Module 16 Investment Property
Module 16 Investment Property
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Contents
INTRODUCTION __________________________________________________________ Learning objectives ________________________________________________________ IFRS for SMEs ____________________________________________________________ Introduction to the requirements_______________________________________________ 1 1 2 2
REQUIREMENTS AND EXAMPLES ___________________________________________ 5 Scope of this Section _______________________________________________________ 5 Definition and initial recognition of investment property _____________________________ 6 Measurement at initial recognition ____________________________________________ 11 Measurement after recognition_______________________________________________ 13 Transfers _______________________________________________________________ 16 Disclosures ______________________________________________________________ 20 SIGNIFICANT ESTIMATES AND OTHER JUDGEMENTS _________________________ 26 COMPARISON WITH FULL IFRSs ___________________________________________ 28 TEST YOUR KNOWLEDGE ________________________________________________ 29 APPLY YOUR KNOWLEDGE _______________________________________________ Case study 1 ____________________________________________________________ Answer to case study 1 ____________________________________________________ Case study 2 ____________________________________________________________ Answer to case study 2 ____________________________________________________ 35 35 37 41 43
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This training material has been prepared by IFRS Foundation education staff and has not been approved by the International Accounting Standards Board (IASB). The accounting requirements applicable to small and medium-sized entities (SMEs) are set out in the International Financial Reporting Standard (IFRS) for SMEs, which was issued by the IASB in July 2009.
INTRODUCTION
This module, updated in January 2013, focuses on the accounting and reporting of investment property in accordance with Section 16 Investment Property of the IFRS for SMEs that was issued in July 2009 and the related non-mandatory guidance subsequently provided by the IFRS Foundation SME Implementation Group. It introduces the learner to the subject, guides the learner through the official text, develops the learners understanding of the requirements through the use of examples and indicates significant judgements that are required in accounting for investment property. Furthermore, the module includes questions designed to test the learners knowledge of the requirements and case studies to develop the learners ability to account for and disclose investment property in accordance with the IFRS for SMEs.
Learning objectives
Upon successful completion of this module you should know the financial reporting requirements for investment property in accordance with the IFRS for SMEs as issued in July 2009. Furthermore, through the completion of case studies that simulate aspects of the real world application of that knowledge, you should have enhanced your competence to account for investment property in accordance with the IFRS for SMEs. In particular you should, in the context of the IFRS for SMEs, be able:
to distinguish investment property from other assets of an entity to identify when items of investment property qualify for recognition in financial statements to measure items of investment property on initial recognition and subsequently to present and disclose investment property in financial statements to identify when an item of investment property is to be derecognised or transferred to another classification of asset, and account for that derecognition or transfer to demonstrate an understanding of significant judgements that are required in accounting for investment property.
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a preface, which provides a general introduction to the IFRS for SMEs and explains its purpose, structure and authority. implementation guidance, which includes illustrative financial statements and a disclosure checklist. the Basis for Conclusions, which summarises the IASBs main considerations in reaching its conclusions in the IFRS for SMEs. the dissenting opinion of an IASB member who did not agree with the publication of the IFRS for SMEs.
In the IFRS for SMEs the Glossary is part of the mandatory requirements. In the IFRS for SMEs there are appendices in Section 21 Provisions and Contingencies, Section 22 Liabilities and Equity and Section 23 Revenue. Those appendices are non-mandatory guidance. Further, the SME Implementation Group (SMEIG), responsible for assisting the IASB on matters related to the implementation of the IFRS for SMEs, published implementation guidance in the form of questions and answers (Q&As). The Q&As are intended to provide non-mandatory and timely guidance on specific accounting questions that are being raised with the SMEIG by users implementing the IFRS for SMEs. When the IFRS for SMEs was issued in July 2009, the IASB undertook to assess entities experience of applying the IFRS for SMEs following the first two years of application and consider whether there is a need for any amendments. To this end, in June 2012, the IASB issued a Request for Information: Comprehensive Review of the IFRS for SMEs. Currently it is expected that an exposure draft proposing amendments to the IFRS for SMEs will be issued in the first half of 2013.
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Notes(1)
Some incorrectly think that investment property appears only in the financial statements of property investment entities. However, many entities whose main business is not that of a property investment entity (eg some manufacturers and retailers) also hold property for rental to others and for capital appreciation. An entity does not have an accounting policy choice but, rather, the accounting for investment property is driven by circumstances. If an entity knows or can measure the fair value of an item of investment property without undue cost or effort on an ongoing basis, it must use the fair value through profit or loss model for that investment property. It must use the cost-depreciation-impairment model in Section 17 for
(1)
SME Implementation Group (SMEIG)April 2012: Application of undue cost or effort Undue cost or effort is deliberately not
defined in the IFRS for SMEs, because it would depend on the SMEs specific circumstances and on managements professional judgement in assessing the costs and benefits. Whether the amount of cost or effort is excessive (undue) necessarily requires consideration of how the economic decisions of the users of the financial statements could be affected by the availability of the information. Applying a requirement would result in undue cost or effort because of either excessive cost (eg if valuers fees are excessive) or excessive endeavours by employees in comparison to the benefits that the users of the SMEs financial statements would receive from having the information. Assessing whether a requirement will result in undue cost or effort should be based on information available at the time of the transaction or event about the costs and benefits of the requirement. On any subsequent measurement, undue cost or effort should be based on information available at the subsequent measurement date (eg the reporting date). Undue cost or effort is specifically included for some requirements. It may not be used for any other requirements in the IFRS for SMEs. (See Q&A 2012/01 at http://go.ifrs.org/IFRS+for+SMEs+QandA)
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Notes
Property held for the purposes described in paragraph 16.2(b) are inventories (see Section 13 Inventories). Provided that the owner-occupied property described in paragraph 16.2(a) is expected to be used during more than one period, it is property, plant and equipment (see Section 17 Property, Plant and Equipment). 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. See paragraph 16.4 for the classification of mixed use property. Judgement is sometimes needed to determine whether a property qualifies as investment property. For example, when an entity provides ancillary services to the occupants of a property it holds, it treats the property as investment property if the
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16.3
A property interest that is held by a lessee under an operating lease may be classified and accounted for as investment property using this section if, and only if, the property would otherwise meet the definition of an investment property and the lessee can measure the fair value of the property interest without undue cost or effort on an ongoing basis. This classification alternative is available on a property-by-property basis.
