Question Tag: Fair Value Model

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  • 4 Marks

FR – April 2022 – L2 – Q2d – Conceptual Framework for Financial Reporting

Explain the definition of investment property under IAS 40 and discuss the differences between the fair value model and revaluation model for investment properties.

d) The recognition, measurement, and disclosure of an Investment Property in accordance with IAS 40: Investment Property appears straightforward. However, this could get complicated when measured either under the fair value model or under the revaluation model.

Required:
i) Define Investment Property under IAS 40 and explain the rationale behind its accounting treatment. (2 marks)

ii) Explain how the treatment of an investment property carried under the fair value model differs from an owner-occupied property carried under the revaluation model. (2 marks)

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  • 7 Marks

FR – Nov 2023 – L2 – Q2c – Financial Reporting Standards and Their Applications

Determine the amounts to be recognized in profit or loss and other comprehensive income for Wenchi Ltd in respect of an office building.

Wenchi Ltd (Wenchi) is a real estate development company. On January 1, 2022, Wenchi’s office building had a net carrying value of GH¢13.5 million. The property became vacant on April 1, 2022, and was leased to a third party. On October 1, 2022, the property was added to inventory for sale after the lease expired. The property was sold in December 2022 for GH¢16 million.

Required:
In accordance with IFRS, determine the amounts to be recognized in profit or loss and other comprWenchi Ltd (Wenchi) is a real estate development company which has been operating for several years. On January 1, 2022, the office building of Wenchi had a net carrying value of GH¢13.5 million. The cost model was used to value the property. No depreciation had been incurred because the expected residual value was more than the cost due to a buoyant real estate market.

The property became vacant as a result of relocating the company’s operations, and on April 1, 2022, a third party (Dormaa Ltd) was given a six-month short lease to occupy it. The property’s fair value at the time it was leased out was GH¢16.5 million.

Wenchi made the choice to add the property to its inventories of properties for sale in the regular course of business once the lease expired. The property was valued at GH¢15.75 million at 1 October 2022. The property was sold in December 2022 for GH¢16 million.

Required:
In accordance with IFRS, determine the amounts to be recognized in profit or loss and in other comprehensive income in respect of the property for the year ended 31 December 2022.ehensive income in respect of the property for the year ended 31 December 2022.

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  • 3 Marks

FR – Nov 2016 – L2 – Q2c – Financial Reporting Standards and Their Applications

Calculate the carrying amount of investment property in accordance with IAS 40.

c) Tanoso owns the following properties as at 31 December 2015:

Property Fair Value (GH¢million)
Land with future use undetermined 3.2
Factory rented to Tanoso’s subsidiary under an operating lease 2.4
10-floor office building (fair value is equal per floor), 3 floors used as the subsidiary’s head office, and 7 floors rented to third parties under an operating lease 15.0
Empty building held for capital appreciation, but not leased out 4.1

Tanoso’s accounting policy is to hold its investment properties under the fair value model and its land and buildings under the revaluation model.

Required:
In accordance with IAS 40 Investment Property, calculate the carrying amount to be recognised as investment property in Tanoso’s consolidated financial statements as at 31 December 2015.

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  • 5 Marks

FR – May 2019 – L2 – Q2b – Financial Reporting Standards and Their Applications

Preparation of extracts from consolidated financial statements related to investment properties of Kumbungu Group

Kumbungu Group owns a number of freehold properties throughout Northern Region. Three of these properties are rented out under annual contracts, the details of which are as follows:

Property Life Cost (GH¢’000) Value at 31/12/2017 (GH¢’000) Value at 31/12/2018 (GH¢’000)
1 50 years 200 275 225
2 40 years 180 240 210
3 15 years 150 175 180

All three properties were acquired on 1 January 2017, and their valuation is based on their age at the date of the valuation. Property 1 is let to a subsidiary (60% ownership) of Kumbungu on normal commercial terms, while Property 2 and Property 3 are let on normal commercial terms to companies that are not related to Kumbungu.

Kumbungu adopts the fair value model of accounting for investment properties in accordance with IAS 40: Investment Properties and the benchmark treatment for owner-occupied properties in accordance with IAS 16: Property, Plant and Equipment. Annual depreciation, where appropriate, is based on the carrying value of assets at the beginning of the relevant accounting period.

Required:

Prepare extracts for the consolidated income statement of Kumbungu for the year ended 31 December 2018 and the consolidated statement of financial position as at that date in respect of the above properties.

