rahmanawan6@gmail.

com Abdul Rahman Panjaitan

annisadew67@gmail.com Annisa Dewi Syafrina
danilalamsyah01@gmail.com Danil

Department of Accounting, Faculty of Economics, Andalas University

BUAPAKMU DARI
Popular slang back then (generation 90s kids will get it)
Negative comments on IAS 40
Robert Gazzi and Ming Tse of PwC:
...taking all fair value changes through the
profit and loss account would result in
substantial volatility of reported profit year
on year...
...using reported profit to measure company’s
performance would be possibly misleading.
The Hong Kong Accountant, January 2002.
The Hong Kong and Shanghai Hotels,
Ltd:
..in the view of the directors either not
reflecting the commercial substance of the
business or being subject to significant
potential short-term volatility.
..the investment properties were not revalued
at 30 June 2005 since the director consider
that such change of practice could introduce a
significant element of short term volatility
into the income statement..
Interim report of June 2005
 Hong Kong Investment
Property
Hong Kong is a world-recognised
centre for property construction,
development and investment (KPMG
China and Hong Kong, 2004) and the
total market capitalisation of its
property industry
(conglomerates/consolidated
enterprises excluded) in 2006 was
HK$13,249bn, representing 11% of
the total market capitalisation of all
Hong Kong Stock Exchange Main
Board equities (HKSE, 2005, 2006).
Investment property is a significant component of many company balance sheets in
Hong Kong and the way it is accounted for has become an issue of prominent
interest in Hong Kong in 2005–2006 (McBride, 2006)
The date 1 January 2005 marked the
beginning of a new era when accounting
standards in Hong Kong became fully
converged with International Financial
Reporting Standards (IFRS).
 SSAP 13, Standard Prior IFRS that Regulates
Investment Property in Hong Kong
Statement of Standard Accounting Practice 13 (2000) adopted the
definition of open market value from the Hong Kong Institute of
Surveyors which defined it as 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 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 (HKSA, 2000).
 Main Issue
“How many companies adopt HKAS 40 prior and after year 2005?”

“Why many companies adopt HKAS 40 early ?”

“What is the impact by adopting HKAS 40 for real estate businesses in

Hong Kong?”
“How many companies adopt HKAS 40 prior and after year 2005?”
Related research:
“Why many companies adopt HKAS 40 early ?”
 HKAS 40 Investment Properties
SSAP 13 Investment Properties
(effective 2005)
(2000)

17. ...changes in the value of 35. A gain or loss arising from a

investment properties should not change in the fair value of
be taken to the profit and loss investment property shall be
account but should be treated as recognised in profit or loss for the
movements in an investment period in which it arises.
property revaluation reserve,...
 Fair Value Advantages

• Historical cost unable to reflect price change

due to inflation (Deegan & Unerman, 2006)
• Fair value for certain assets reflects the
market assessment caused by current
economic conditions (Riahi-Belkaoui, 2004;
Alkhadash & Abdullatif, 2009)
• Fulfills the financial statement information by
reflecting asset liability management
activities (Gebhardt et al., 2004; Siam and
Abdullatif, 2011)
• Representing up-to-date value and true
economic substance (Penman, 2007)
• Improve international accounting
harmonization (Barlev & Haddad, 2007)
 Fair Value Disadvantages

• Cause distortion for net income, less reliable than

traditional methods, possibility to manipulate fair values by
managers, and might break historical cost model which
more understandable (Evans, 2003)
• Increase volatility of earnings and unavailable market
information can misuse the fair value estimations (Penman,
2007)
• Irrelevant when measuring particular assets, ex: WIP or
Inventorie (Benston, 2008)
• Undependable in estimating future cash flows, possibility to
apply subjective estimations and practice of moral hazard
by managers (Ronen, 2008)
“What is the impact by adopting HKAS 40 for real estate businesses in
Hong Kong?”
Profit from Operations
2005 2004
HK$’M HK$’M

Annual Report of IDT International Ltd, 2005

Supporting Research:
House Price Change in Hong Kong, Source: Rating and Valuation Department
Summarization both references:

• Increase in the profit for current period and the

total asset of the company.
• Significant market price reaction to investment
properties’ fair value change information
• Significant association between the market-
adjusted annual share returns and the
presentation of the investment properties’ fair
value change in the income statement
• Result above strongly suggest that investors
appear to place more value on HKAS 40 rather
than SSAP 13
Companies Investors Goverment
Our group final judgement for HKAS 40
adoption in Hong Kong
 Decision Usefulness, according to
IASB
The objective of financial reporting is defined as: “To provide
financial information about the reporting entity that is useful to
existing and potential investors, lenders and other creditors in making
decisions about providing resources to the entity. Those decisions
involve buying, selling or holding equity and debt instruments, and
providing or settling loans and other forms of credit.” ( CF OB2).
Decisions about selling or holding such instruments are
assumed to depend on the return these primary users expect from
investing in them (CF OB3 & OB5). Consequently, users need
information to help them assess the prospects for future net cash
inflows to an entity (CF OB3).