Notes
In accordance with Section 20 Leases, a lessee under an operating lease does not recognise a leased asset and does not recognise the related lease obligation in its statement of financial position (see Section 20). Furthermore, if the lessee makes an upfront payment relating to a property interest held under an operating lease, the lessee accounts for that payment as a prepaid expense, not as an item of property. However, paragraph 16.3 allows for such an entity (as the lessee) to elect, on a property-by-property basis, to account for the operating lease of investment property as if it were a finance lease in accordance with Section 20, provided that the property would otherwise meet the definition of an investment property and the lessee can measure the fair value of the property interest without undue cost or effort(2) on an ongoing basis.
(2)
See footnote (1) about SME Implementation Group (SMEIG)April 2012: Application of undue cost or effort
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16.4
Mixed use property shall be separated between investment property and property, plant and equipment. However, if the fair value of the investment property component cannot be measured reliably without undue cost or effort, the entire property shall be accounted for as property, plant and equipment in accordance with Section 17.
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(3) (4)
See footnote (1) about SME Implementation Group (SMEIG)April 2012: Application of undue cost or effort In this example, and in all other examples in this module, monetary amounts are denominated in currency units (CU).
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16.6
The initial cost of a property interest held under a lease and classified as an investment property shall be as prescribed for a finance lease by paragraph 20.9, even if the lease would otherwise be classified as an operating lease if it was in the scope of Section 20 Leases. In other words, the asset is recognised at the lower of the fair value of the property and the present value of the minimum lease payments. An equivalent amount is recognised as a liability in accordance with paragraph 20.9.
Notes
In applying the guidance in paragraphs 11.2711.32 to an investment property, the reference to ordinary shares or preference shares in paragraph 11.27 should be read to include investment property. Measurement after initial recognition is driven by circumstances rather than an accounting policy choice between the cost and fair value models. If an entity can measure the fair value of an item of investment property reliably without undue cost or effort(5) on an ongoing basis, it must use the fair value model. Otherwise, it must use the cost model. When there is evidence that the fair value of a property cannot be measured reliably without undue cost or effort on an ongoing basis then the property is accounted for in accordance with Section 17 (ie a cost-depreciation-impairment model). This arises, for example, when the market for comparable properties is inactive (eg there are few recent transactions, price quotations are not current, observed transaction prices indicate that the seller was forced to sell) and alternative reliable estimates of fair value (eg based on discounted cash flow projections) are not available. Investment property accounted for using the cost-depreciation-impairment model is subject to impairment testing in accordance with Section 27 Impairment of Assets. When, at the reporting date, there is an indication that the property might be impaired the entity is required to estimate the recoverable amount of the investment property. The recoverable amount of a property is the higher of its fair value less costs to sell (see paragraph 27.14) and its value in use (see paragraphs 27.1527.20). Unless the propertys value in use is greater than its carrying amount (in which case there would be no impairment), the entity must estimate the propertys fair value less costs to sell. This is so even though the entity has already established that it cannot measure the propertys fair value on without undue cost or effort on an ongoing basis (ie the hurdle is higher for impairment testing). If the recoverable amount is less than the carrying amount of the property, its carrying amount is reduced to the recoverable amount by recognising a corresponding
(5)
See footnote (1) about SME Implementation Group (SMEIG)April 2012: Application of undue cost or effort
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(6)
In this example, and all other examples in this module where investment property is accounted for using the
cost-depreciation-impairment model because the fair value of an investment property cannot be determined reliably on an ongoing basis, the residual value of investment property is assumed to be nil (ie in the absence of explicit guidance in the IFRS for SMEs it is assumed that in accordance with paragraph 10.6 the entity chose to developed its accounting policy for the determination of the residual value of such property in accordance with the requirements of full IFRSssee IAS 40 paragraph 53 (as issued at 9 July 2009) and the Basis for Conclusions on IAS 40 paragraph B67(a)(viii)).
(7)
In this example, and other some other examples in this module, the value of land is for simplicity assumed to be nil. In
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Carrying amount
950,000
Transfers
16.8 If a reliable measure of fair value is no longer available without undue cost or effort for an item of investment property measured using the fair value model, the entity shall thereafter account for that item as property, plant and equipment in accordance with Section 17 until a reliable measure of fair value becomes available. The carrying amount of the investment property on that date becomes its cost under Section 17. Paragraph 16.10(e)(iii) requires disclosure of this change. It is a change of circumstances and not a change in accounting policy.
