and equity securities such as corporate bonds and shares. Not applied to investment in subsidiaries and associated companies.
• Classification of investments in securities:
  • Held-to-maturity securities (debt securities held to maturity)
    • If a significant proportion (>=10%) of 'held-to-maturity securities' is sold before the maturity dates, the classification of the whole of the held-to-maturity category must be reconsidered and reclassified as investments other than held-to-maturity securities.
    • The disposal before maturity may be considered as maturity if either:
      • the date of sales of a security is so near the maturity date (say, within 3 months) that security's fair value would not be affected by changes in market interest rates or
      • the enterprise has already collected a substantial portion (at least 85%) of the principal outstanding at the time of the sale of this security.
  • Other than held-to maturity securities:
    • Benchmark treatment (preferred treatment)
      • Investment securities (held for a strategic reason or for an identified long-term purpose; maintaining a good relationship with a business counterpart or for generating regular cash inflows rather than for short-term fluctuations in price)
      • Other investments (held for capital gain and trading purposes; generally in liquid securities) or
    • Alternative treatment (Allowed but not preferred treatment)
      • Trading securities (held for trading purposes; for generating a trading profit from short-term fluctuations in its price; such trading purposes must be intended at the time of acquiring it)
      • Non-trading securities (not held for trading purposes)
• Accounting treatments
  • In the past, investments were classified as either long-term or short term investments under the heading of fixed assets or current assets;
  • Held-to-maturity securities:
    • Measured at amortized cost in the balance sheet which is the cost adjusted by the cumulative amortization of the premium or discount (i.e. the difference between the purchase price and the maturity amount)
    • E.g. if you need to pay $120 to purchase debentures having a nominal value of $100, there is a premium of $20.
  • The benchmark treatment
    • Investment securities: carried at cost less any provision for diminution in value that is expected not to be temporary.
    • Other investments: measured at fair value in the balance sheet, and unrealized holding gains or losses should be included in the P & L a/c.
    • Disposal of investment: profit or loss should be accounted in the P & L a/c.
  • Alternative treatment (complying with IAS 39)
    • Trading securities: measured at fair value. Any gain or loss should be included in P & L a/c.
    • Non-trading securities: measured at fair value. Any gain or loss should be recognized directly in equity (i.e. investment revaluation reserve). If the securities are disposed of or impaired, the cumulative gain or loss should be transferred from the investment revaluation reserve to the P & L a/c.
  • Fair value:
    • Quoted companies: the quoted market prices of securities;
    • Unquoted or inactive quoted companies: different pricing techniques such as DCF, PE ratios and dividend yield may be used.
  • Impairment:

  Investment in securities	Recorded at	Impairment Loss
  Held-to-maturity securities (HTMS)	Amortized cost	Dr. P & L a/c
  		Cr. Provision for loss
  Other than HTMS
  Benchmark treatment
  Investment securities	Cost	Dr. P & L a/c
  		Cr. Provision for loss
  Other investments	Fair value	Reviewed and adjusted annually
  (These securities should be reviewed annually to assess whether their fair value has declined below the carrying amount. Unless the decline in value is temporary, the reduction in value should be recognized as expense in the P & L a/c for the period. It is generally assumed that the decline in value is not temporary if any condition indicatiing an impairment loss in the carrying amount of securities has occurred for three years.)
  Alternative treatment
  Non-trading securities	Fair value	Transfer from equity (investment revaluation reserve) to P & L a/c
  Trading securities	Fair value	Reviewed and adjusted annually

  • Transfer between categories of investment:

• Disclosure requirements
  • classified as either fixed assets or current assets in the balance sheet, depending on the length of time held
  • An analysis in the notes to the accounts about the classification of securities:
    • equities and debt securities
    • listed and unlisted securities
    • held-to-maturity securities, investment securities and other investments (in the benchmark treatment)
    • held-to-maturity securities, trading securities and non-trading securities (in the alternative treatment)
  • Additional disclosures:
    • the accounting policies adopted
    • the significant amounts related to investments in securities and included in income for:
      • dividends and interest
      • the net realized gain or loss on disposal
      • the net realized and unrealized holding gain or loss
      • the net gain or loss from transfers between categories of securities
      • impairment losses
    • the market value of listed investments if they are not carried at market value
    • significant restrictions on the realizability of investments or the remittance of income and proceeds of disposal
    • the movements in investment revaluation reserve
    • an analysis of the portfolio of investments