- 12 Marks
FR – Nov 2023 – L2 – Q3b – Property, Plant, and Equipment (IAS 16)
Discuss financial implications of reclassifying investment property under cost and fair value models.
Question
Young Shall Grow Limited with year-end December 31 purchased an office building, with a useful life of 50 years, for N55 million on January 1, 2013. The amount attributable to land was negligible. The company used the building as its head office until December 31, 2017, when the entity moved to a larger premises.
The building was reclassified as an investment property and leased out under a five-year lease. However, owing to a change in circumstances, Young Shall Grow Limited took possession of the building five years later, on December 31, 2022, to use it as its head office once more. At that date, the remaining useful life of the building was confirmed as 40 years.
The fair value of the building was as follows:
- At December 31, 2017: N60 million
- At December 31, 2022: N75 million
Required:
Discuss how the changes of use should be reflected in the financial statements of Young Shall Grow Limited:
- If the company uses the cost model for its investment properties.
- If the company uses the fair value model for its investment properties.
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