Notes(8)
Changes in accounting policies and the correction of prior period errors result in the restatement of comparative figures (see Section 10 Accounting Policies, Estimates and Errors). Similarly, when the presentation or classification of items in the financial statements is changed, an entity reclassifies comparative amounts (see paragraphs 3.113.13). These retrospective treatments are necessary to provide users of financial statements with comparable information that faithfully represents the entitys financial position, performance and cash flows. Transfers are different. They occur when there is a change in circumstances (see paragraph 16.8 above) or a change in use of an item that results in it being subject to different accounting and reporting requirements (eg when an owner occupies a property that was held to earn lease rentals and for capital appreciation, the property is transferred from investment property to property, plant and equipment). When a transfer takes place, the classifications in the comparative period must not be changed it faithfully represents the circumstances and use to which the assets was put in the comparative period (ie whilst the asset is investment property it must be accounted for and reported as investment property and whilst it is property, plant and equipment it must be accounted for and reported as property, plant and equipment).
(8)
See footnote (1) about SME Implementation Group (SMEIG)April 2012: Application of undue cost or effort
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16.9
Other than as required by paragraph 16.8, an entity shall transfer a property to, or from, investment property only when the property first meets, or ceases to meet, the definition of investment property.
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4.2(e) 4.2(f)
16
17,000
10,000
XYZ Group [Extract from] Notes for the year ended 31 December 20X2
Note 1 Accounting policies
Investment property Items of investment property whose fair value can be measured reliably without undue cost or effort on an ongoing basis after initial recognition are measured at fair value with changes in fair value recognised in profit or loss. All other investment property is accounted for as property, plant and equipment.
(9)
See footnote (1) about SME Implementation Group (SMEIG)April 2012: Application of undue cost or effort
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Reference to IFRS for SMEs Property, plant and equipment Investment property whose fair value cannot be measured reliably on an ongoing basis is presented as a separate class of property, plant and equipment. Such property is, after initial recognition, measured at cost less accumulated depreciation and accumulated impairment losses. The residual value of such investment property is deemed to be nil, as its fair value cannot be measured reliably without undue cost or effort on an ongoing basis. Depreciation is charged so as to allocate the cost of the buildings over their estimated useful lives, using the straight-line method. Land has an indefinite useful life and is therefore not depreciated. The useful life of buildings is 75 years from the date of construction.
Note 5 Profit before tax
The following items have been recognised as expenses (income) in determining profit before tax:
20X2 CU Rental income from investment property Increase in the fair value of an investment property during prior years that is recognised when management determined that the fair value of the property can be determined reliably without undue cost or effort on an ongoing basis Increase in the fair value of investment property during the year Gain on disposal of investment property carried using cost-amortisation-impairment model Depreciationinvestment property (X) 20X1 CU (X)
23.30(b)(viii)
(800) (1,000)
(X)
3.2 3.2
(100) 40
(X) X
3.2 3.2
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Note 15 Property, plant and equipment Description Land and buildings CU Cost Accumulated depreciation Carrying amount at 31 December 20X1 Additions Acquired in a business combination Transferred to investment property as reliable measure of fair value is available Disposals Depreciation Carrying amount at 31 December 20X2 Cost Accumulated depreciation Carrying amount at 31 December 20X2 (39) 2,461 3,000 (539) 2,461 2,000 (500) 1,500 1,000 Investment property CU 3,000 (200) 2,800 100 250 (180) (120) (40) 2,810 3,020 (210) 2,810 Total CU CU 5,000 (700) 4,300 100 1,250 (180) (120) (79) 5,271 6,020 (749) 5,271
17.31(d) 17.31(d) 17.31(e) 17.31(e)(i) 17.31(e)(iii) 17.31(e)(iv) 17.31(e)(ii) 17.31(e)(vi) 17.31(e) 17.31(d) 17.31(d) 17.31(e)
On 31 December 20X2 investment property accounted for as property, plant and equipment with a carrying amount of CU1,000 was pledged as security for a CU800 loan from Bank A. The loan bears interest at the fixed rate of 3 per cent per year and is repayable in full on 31 December 20X8. The groups investment property was unencumbered at 31 December 20X1.
17.32(a)
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The fair value of investment property is determined at the end of each year by independent suitably qualified valuers using current market prices for comparable real estate, adjusted for any differences in nature, location and condition.
Description Carrying amount at 31 December 20X1 Additions Acquired in a business combination Transferred from investment property carried as property, plant and equipment as a reliable measure of fair value became available on an ongoing basis Increase in fair value during the year Disposals Carrying amount at 31 December 20X2 CU 10,000 2,100 3,020
Investment property with a carrying amount of CU6,000 was pledged as security for a CU8,000 (20X1: CU8,000) loan from Bank B. The loan bears interest at the fixed rate of 2.5 per cent per year and is repayable in full on 31 December 20X9. The group cannot dispose of the pledged property without the written consent of Bank B. On 31 December 20X2 the group had contracted Entity D to construct an office block on vacant land owned by the group. The CU4,000 fixed price contract requires construction to commence by 30 June 20X3 and to be completed by 30 June 20X5. There were no contractual commitments at 31 December 20X1. The minimum lease payments receivable under non-cancellable operating leases:
20X2 20X1 X X
16.10(c)
16.10(d)
20.30(a)
Due no later than 1 year Due later than 1 year and no later than 5 years Due later than 5 years Total
X X
X X
X X
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16.11 In accordance with Section 20, the owner of an investment property provides lessors disclosures about leases into which it has entered. An entity that holds an investment property under a finance lease or operating lease provides lessees disclosures for finance leases and lessors disclosures for any operating leases into which it has entered.
