IFRS 5 Diploma IFRS past exam (Dec 2015)

You are the financial controller of Omega, a listed company which prepares consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). Your managing director, who is not an accountant, has recently attended a seminar and has raised a question for you concerning issues discussed at the seminar:

Another delegate was discussing the fact that the entity of which she is a director is relocating its head office staff to a more suitable site and intends to sell its existing head office building. Apparently the existing building was advertised for sale on 1 July 2015 and the entity anticipates selling it by 31 December 2015. The year end of the entity is 30 September 2015. The delegate stated that in certain circumstances buildings which are intended to be sold are treated differently from other buildings in the financial statements. Please outline under what circumstances buildings which are being sold are treated differently and also what that different treatment is. (10 marks)

Proposed Solution:

There are two different ways of treating an asset which is for continued use vs those which are intended for sale.

Under IFRS, Non-current assets held for sale are to be presented separately from other assets. There are conditions for an asset to qualify as a non-current held for sale namely:

- asset is available for sale in its immediate condition; and

- sale is highly probable.

For sale to be highly probable, the following conditions are required to be met:

- management is committed to sell the asset;

- sale is expected to be completed in 1 year from the date of classification;

- asset is actively marketed for sale;

- price is reasonably approximate to fair value;

- no changes in plan to sell are expected;

If an asset is classified as held for sale:

- no depreciation is charged on the asset;

- asset is shown at the lower of carrying amount and the fair value less costs to sell. Any difference between the carrying amount and fair value less costs to sell should be charged as impairment loss.

IAS 16 / IAS 40 Diploma IFRS Exam Question (Dec 2018)

•You are the financial controller of Omega, a listed entity which prepares consolidated financial statements in accordance with (IFRS Standards). The financial statements for the year ended 30 September 2018 are due to be published shortly. A trainee accountant who is assigned to your department is reviewing the financial statements as part of a training exercise. She has prepared a list of queries arising out of this review.

•When I look at the statement of financial position, one of the categories of non-current assets is ‘investment properties’ and another category is ‘property, plant and equipment’ – in which all other properties are included. Surely we invest in all our properties, so why have two categories for them in the statement of financial position? How do we decide what goes where?

•A note to the financial statements states that investment properties are measured at their fair values and not depreciated. Don’t all non-current assets have to be depreciated over their estimated useful lives? Another note states that property included in property, plant and equipment is measured at cost less accumulated depreciation rather than at fair value. Shouldn’t all properties be measured in the financial statements on a consistent basis?

•Finally, I can’t immediately see from the financial statements where the gains or losses relating to the measurement of investment properties are included. The profit statement seems to include two main components – profit or loss and other comprehensive income. Where would the gains or losses go? Presumably the treatment of gains and losses is the same for any non-current assets which are measured at fair value? (10 marks)

Proposed Solution:

IFRS require distinction between property that are covered under Property, Plant and Equipment and Investment Properties and these are accounted for and presented separately.

Property, Plant and Equipment include those assets which are Non-Current, Tangible and are used for business purposes (including production or administrative purposes). Examples would include a factory building, vehicles etc.

Investment Properties include Land or Building which are held for earning rentals, capital appreciation or both.

An entity has a choice to use cost or fair value (revaluation) model for each class of assets under Property, Plant and Equipment. Similarly, Investment properties can be either measured using cost or fair value method. Choice of one method for Properties under Property, Plant and Equipment does not impact the valuation method used for Investment Properties. This would imply that Properties under Property, Plant and Equipment may be measured using Cost model, and Properties under Investment Property may be measured using fair value method. Also, the IFRS require that no depreciation is permitted to be charged on investment properties if these are measured at fair value.

Any gains or losses on changes in fair value of investment properties are recognised through Profit or Loss rather than Other Comprehensive Income. The Other Comprehensive Income option is only applicable for assets accounted for under revaluation method for Property, Plant and Equipment .

Another Proposed Solution:

As per IAS 16, Property, plant and equipment are tangible assets that are

- held for use in the production or supply of goods and services or for administrative purposes; and

- expected to be used for more than one period.

Property plant and equipment can be measured at any of below 2 models:

a) Revaluation model- Fair value less subsequent accumulated depreciation less subsequent impairment loss

b) The cost model- Cost less accumulated depreciation less impairment loss.

Revaluation model is applied for entire class of assets which it belongs.

As per IAS 40, Investment properties are property (land, building, part or both) that are held to earn rental income or for capital appreciation or both.

Entity need to choose anyone from below 2 options to measure Investment properties subsequently:

a) The fair value model

b) The cost model.

This election is applied to all of its investment property.

Gain or losses on subsequent measurement of Investment properties are directly recorded in Profit & Losses in the period in which gain or loss arises.

IAS 16 / IAS 40 Diploma IFRS Exam Question (Dec 2016)

•You are the financial controller of Omega, a listed entity which prepares consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). You have recently produced the final draft of the financial statements for the year ended 30 September 2016 and these are due to be published shortly. The managing director, who is not an accountant, reviewed these financial statements and prepared a list of queries arising out of the review.

•The notes to the financial statements say that plant and equipment is held under the ‘cost model’. However, property which is owner occupied is revalued annually to fair value. Changes in fair value are sometimes reported in profit or loss but usually in ‘other comprehensive income’. Also, the amount of depreciation charged on plant and equipment as a percentage of its carrying amount is much higher than for owner occupied property.

•Another note says that property we own but rent out to others is not depreciated at all but is revalued annually to fair value. Changes in value of these properties are always reported in profit or loss. I thought we had to be consistent in our treatment of items in the accounts.

•Please explain how all these treatments comply with relevant reporting standards. (7 marks)

Proposed Solution:

As per IAS 16, an entity can choose from any of the below 2 options to measure Property, plant and equipment subsequently:

a) cost model- Cost less accumulated depreciation less impairment loss

b) Revaluation model- Fair value less subsequent accumulated depreciation less subsequent impairment loss

If entity choose to adopt revaluation model, assets need to be revalued once in a year and gain on revaluation are recorded in other comprehensive income and loss (over previous revaluation gain) is recorded in profit or loss account.

As per IAS 40, If entity chooses to follow fair value model for subsequent measurement, changes in fair value are reported in profit or loss. Also the assets need to fair valued annually.

Hence above explanation justifies that accounting treatment of property, plant and equipment as per IAS 16 and investment property as per IAS 40 are different and need not be consistent.