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  • 4 Marks

FR – April 2022 – L2 – Q2d – Conceptual Framework for Financial Reporting

Explain the definition of investment property under IAS 40 and discuss the differences between the fair value model and revaluation model for investment properties.

d) The recognition, measurement, and disclosure of an Investment Property in accordance with IAS 40: Investment Property appears straightforward. However, this could get complicated when measured either under the fair value model or under the revaluation model.

Required:
i) Define Investment Property under IAS 40 and explain the rationale behind its accounting treatment. (2 marks)

ii) Explain how the treatment of an investment property carried under the fair value model differs from an owner-occupied property carried under the revaluation model. (2 marks)

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  • 7 Marks

FR – Nov 2023 – L2 – Q2c – Financial Reporting Standards and Their Applications

Determine the amounts to be recognized in profit or loss and other comprehensive income for Wenchi Ltd in respect of an office building.

Wenchi Ltd (Wenchi) is a real estate development company. On January 1, 2022, Wenchi’s office building had a net carrying value of GH¢13.5 million. The property became vacant on April 1, 2022, and was leased to a third party. On October 1, 2022, the property was added to inventory for sale after the lease expired. The property was sold in December 2022 for GH¢16 million.

Required:
In accordance with IFRS, determine the amounts to be recognized in profit or loss and other comprWenchi Ltd (Wenchi) is a real estate development company which has been operating for several years. On January 1, 2022, the office building of Wenchi had a net carrying value of GH¢13.5 million. The cost model was used to value the property. No depreciation had been incurred because the expected residual value was more than the cost due to a buoyant real estate market.

The property became vacant as a result of relocating the company’s operations, and on April 1, 2022, a third party (Dormaa Ltd) was given a six-month short lease to occupy it. The property’s fair value at the time it was leased out was GH¢16.5 million.

Wenchi made the choice to add the property to its inventories of properties for sale in the regular course of business once the lease expired. The property was valued at GH¢15.75 million at 1 October 2022. The property was sold in December 2022 for GH¢16 million.

Required:
In accordance with IFRS, determine the amounts to be recognized in profit or loss and in other comprehensive income in respect of the property for the year ended 31 December 2022.ehensive income in respect of the property for the year ended 31 December 2022.

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  • 3 Marks

FR – Nov 2016 – L2 – Q2c – Financial Reporting Standards and Their Applications

Calculate the carrying amount of investment property in accordance with IAS 40.

c) Tanoso owns the following properties as at 31 December 2015:

Property Fair Value (GH¢million)
Land with future use undetermined 3.2
Factory rented to Tanoso’s subsidiary under an operating lease 2.4
10-floor office building (fair value is equal per floor), 3 floors used as the subsidiary’s head office, and 7 floors rented to third parties under an operating lease 15.0
Empty building held for capital appreciation, but not leased out 4.1

Tanoso’s accounting policy is to hold its investment properties under the fair value model and its land and buildings under the revaluation model.

Required:
In accordance with IAS 40 Investment Property, calculate the carrying amount to be recognised as investment property in Tanoso’s consolidated financial statements as at 31 December 2015.

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  • 5 Marks

FR – May 2019 – L2 – Q2b – Financial Reporting Standards and Their Applications

Preparation of extracts from consolidated financial statements related to investment properties of Kumbungu Group

Kumbungu Group owns a number of freehold properties throughout Northern Region. Three of these properties are rented out under annual contracts, the details of which are as follows:

Property Life Cost (GH¢’000) Value at 31/12/2017 (GH¢’000) Value at 31/12/2018 (GH¢’000)
1 50 years 200 275 225
2 40 years 180 240 210
3 15 years 150 175 180

All three properties were acquired on 1 January 2017, and their valuation is based on their age at the date of the valuation. Property 1 is let to a subsidiary (60% ownership) of Kumbungu on normal commercial terms, while Property 2 and Property 3 are let on normal commercial terms to companies that are not related to Kumbungu.

Kumbungu adopts the fair value model of accounting for investment properties in accordance with IAS 40: Investment Properties and the benchmark treatment for owner-occupied properties in accordance with IAS 16: Property, Plant and Equipment. Annual depreciation, where appropriate, is based on the carrying value of assets at the beginning of the relevant accounting period.

Required:

Prepare extracts for the consolidated income statement of Kumbungu for the year ended 31 December 2018 and the consolidated statement of financial position as at that date in respect of the above properties.

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