Example disclosures
Ex 31 A group could present the disclosures required by paragraph 16.11 as follows: Reference to IFRS for SMEs
XYZ Group [Extract from] Notes for the year ended 31 December 20X2
Note 16 Investment property
The non-cancellable fixed rate operating leases over the groups investment property land and buildings were entered into at market rates with independent third parties.
20X3 The minimum lease payments receivable under non-cancellable operating leases 20X420X7 after 20X7
CU2,500
CU10,000
CU2,500
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Classification
Investment property is held to earn rentals or for capital appreciation or both. Therefore, unlike an item of property, plant and equipment, an investment property generates cash flows largely independently of the other assets held by an entity. In most cases little difficulty is encountered in determining whether a property is an investment property. However, significant judgement is required to classify some items of property. For example:
Some properties comprise a portion that is held to earn rentals or for capital appreciation and another portion that is held for use in the production or supply of goods or services or for administrative purposes. If these portions could be sold separately (or leased out separately under a finance lease), an entity accounts for the portions separately. If the portions could not be sold separately, the property is investment property only if an insignificant portion is held for use in the production or supply of goods or services or for administrative purposes. In some cases, an entity provides ancillary services, for example security and maintenance services, to the occupants of a property it holds. It may be difficult to determine whether ancillary services are so significant that a property does not qualify as investment property. In most cases security and maintenance services will be insignificant and hence the building would be classified as investment property. However, some companies rent out fully furnished offices including a whole range of services such as information technology systems and administration services (eg many hotels). Such arrangements are in the nature of the provision of a service and the property would be classified as owner-occupied and accounted for under Section 17. There are several instances in between these extremes where it may be difficult to judge whether the services are insignificant.
Where significant judgement is needed to determine whether a property qualifies as investment property an entity should develop criteria so that it can exercise that judgement consistently in accordance with the definition of investment property. When the fair value of an investment property can be measured reliably without undue cost or effort on an ongoing basis, after initial recognition an entity measures the investment property at its fair value. Otherwise, investment property is measured after initial recognition using the cost-depreciation-impairment model in Section 17. The management of an entity
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Measurement
1
An entity shall measure investment property at its cost at initial recognition. After initial recognition an entity measures investment property whose fair value can be measured reliably without undue cost or effort on an ongoing basis at fair value at each reporting date. All other investment property is accounted for as property, plant and equipment using the costdepreciation-impairment model in Section 17. Significant judgements in measuring the cost of an item of investment property at initial recognition may include:
if payment for the property is deferred beyond normal credit termsdetermining the discount rate at which to discount all future payments to arrive at the present value that will be included in the cost of the property. if applicableestimating the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs when the item is acquired.
Where the cost-depreciation-impairment model is used for measurement after initial recognition, significant judgements in accounting for the depreciation of investment property may include:
allocating the amount initially recognised in respect of an item of investment property to its significant parts that, in accordance with paragraph 17.16, are required to be depreciated separately; estimating the useful life of the property (or significant part of a property); determining the appropriate depreciation method that reflects the pattern in which the entity expects to consume the investment property (or significant part of a property).
Significant judgements in accounting for the impairment of investment property carried using the cost-depreciation-impairment model may include:
assessing whether there is an indication that an item of investment property may be impaired; and if there is an indication that the investment property may be impaireddetermining the recoverable amount of the investment property.
When the fair value of an investment property can be measured reliably without undue cost or effort on an ongoing basis some judgements might be necessary in estimating the fair value of the investment property. Paragraphs 11.2711.32 provide guidance on determining fair value.
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IFRS for SMEs is drafted in plain language and includes significantly less guidance on how to apply the principles. Full IFRSs (IAS 40) allow an accounting policy choice of either fair value through profit or loss or a cost-depreciation-impairment model (with some limited exceptions). An entity following the cost-depreciation-impairment model is required to provide supplemental disclosure of the fair value of its investment property. The IFRS for SMEs does not have an accounting policy choice but, rather, the accounting for investment property is driven by circumstances. If an entity knows or can measure the fair value of an item of investment property without undue cost or effort on an ongoing basis, it must use the fair value through profit or loss model for that investment property. It must use the cost-depreciation-impairment model in Section 17 Property, Plant and Equipment for other investment property. Unlike IAS 40, the IFRS for SMEs does not require disclosure of the fair values of investment property measured on a cost basis. For differences related to impairment testing of investment property accounted for using the cost-depreciation-impairment model see Section 27 Impairment of Assets.
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Question 1
Investment property is defined as: (a) property (land or a building, or part of a building, or both) held for sale in the ordinary course of business. (b) property (land or a building, or part of a building, or both) held to earn rentals. (c) property (land or a building, or part of a building, or both) held for capital appreciation. (d) property (land or a building, or part of a building, or both) held to earn rentals or for capital appreciation or both.
