Question Tag: IAS 40

Search 500 + past questions and counting.

CR – May 2023 – L3 – Q3 – Employee Benefits (IAS 19)

Discuss accounting treatments for investment properties and pension plans, including calculations and financial statement impacts.

Question

You are the Financial Controller of Gongon Group. On January 2, 2021, you are busy preparing the financial statements for the year ended December 31, 2020. You are under a lot of pressure as you have been asked to present the draft financial statements to the Board of Directors in two days’ time.

The first draft of the financial statements for each of the three companies has been prepared and is now on your table. You have also compiled a list of outstanding issues that you need to consider before presenting the financial statements to the Board.

Outstanding Issues:

Here’s the rewritten version of the First Issue:

First Issue: Investment Properties and Changes in Use

Gongon Group holds three investment properties in its financial statements. These properties are measured at fair value in line with IAS 40 – Investment Properties, while owner-occupied properties are measured at cost less accumulated depreciation and impairment losses. Currently, the properties are presented at their 2019 year-end valuations, with no adjustments for 2020.

Details of the Properties

Property A (Commercial Warehouse):
- Location: Apapa
- Use Change: Reassigned as office space for the company during 2020. Tenants vacated on May 1, 2020.
- Valuations:
  - January 1, 2020: ₦8,000,000
  - May 1, 2020: ₦7,600,000
  - December 31, 2020: ₦7,400,000
- Depreciation Policy: The company applies a 2% annual depreciation rate, calculated monthly for owner-occupied properties.
Property B:
- Acquisition Year: 2014
- Valuations:
  - January 1, 2020: ₦9,000,000
  - December 31, 2020: ₦8,800,000
- Planned Disposal:
  - Property was vacant from September 2020 and put on the market in October 2020 with an asking price of ₦8,800,000.
  - Estimated disposal costs: ₦600,000.
  - No firm offers had been made by year-end.
Property C:
- Valuation: Last valued at ₦18,500,000 in December 2018.

Draft Statements of financial position at December 31, 2020

Extract of draft statement of profit or loss and other comprehensive income for the year ended December 31, 2020

Second Issue: Pension Scheme Accounting Treatment

On January 1, 2020, Gongon PLC commenced a defined benefit plan for several head office employees. Under the scheme, Gongon PLC is obligated to provide post-employment benefits to these staff members. The company manages the actuarial and investment risks associated with the pension scheme.

Details of the Pension Scheme

Details	₦’000
Interest Income on Plan Assets	330
Employer’s Contribution to Plan	11,000
Current Service Cost	12,000
Interest on Plan Liability	360
Fair Value of Plan Assets (31/12/2020)	11,600
Present Value of Plan Obligation (31/12/2020)	12,400

Current Accounting Treatment

The Chief Accountant was uncertain about the appropriate accounting standard to apply for the pension scheme. The only adjustment made for 2020 was:

Expensing the Employer’s Contribution of ₦11 million in the statement of profit or loss and other comprehensive income.
Crediting the corresponding cash account.

The current treatment does not comply with the requirements of IAS 19 – Employee Benefits, which mandates more comprehensive reporting for defined benefit plans.

Required:
(a) Discuss and analyze the required accounting treatment of the first issue, showing relevant calculations and the impact on Gongon PLC’s financial statements as of December 31, 2020. (12 Marks)

(b) Review the accounting treatment of the second issue (pension plan) and make necessary disclosures in accordance with the relevant accounting standard. (8 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Change of Use, Defined Benefit Obligation, IAS 19, IAS 40, Investment properties, Pension Plan
Level: Level 3

Topic: Employee Benefits (IAS 19)

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.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Change in Use, IAS 40, Investment Property, Reclassification
Level: Level 2

Topic: Property, Plant, and Equipment (IAS 16)

FR – May 2017 – L2 – SB – Q3 – Partnership Account

Advise Bode Limited on accounting treatment for impairment, borrowing costs, and reclassification to investment property in accordance with IAS 36, IAS 23, and IAS 40.

