3.3 Investment Property and Agriculture (PAS 40 and PAS 41)

Investment Property and Agriculture (PAS 40 and PAS 41)

Investment property (two FAR items) and biological assets (two FAR items) share a theme: fair value measurement through profit or loss as an alternative to cost. This section defines investment property, compares the cost and fair value models with a worked example, explains transfers when use changes, and then applies PAS 41 to living animals and plants, agricultural produce, and bearer plants.

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1. PAS 40: Investment Property

Investment property is land or a building (or part of a building, or both) held by the owner (or by a lessee as a right-of-use asset under PFRS 16) to earn rentals or for capital appreciation (or both), rather than for:

1. Use in the production or supply of goods/services or for administrative purposes (owner-occupied property, PAS 16); or
2. Sale in the ordinary course of business (inventory, PAS 2).

Measurement Models

An entity selects either the Cost Model or the Fair Value Model for all its investment property:

• Cost Model: Measured at cost less accumulated depreciation and accumulated impairment losses (identical to PAS 16). Fair value must still be disclosed in the financial statement notes.
• Fair Value Model: Measured at fair value at each reporting date. Any gain or loss arising from a change in fair value is recognized directly in Profit or Loss in the period in which it arises. No depreciation is recognized.

Classification Transfers

Transfers to or from investment property occur only when there is an observable change in use:

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2. Worked Example: Cost Model versus Fair Value Model

On January 1, 2025, Tagaytay Realty buys an office building to lease to tenants for PHP 20,000,000, of which PHP 5,000,000 relates to the land. The building has a 25-year useful life and no residual value. Fair value of the whole property is PHP 21,500,000 on December 31, 2025 and PHP 21,000,000 on December 31, 2026.

The policy choice applies to all investment property. An entity that chooses the fair value model may measure a particular property at cost only if its fair value cannot be measured reliably on a continuing basis (an exception that applies until disposal). A change from the cost model to the fair value model is allowed only if it results in a more relevant presentation, which PAS 40 considers highly unlikely in the reverse direction.

Other recurring PAS 40 rules:

• Dual-use property is split only if the parts could be sold or leased out separately; otherwise it is investment property only if an insignificant portion is owner-occupied.
• Ancillary services keep a property as investment property if they are insignificant (a building with security and maintenance), but a hotel operated by the owner is owner-occupied PPE.
• Property leased to a subsidiary is investment property in the lessor's separate statements but owner-occupied in the consolidated statements.
• Property under construction for future use as investment property is investment property.

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3. PAS 41: Agriculture and Biological Assets

• Biological Assets: Living animals or living plants. Under PAS 41, biological assets are measured on initial recognition and at each reporting date at Fair Value Less Costs to Sell (FVLCTS). All changes in FVLCTS are recognized in Profit or Loss.
• Agricultural Produce: Harvested product of the biological asset (e.g., picked fruit, cut timber, harvested milk). Measured at harvest point at FVLCTS. This value becomes deemed initial cost under PAS 2 for subsequent inventory accounting.
• Bearer Plants (PAS 16 Exception): Living plants that: (1) are used in the production or supply of agricultural produce; (2) are expected to bear produce for more than one period; and (3) have a remote likelihood of being sold as agricultural produce (e.g., rubber trees, oil palms, grapevines, fruit trees). Bearer plants are scoped out of PAS 41 and accounted for under PAS 16 (at cost or revaluation model). However, the produce growing on bearer plants (e.g., developing fruit) remains under PAS 41 at FVLCTS.

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4. Worked Example: Biological Assets and Agricultural Produce

On January 1, 2026, a dairy farm in Bukidnon has 100 milking cows with a fair value less costs to sell (FVLCTS) of PHP 60,000 each. During 2026, ten calves are born and the herd produces 50,000 liters of milk. At the point of harvest, milk has an FVLCTS of PHP 40 per liter. At December 31, 2026, each mature cow has an FVLCTS of PHP 64,000 and each calf PHP 12,000.

Additional PAS 41 points:

• If fair value cannot be measured reliably on initial recognition (no quoted price and unreliable alternative estimates), the biological asset is carried at cost less accumulated depreciation and impairment until fair value becomes reliably measurable.
• An unconditional government grant related to a biological asset measured at FVLCTS is recognized in profit or loss when it becomes receivable; a conditional grant is recognized when the conditions are met.
• Bearer plants (coconut trees, oil palms, mango trees, grapevines) are PPE under PAS 16, but the fruit growing on them remains a biological asset under PAS 41 until harvest.
• Processing after harvest (turning milk into cheese, logs into lumber) is outside PAS 41 and falls under PAS 2.