Question 2
A property interest that is held by a lessee under an operating lease may be classified and accounted for as investment property if, and only if, (a) the property would otherwise meet the definition of an investment property and the lessee can measure the fair value of the property interest without undue cost or effort on an ongoing basis. Furthermore, the entity accounts for all its qualifying operating leasehold property interests as investment property. (b) the property would otherwise meet the definition of an investment property and the lessee can measure the fair value of the property interest without undue cost or effort on an ongoing basis (irrespective of whether other qualifying operating leasehold property interests are accounted for as investment property (ie the election is available to the entity on a property-by-property basis)). (c) the property would otherwise meet the definition of an investment property and the lessee accounts for all of its investment property (and qualifying operating leasehold property interests) at fair value with the change in fair value recognised in profit or loss. (d) the property would otherwise meet the definition of an investment property and the lessee accounts for all of its investment property (and qualifying operating leasehold property interests) using a cost-amortisation-impairment model set out in Section 17. Property, Plant and Equipment.
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Question 3
An entity operates a bed and breakfast from a building it owns. The entity also provides its guests with other services including housekeeping, satellite television and broadband internet access. The daily room rental is inclusive of these services. Furthermore, upon request, the entity conducts tours of the surrounding area for its guests. Tour services are charged for separately. The entity should account for the building as: (a) inventory (b) investment property (c) property, plant and equipment
Question 4
An entity must measure its investment property after initial recognition: (a) either at fair value or using the cost-depreciation-impairment model (same accounting policy for all investment property). (b) either at fair value or using the cost-depreciation-impairment model (elected item by item). (c) at fair value. (d) at fair value, for those properties that fair value can be measured reliably without undue cost or effort on an ongoing basis, with all other investment property accounted for using the cost-depreciation-impairment model in Section 17.
Question 5
Investment property whose fair value cannot be measured reliably without undue cost or effort on an ongoing basis is accounted for after initial recognition: (a) as inventory in accordance with Section13. (b) as property, plant and equipment in accordance with Section 17. (c) as a financial asset in accordance with Section 11. (d) as an intangible asset with a finite useful life in accordance with Section 18.
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Question 6
A building is owned by a subsidiary (lessor) to earn rentals under an operating lease from its parent (lessee). The parent manufactures its products in the rented building. The fair value of the building can be measured reliably without undue cost or effort on an ongoing basis. The building is: (a) accounted for as an item of property, plant and equipment by the subsidiary and an investment property by the group. (b) accounted for as an investment property by the subsidiary and as an item of property, plant and equipment by the group. (c) accounted for as an investment property by both the subsidiary and the group. (d) accounted for as an item of property, plant and equipment by both the subsidiary and the group.
Question 7
On 1 January 20X1 an entity acquired a building for CU95,000, including CU5,000 non-refundable purchase taxes. The purchase agreement provided for payment to be made in full on 31 December 20X1. Legal fees of CU2,000 were incurred in acquiring the building and paid on 1 January 20X1. The building is held to earn lease rentals and for capital appreciation. An appropriate discount rate is 10 per cent per year. The entity shall measure the initial cost of the building at: (a) CU88,364 (b) CU97,000 (c) CU102,000 (d) CU107,000
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Question 8
On 1 January 20X1 an entity acquired an investment property (building) in a remote location for CU100,000. After initial recognition, the entity measures the investment property using the cost-depreciation-impairment model, because its fair value cannot be measured reliably without undue cost or effort on an ongoing basis. At 31 December 20X1 management: assessed the buildings useful life at 50 years from the date of acquisition presumed the residual value of the building to be nil (given that the fair value cannot be determined reliably) assessed that the entity will consume the buildings future economic benefits evenly over 50 years from the date of acquisition declined an unsolicited offer to purchase the building for CU130,000. This is a one-off offer that is unlikely to be repeated in the foreseeable future. (a) CU98,000 (b) CU100,000 (c) CU130,000 (d) CU127,400
The entity should measure the carrying amount of the building on 31 December 20X1 at:
Question 9
On 31 December 20X2 the entity reassessed the remaining useful life of the investment property described in Question 8 as 73 years. The revised assessment is supported by new information that became available in late 20X2. The entity should measure the carrying amount of the building on 31 December 20X2 at: (a) CU130,000 (b) CU96,676 (c) CU126,533 (d) CU97,333
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Question 10
On 1 January 20X1 an entity acquired a tract of land for an undetermined purpose. On 1 January 20X4 the entity started constructing a building on the land for use as its administrative headquarters. On 1 January 20X5 the entitys administrative staff moved into that building. Three years later (on 1 January 20X8) the entitys administrative staff moved into newly acquired premises. The old building was immediately rented to an independent third party under an operating lease. On 31 December 20X9 the entity accepted an unsolicited offer from the tenant to purchase the building from the entity with immediate effect. The fair value of the property (land and related buildings) can be measured reliably without undue cost or effort on an ongoing basis. The entity shall account for the tract of land and the related building as: (a) investment property from 1 January 20X1 to 31 December 20X9. (b) investment property during 20X120X3 and 20X820X9 and as property, plant and equipment during 20X420X7. (c) investment property during 20X120X3 and as property, plant and equipment during 20X420X10. (d) property, plant and equipment during 20X120X7 and as investment property during 20X820X9.