Question

You are a financial reporting consultant. The management of Bode Limited, a well-diversified company with branches in all states of the federation, has some transactions for which it requires advice. Bode Limited has a financial accountant who is not yet a qualified accountant. These transactions are as follows:

Impairment of Assets: Bode Limited recognized a cash-generating unit during the year ended December 31, 2015, comprising:
- Property, plant, and equipment: N4,050 million
- Goodwill: N450 million
- Other assets: N2,700 million
  Total carrying amount: N7,200 million
The management estimated the recoverable amount of the cash-generating unit at N6,300 million as of December 31, 2015. The financial accountant understands some provisions of IAS 36 on asset impairment but is uncertain about how to allocate impairment across these assets within the unit.
Borrowing Costs: On January 1, 2015, Bode Limited borrowed N300 million to fund the construction of two assets, expected to take a year to complete. The funds were drawn on January 1 and were allocated as follows, with the remaining funds invested temporarily:
- Asset X: N50 million on January 1, N50 million on July 1
- Asset Y: N100 million on January 1, N100 million on July 1
  The loan interest rate is 9% per annum, and surplus funds can be invested at a rate of 7% per annum.
Investment Property Reclassification: The company’s head office in Abuja, previously owner-occupied, was vacated and let out on June 30, 2015, due to a cost-saving decision to move operations to a nearby branch office. The property, initially recognized under IAS 16 at a cost of N37.5 million with a 50-year useful life, was revalued to N52.5 million by an independent valuer as of December 31, 2015. Bode Limited’s accounting policy for investment properties is to use the fair value model.

Required:
Write a memo advising Bode Limited on the accounting treatments for each transaction in their financial statements. Provide relevant calculations where necessary.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Borrowing Costs, IAS 23, IAS 36, IAS 40, Impairment of Assets, Investment Property

Topic: Partnership Accounts (Including Profit Sharing, Capital and Current Accounts)
Series: MAY 2017

FR – Nov 2015 – L2 – Q7b – Fair Value Measurement (IFRS 13)

Explaining accounting treatment for investment property and calculating values for the financial statements.

Question

KOLA NITDA Nigeria Plc is a company engaged in the manufacturing of hand sanitizer to prevent Ebola disease. The following information relates to property owned by the company:

N’000
Land – Plot 404 Apapa Industrial Area
Building therein (acquired June 30, 2013)
Improvement to the building to extend rented floor capacity
Repairs and maintenance to investment property for the year
Rental received for the year

Approximately six percent of the property floor space is used as the administrative head office of the company. The property can be sold only as a complete unit. The remainder of the building is leased out under operating leases. The company provides lessees with security services.

The company values investment property using the fair value model on December 31, 2014, which is the company’s year-end. Tewogbade & Co. (an independent valuer) valued the property at N144,000,000 on that date.

Required:
i. Advise the Directors of KOLA NITDA Nigeria Plc on how the property should be treated in the financial statements of the company as at December 31, 2014 in order to ensure strict compliance with provisions of IAS 40. (5 Marks)
ii. Calculate the value of investment property that should be disclosed in the statement of financial position as at December 31, 2014 and the amount that should be charged to the statement of profit or loss and other comprehensive income for the period then ended. (5 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Fair Value, IAS 40, Investment Property, Property Accounting, Revaluation Model, Valuation
Level: Level 2

Topic: Fair Value Measurement (IFRS 13)
Series: NOV 2015

FR – Nov 2015 – L2 – Q7a – Fair Value Measurement (IFRS 13)

Explaining the difference between accounting treatment for investment properties and owner-occupier properties under IAS 40 and revaluation model.

Question

The objectives of IAS 40 – Investment Property is to prescribe the accounting treatment and disclosure requirements for investment property. The main issue in accounting for investment properties is to distinguish these properties separately from owner-occupier properties.

Required:
Explain how treatment of an investment property carried at fair value model differs from an owner-occupier property carried under revaluation model.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Fair Value, IAS 40, Investment Property, Real Estate Accounting, Revaluation Model
Level: Level 2

Topic: Fair Value Measurement (IFRS 13)
Series: NOV 2015

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.

Question

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)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Fair Value Model, IAS 40, Investment Property, Owner-Occupied Property, Revaluation Model, Valuation Models
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: APR 2022

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.

Question

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.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Fair Value Model, IAS 40, nt Property, Profit or Loss, Revaluation
Level: Level 2

Topic: Financial Reporting Standards and Their Applications, Investment Property
Series: NOV 2023

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

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

Question

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.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Fair Value Model, IAS 40, Investment Property, Property Recognition
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: NOV 2016

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

Question

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.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Fair Value Model, IAS 16, IAS 40, Investment Property, Property Valuations
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: MAY 2019

CR – May 2023 – L3 – Q3 – Employee Benefits (IAS 19)