Thus, financial statements provide information that should be useful

in estimating the value of the reporting entity (CF OB7).
 Relevance and Faithful Representation

“If financial information is to be useful, it must be relevant and

faithfully represents what it purports to represent” (CF QC4).

Relevant financial information is defined as Information

that is: “capable of making a difference in the decisions made by
users.” (CF QC6), which it is regarded as having if it has
predictive and/or confirmatory value (CF QC7). A
predicative value is attributed to financial information that
can be employed by users as an input for predicting future
outcomes (CF QC 8) and a confirmatory value if it provides
feedback about previous evaluations (CF QC9).
In CF QC 12, IASB admits that is unlikely to achieve a
perfectly faithful representation of a phenomenon.
Nevertheless, the goal is to maximize the quality of
the characteristics that IASB believes such a depiction
should have; complete, neutral and free from error
(CF QC12). In short, Faithfull representation is not
intended to mean accurate in all respects. Free from
error is understood as no errors in the description of
a phenomenon and the processes used to produce
the reported information (CF QC15). Neutral is
described as without bias (CF QC14) and complete as
including all information necessary to understand the
depicted phenomenon (CF QC13).

Finally, QC 17 of the conceptual framework provides

that: “Information must be both relevant and
faithfully represented if it is to be useful. Neither a
faithful representation of an irrelevant phenomenon
nor an unfaithful representation of a relevant
phenomenon helps users make good decisions.”
In Financial Accounting Theory, Scott (2003) writes the
following on the fundamental problem of accounting:
“Investors’ interests are best served by information that
provides a useful tradeoff between relevance and reliability,
where relevant information is that which enables investors to
assess the firm’s future economic prospects, and reliable
information is that which is precise and free of bias or other
management manipulation.”
Weijun (2007) Findings:
1. Fair Value of investment property is
relevant to investor when they are
m a k i n g e co n o m i c d e c i s i o n o n
respective company.
2. Since the relevance of information
is the main concern for investors, so
the reliability should not be an
obstacle of applying fair value
accounting on investment property.
Case Study 5.3
 Additional Information
In Hong Kong, since 1997, all land has
become the property of the People’s
Republic of China while the government
of the Hong Kong Special Administrative
Region is responsible for its
management, use and development.
In other words, every piece of land in
Hong Kong (with the sole exception of St.
John’s Cathedral, the only freehold
property in Hong Kong) is leasehold
property (www.dlapiperrealworld.com).
IAS 40 Investment Property (p.5)

• Investment property is 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:
(a) use in the production or supply of
goods or services or for administrative
purposes; or
(b) sale in the ordinary course of business.
• Owner-occupied property is
property held (by the owner or
by the lessee under a finance
lease) for use in the production
or supply of goods or services or
for administrative purposes.
 IAS 40 Investment Property
(p.7)
7. Investment property is held to earn rentals
or for capital appreciation or both. Therefore,
an investment property generates cash flows
largely independently of the other assets
held by an entity.
This distinguishes investment property from
owner-occupied property. The production or
supply of goods or services (or the use of
property for administrative purposes)
generates cash flows that are attributable
not only to property, but also to other assets
used in the production or supply process. IAS
16 Property, Plant and Equipment applies to
owner-occupied property.
 IAS 40 Investment Property
(p.12)
12. In other cases, the services
provided are significant. For example,
if an entity owns and manages a
hotel, services provided to guests are
significant to the arrangement as a
whole.

Therefore, an owner-managed hotel

is owner-occupied property, rather
than investment property.
Recognition, Measurement, and Disclosure for
Investment Property
Recognition
Investment property shall be
recognised as an asset when, and
only when:

(a)it is probable that the future

economic benefits that are
associated with the investment
property will flow to the entity;
and
(b) the cost of the investment
property can be measured reliably.

(IAS 40, p. 16)

Measurement
Measurement at Recognition:
An investment property shall be
measured initially at its cost. Transaction
costs shall be included in the initial
measurement.

Measurement after recognition:

Subsequent to the initial recognition, IAS
40 requires an entity to choose as its
accounting policy either the fair value
model or the cost model and to apply
that policy to all of its investment
property.

(IAS 40, p. 20 & p.32A)

Transfer
Transfers to, or from, investment property shall
be made when, and only when, there is a
change in use, evidenced by:
(a) commencement of owner-occupation, for a
transfer from investment property to owner-
occupied property;

(IAS 40, P.57)

For a transfer from investment property carried

at fair value to owner-occupied property or
inventories, the property’s deemed cost for
subsequent accounting in accordance with IAS
16 or IAS 2 shall be its fair value at the date of
change in use.
(IAS 40, p.60)
Disclosure (IAS 40, P.75)
An Entity shall disclose:
• whether it applies the fair value model or the
cost model.
• The criteria used in classified invesment property
• the methods and significant assumptions applied
in determining the fair value of investment
property
• the amounts recognised in profit or loss
• the existence and amounts of restrictions on the
realisability of investment property or the
remittance of income and proceeds of disposal.
• contractual obligations to purchase, construct or
develop investment property or for repairs,
maintenance or enhancements.
People is Money
Money is People