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Answers
(d) see paragraph 16.2 (b) see paragraph 16.3 (c) reasonthe arrangement between the entity and the bed and breakfast guests is for the provision of services, rather than the property being a passive investment Q4 (d) see paragraphs 16.1, 16.5 and 16.7 Q5 (b) see paragraphs 16.1 and 16.7 Q6 (b) see paragraphs 9.2 and 16.2 Q7 (a) calculation(CU95,000 purchase price excluding refundable taxes) 1.1 = CU86,364 present value of the purchase price + CU2,000 direct costs (legal fees) = CU88,364 Q8 (a) calculationCU100,000 cost less (CU100,000 depreciable amount 50 years useful life 1 year in use) accumulated depreciation = CU98,000. The one-off offer does itself mean that fair value can be determined reliably on an ongoing basis. Q9 (b) calculationCU98,000 carrying amount (and depreciable amount as the residual value is nil) 73 74 years remaining useful life measured from the beginning of the current reporting period) = CU96,676 carrying amount at 31 December 20X2 (the entity would account for the change in accounting estimate prospectively by including it in profit or loss in the period of the change and future periods (see paragraph 10.16(b)). Q10 (b) see paragraphs 16.2, 16.9 and 17.2. The IFRS for SMEs does not specify how to classify land that is held for an undetermined purpose. In developing its accounting policy for land acquired for an undetermined purpose an entity may (but is not required to) look to the requirements of full IFRSs (see paragraph 10.6). IAS 40 Investment Property (as issued at 9 July 2009) specifies that land acquired for an undetermined purpose is classified as investment property (see IAS 40 paragraph 8(b)) because a subsequent decision to use such land as inventory or for development as owner-occupied property would be an investment decision (see the Basis for Conclusions on IAS 40 paragraph B67(b)(ii)). Q1 Q2 Q3
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Case study 1
In 20X1 SME A incurred (and paid) the following expenditures in acquiring property consisting of ten identical freehold detached houses each with separate legal title including the land on which it is built:
Date 1 January 20X1 1 January 20X1 1 January 20X1 1 January 20X1 CU 200,000,000 20,000,000 1,000,000 10,000 Additional information 20 per cent of the price is attributable to the land Non-refundable transfer taxes (not included in the CU200,000,000 purchase price) Legal costs directly attributable to the acquisition Reimbursing the previous owner for prepaying the non-refundable local government property taxes for the six-month period ending 30 June 20X1 Advertising campaign to attract tenants Opening function to celebrate new rental business that attracted extensive coverage by the local press 30 June 20X1 Throughout 20X1 20,000 120,000 Non-refundable annual local government property taxes for the year ending 30 June 20X2 Day-to-day repairs and maintenance, including the salary and other costs of the administration and maintenance staff. These costs are attributable equally to each of the ten units.
500,000 200,000
SME A uses one of the ten units to accommodate its administration and maintenance staff. The other nine units are rented to independent third parties under non-cancellable operating leases. Before occupying the premises tenants pay SME A a refundable deposit equal to two months rentals. Deposits held by SME A at 31 December 20X1 totalled CU270,000. Rentals received in the year ended 31 December 20X1 totalled CU1,550,000, of which CU50,000 relates to January 20X2. At 31 December 20X1 SME A made the following assessments about the units:
Useful life of the buildings: 50 years from the date of acquisition The entity will consume the buildings future economic benefits evenly over 50 years from the date of acquisition.
SCENARIO 1: Assume that the fair value of the units can be determined reliably without undue cost or effort
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To recognise the acquisition of nine units of investment property and one owner-occupied property.
Dr Dr
Investment property (cost) Property, plant and equipment (costland and buildings) Cr Cash
Dr Dr
Investment property (cost) Property, plant and equipment (costland and buildings) Cr Cash
Dr
CU10,000 CU10,000
To recognise local government property taxes prepaid for the six months ending 30 June 20X1.
Dr
CU500,000 CU500,000
At 2 January 20X1 Dr Profit or loss (operating expenses) Cr Cash To recognise expenditure on the opening function for the investment property business. CU200,000 CU200,000
To recognise local government property taxes paid on 30 June 20X1 for the twelve months ending 30 June 20X2.
The fair value of the units can be determined reliably without undue cost or effort on an ongoing basis. Therefore, in accordance with paragraph 16.1, SME A accounts for the units as investment property using the fair value model.
(11)
(10)
Although the entity discloses buildings and the land on which they are built as a single class of asset they are accounted
for separately (ie the building is depreciated and the land is not depreciated).
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To recognise as an expense local government property taxes prepaid on 1 January 20X1 for the first six months ending 30 June 20X1.
Dr
CU10,000 CU10,000
To recognise local government property taxes paid on 30 June 20X1 for the last six months of the current reporting period. CU10,000 will remain as an asset as it relates to the first six months of the next reporting period.
Dr
CU270,000 CU270,000
Dr
Dr
CU120,000 CU120,000
Dr
CU353,600
CU353,600
Dr
CU26,100,000
CU26,100,000
To recognise the increase in the fair value of the investment property in 20X1.
