Annual Report 2012 - ORCO Germany

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2.6. Investment property
Property that is held for long-term rental yields or for capital appreciation or both (including the land bank), and that is not occupied by the Group, is
classified as investment property.
Investment property comprises of freehold land, freehold buildings, extended stay residences, land plots held under operating lease and buildings held
under finance lease.
Land plots held under operating lease is classified and accounted for as investment property when the definition of investment property is met.
Investment property is measured initially at its cost, including related transaction costs.
After initial recognition, investment property is carried at fair value. Fair value is based on active market prices, adjusted, if necessary, for any difference
in the nature, location or condition of the specific asset. If this information is not available, the Group uses alternative valuation methods such as recent
prices on less active markets or discounted cash flow projections. These valuations are performed annually by an independent expert, DTZ Debenham
Tie Leung. Investment property that is being redeveloped for continuing use as investment property or for which the market has become less active
continues to be measured at fair value.
The fair value of investment property reflects, among other things, rental income from current leases and assumptions about rental income from future
leases in the light of current market conditions. The fair value also reflects, on a similar basis, any cash outflows that could be expected in respect of the
property. Some of those outflows are recognized as a liability, including finance lease liabilities in respect of land classified as investment property;
others, including contingent rent payments, are not recognized in the consolidated financial statements.
Subsequent expenditure is charged to the asset’s carrying amount only when it is probable that future economic benefits associated with the item will
flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance costs are charged to the consolidated income
statement during the financial period in which they are incurred.
Changes in fair values are recorded in the consolidated income statement under “Net gain/(loss) from fair value adjustment on investment property”.
If an item of property, plant and equipment becomes an investment property because its use has changed, any difference resulting between the carrying
amount and the fair value of this item at the date of transfer is recognized in equity as a revaluation of property, plant and equipment under IAS 16.
However, if a fair value gain reverses a previous impairment loss, the gain is recognized in the consolidated income statement.
Freehold lands for which the destination is not specified at the acquisition date are classified under Investment property as land bank. The specific
destination (if any) is to be determined by the investment committee approving the acquisition. The destination of land bank plots is considered to remain
uncertain until the start of the development that will trigger the transfer at fair value to inventories. The start of the development will depend on whether it
is decided by the Investment Committee to perform a land development with a view to sale or a construction development with a view to sale. In the case
of a construction development with a view to sell in the ordinary course of activities, the start of the development is considered to be when the project
design is definitive, the building permit is granted and the start of the construction has been validated by the Investment Committee. In the case of a land
development with a view to totally or partially sell the parcels in the ordinary course of activities, the start of the development is considered to be the
moment at which the Group has obtained official support from state or city authorities in order to start working on the master plan modification.
If the start of a development of a freehold land with the objective to keep the asset for future rental or value accretion, the property will not be transferred.
All borrowing costs are expensed except for the borrowing costs that are capitalized as part of the cost of that asset when they are directly attributable to
the acquisition, construction or production of a qualifying asset. Capitalized borrowing costs include foreign exchange differences on loans subscribed for
the purpose of obtaining the qualifying asset without limitation; such changes may be positive or negative.
If an investment property becomes owner-occupied, it is reclassified as property, plant and equipment, and its fair value at the date of reclassification
becomes its cost for accounting purposes. Property that is being constructed or developed for future use as investment property is classified as
investment property and stated at fair value, due to the application since the beginning of the year 2009 of the IAS 40 revised. The properties previously
recognized as Properties under development as at 31 December 2008 have been transferred as at 1 January 2009 in Investment Property at their 31
December 2008 fair value.
2.7. Property, plant and equipment
Owner-occupied buildings and fixtures and fittings are classified as property, plant and equipment. Properties under development are classified as
property, plant and equipment only if their future use is owner operated real estate assets (hotels, logistics warehouses or owner-occupied office
buildings.
All property, plant and equipment are stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the
acquisition of the items.
Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future
economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance
are charged to the consolidated income statement during the financial period in which they are incurred.
Depreciation, based on a component approach, starts off when construction or development is completed. Depreciation is calculated using the straightline
method to allocate the costs over the asset’s estimated useful lives, as follows:
- Lands Nil
- Buildings 50 to 80 years
- Fixtures and fittings 3 to 20 years
ANNUAL CONSOLIDATED FINANCIAL STATEMENTS | 12