The calculations and explanatory notes below do not form part of the answer to this case study:
(a) (c)
[CU17,680,000 cost of buildings less nil residual value (assumed)] 50 years (consume future economic benefits evenly over the 50-year useful life of the building) = CU353,600 depreciation for the year Total cost of property: CU200,000,000 purchase price + CU20,000,000 non-refundable transfer taxes + CU1,000,000 legal costs = CU221,000,000. Cost of buildings = CU221,000,000 80% = CU176,800,000 10% (owner-occupied) of CU176,800,000 CU225,000,000
(e) (b)
(b)
CU25,000,000 9 units of investment property = CU225,000,000 fair value of the 9 units of investment property at 31 December 20X1 90% (investment property) of CU221,000,000
(b)
(f)
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To recognise the acquisition of nine units of investment property and one owner-occupied property.
Dr Dr
Property, plant and equipment (costinvestment property) Property, plant and equipment (costland and buildings) Cr Cash
Dr Dr
Property, plant and equipment (costinvestment property) Property, plant and equipment (costland and buildings) Cr Cash
Dr
CU10,000 CU10,000
To recognise local government property taxes prepaid for the six months ending 30 June 20X1.
Dr
CU500,000 CU500,000
At 2 January 20X1 Dr Profit or loss (operating expenses) Cr Cash To recognise expenditure on the opening function for the investment property business. CU200,000 CU200,000
(12)
The fair value of the units cannot be determined reliably without undue cost or effort on an ongoing basis. Therefore, in accordance with paragraph 16.1, SME A accounts for the units as property, plant and equipment using the cost-depreciation-impairment model in Section 17. However, in accordance with paragraph 17.31, it discloses investment property as a separate class of property, plant and equipment (see the definition of a class of assets in the Glossary). Although the entity discloses buildings and the land on which they are built as a single class of asset they are accounted
(13)
for separately (ie the building is depreciated and the land is not depreciated).
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CU20,000 CU20,000
To recognise local government property taxes paid on 30 June 20X1 for the twelve months ending 30 June 20X2.
For the year ended 31 December 20X1 Dr Profit or loss (operating expenses) Cr Prepaid expenses (asset) ending 30 June 20X1. CU10,000 CU10,000
To recognise as an expense local government property taxes prepaid on 1 January 20X1 for the first six months
Dr
CU10,000 CU10,000
To recognise local government property taxes paid on 30 June 20X1 for the last six months of the current reporting period. CU10,000 will remain as an asset as it relates to the first six months of the next reporting period.
Dr
CU270,000 CU270,000
Dr
Dr
CU120,000 CU120,000
Dr
Profit or loss (operating expenses) Cr Accumulated depreciation (PPEinvestment property) Cr Accumulated depreciation (PPEbuildings)
CU3,536,000
CU3,182,400 CU353,600
(c) (d)
The calculations and explanatory notes below do not form part of the answer to this case study:
(a)
[CU176,800,000 cost of buildings less nil residual value] 50 years (consume future economic benefits evenly over the 50 year useful life of the building) = CU3,536,000 depreciation for the year. Note: the residual value of the buildings is considered to be nil (given the fair value cannot be determined reliably). Total cost of property: CU200,000,000 purchase price + CU20,000,000 non-refundable transfer taxes + CU1,000,000 legal costs = CU221,000,000. Cost of buildings = CU221,000,000 80% = CU176,800,000 90% of CU3,536,000 (depreciation for the year) = CU3,182,400 depreciationinvestment property accounted for as property, plant and equipment 10% (owner-occupied) of CU3,536,000
(a) (a)
(b)
(b)
(c)
(d)
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The fair value of these properties can be determined without undue cost or effort on an ongoing basis. On 30 June 20X2 SME Cs investment property is leased to third parties, as follows:
Description Factory building A Factory building B Office building A Remaining period 2.5 years 1.5 years 3.5 years Rent CU80,000 per year CU450,000 per year CU350,000 per year
On 30 September 20X2, in response to an unsolicited offer, SME C disposed of Factory building B for CU9,100,000. On 1 October 20X2, when the fair value of Land B was CU1,050,000, SME C changed the purpose for which it holds Land B. It immediately began to develop Land B as a residential housing estate for sale in the ordinary course of business. On 12 October 20X2 SME C was granted planning permission, at a cost of CU500,000, for the development of an office block on Land C. SME C intends to use the office block to earn lease
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At 31 December 20X2 the fair value of all of the groups investment properties (including SME Bs building) can be determined without undue cost or effort on an ongoing basis. The land on which buildings are situated is immaterial. Draft an extract showing how investment property could be presented and disclosed in the consolidated financial statements of SME B group for the year ended 31 December 20X2.
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[Extract from] SME B group notes for the year ended 31 December 20X2 Note 1 Accounting policies
Investment property Items of investment property whose fair value can be measured reliably without undue cost or effort on an ongoing basis are, after initial recognition, measured at fair value with changes in fair value recognised in profit or loss. All other investment property is accounted for as property, plant and equipment using the cost-depreciation-impairment model. Property, plant and equipment Investment property whose fair value cannot be measured reliably is accounted for as property, plant and equipment, ie after initial recognition it is measured at cost less accumulated depreciation and accumulated impairment losses. The residual value of such investment property is deemed to be nil, as its fair value cannot be measured reliably without undue cost or effort on an ongoing basis. Depreciation is charged so as to allocate the cost of the buildings over their estimated useful lives, using the straight-line method. Land has an indefinite useful life and is therefore not depreciated. The useful life of buildings is 50 years from the date of construction. Investment property is disclosed as a separate class of property, plant and equipment.
The following items have been recognised as expenses (income) in determining profit before tax:
20X2 CU 20X1 CU
Increase in the fair value of an investment property during the past 17 years that is recognised upon its transfer from property, plant and equipment when management determined that the fair value of the property can be determined reliably without undue cost or effort on an ongoing basis Increase in the fair value of investment property during the year Rental income from investment property Depreciation
(150,000) 60,000
(f) (c)
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Note 11 Property, plant and equipment Description Cost Accumulated depreciation Carrying amount at 31 December 20X1 Acquired in a business combination Additions Transferred to investment property when the fair value of the property can be measure reliably without undue cost or effort on an ongoing basis Depreciation Carrying amount at 31 December 20X2cost 4,000,000 3,000,000 4,000,000 3,000,000 Land Land and buildings Investment property 3,000,000 (1,000,000) 2,000,000 Total (CU) 3,000,000 (1,000,000) 2,000,000 4,000,000 3,000,000
(1,940,000) (60,000)
(b) (c)
Note 12 Investment property CU Carrying amount at 31 December 20X1 Transferred from property, plant and equipment when the fair value of the property could be measure reliably without undue cost or effort on an ongoing basis Additions Acquired in a business combination Transferred to inventory Disposals Gain in fair value during the year Carrying amount at 31 December 20X2 5,000,000 500,000 20,500,000 (1,050,000) (9,100,000) 1,350,000 17,200,000
(g) (h) (i) (j) (d) (k)
The fair value of investment property is determined at the end of each year by independent suitably qualified valuers using current market prices for comparable real estate, adjusted for any differences in nature, location and condition of the property and any changes in market conditions since the transactions took place. At 31 December 20X2 the group had contracted Entity D to construct an office block on vacant land owned by the group. The CU10,000,000 fixed price contract requires construction to commence by 30 June 20X3 and to be completed by 30 June 20X5. There were no contractual commitments at 31 December 20X1.
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On 31 December 20X2 SME Bs investment property was pledged as security for a CU3,000,000 loan from Bank A. The loan bears interest at the fixed rate of 3 per cent per year and is repayable in full on 31 December 20X8. The groups investment property was unencumbered at 31 December 20X1. The non-cancellable fixed rate operating leases over the groups investment property land and buildings were entered into at market rates with independent third parties.
20X3 The minimum lease payments receivable under non-cancellable operating leases 20X4 20X5 Total
CU580,000
(b)
(l)
CU580,000
(l)
CU500,000
(m)
CU1,660,000
The calculations and explanatory notes below do not form part of the answer to this case study:
(a)
CU5,000,000 fair value less CU1,940,000 carrying amount of SME Bs building on the date of reclassification = CU3,060,000 gain recognised in 20X2. CU2,000,000 carrying amount at 31 December 20X1 less CU60,000 depreciation for 20X1 CU3,000,000 cost 50 years = CU60,000 depreciation per year CU200,000 increase in fair value of factory building A + CU500,000 increase in fair value of office building A + CU500,000 increase in fair value of land C + CU100,000 increase in fair value of factory building B + CU50,000 increase in the fair value of land B before the change in its use = CU1,350,000 total increase in fair value of investment property accounted for using the fair value model CU40,000 factory building A (for 6 months) + CU112,500 factory building B (for 3 months) + CU175,000 office building A (for 6 months) + CU150,000 SME Bs building (12 months) = CU477,500 rental income CU150,000 SME Bs building (12 months) CU500,000 cost of planning permission for Land C, paragraphs 16.7 and 17.10(b) CU20,500,00 = CU17,500,000 buildings + CU3,000,000 lands (ie cost to the group is fair value at the date of acquisition, see paragraph 19.14). Buildings: CU1,500,000 Factory building A + CU9,000,000 Factory building B + CU7,000,000 Office building A = CU17,500,000. Lands: CU1,000,000 Land B + CU2,000,000 Land C = CU3,000,000
(c)
= CU1,940,000
(e)
(i)
CU1,050,000 carrying amount (ie CU1,000,000 cost + CU50,000 increase in fair value) of Land B on the date it ceased to be investment property carried at fair value and became inventory (ie held for the sale in the ordinary course of business, paragraph 13.1(a)) CU9,100,000 carrying amount (ie CU9,000,000 cost + CU100,000 increase in fair value of factory building Binvestment property carried at fair value) CU5,000,000 SME Bs property + CU1,700,000 Factory building A + CU7,700,000 Office building A + CU3,000,000 land C = CU15,500,000 fair value of investment property on 31 December 20X2. CU150,000 SME Bs property + CU80,000 Factory building A + CU350,000 Office building A = CU580,000. CU150,000 SME Bs property + CU350,000 Office building A = CU500,000.
(j)
(k)
(l) (m)
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Review record:
Education staff review Introduction Explain requirements Significant judgements estimates &
Editorial review
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Comparison with full IFRSs Test your knowledge Apply your case study 1 Apply your case study 2 knowledge
knowledge
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