2. investment property
exercise
1. Change of use: Requirements and Valuation
• Transfer to, or from, investment property shall be made when, and only
when there is a change in use, evidenced by:
– Commencement lend of owner-occupation (transfer to or from PPE)
– Development with view to sale (transfer to Inventories)
– Commencing an operating lease to another party
• Transfer to owner-occupied property or inventories if the fair value
model is applied: Use fair value at date of change in use as deemed cost
• Transfer from owner-occupied property to fair value investment
property:
– Apply IAS 16 until change in use
– Account for carrying/fair value difference as revaluation per IAS 16
• Transfer from inventories to fair value investment property: Recognise
gain/ loss in profit or loss
Wednesday, June 22, 2011
3. CASE STUDY
IAS 40 - Investment Property
2. Wealth Ltd holds an investment property portfolio,
applies IFRS and applies the fair value model under
IAS 40. How should it classify and account for the
following in its accounts for the year ending 31
December 2009?
i. In mid-year the head office occupied a building that
had previously been let to a 3rd party under an
operating lease and treated as investment property.
The cost of the property was N1Om and the fair value
at the date of change of use was N15m.
Wednesday, June 22, 2011
4. ii. An existing investment property is being
redeveloped at a cost of N6m. On
completion of the redevelopment the
property will be re-let as an investment
property. On commencement of the
redevelopment the fair value of the property
was N7m and by the year end the
redevelopment was 50% complete with
costs of N3 incurred. The fair value at year
end is estimated at N8m.
5. iii. The company has acquired a property for
N2m and has spent a further N7m on
renovations to be let as an investment
property. At the year end the building is
nearing completion and its fair value is
determined to be NIOm
6. IAS 16 - Property, Plant and Equipment
Comprehensive Case Study Example
1. The Saints Offshore Oil Rig has recently been constructed, and will be
commencing production during the current financial year.
Management estimates that the oilfield has a useful life of 10 years,
following which the rig will need to be dismantled and removed from
the site and the area restored to its original condition. The estimated
cost of this decommissioning amounts to N900 000 for the
dismantling of the rig and the capping of the wellhead and N100 000
for final clearing of residual pollution damage which is likely to occur
through normal production activity over the 10 year period. The cost
of capital of the enterprise is estimated at 5% p.a.
You may assume that the Saints Oil Rig was constructed in
year 0 and that it will come into production on the first
January of the current financial year (= year I).
Give the accounting entries for : year 0 and end of year 1
Wednesday, June 22, 2011
7. IAS 17 - Leases
• For the following arrangements, discuss whether they are 'in
substance' lease transactions and thus fall under the ambit of IAS
17:
Entity A enters into an arrangement to buy petroleum products
from entity B. The products are produced in a refinery built and
operated by entity B on a site owned by entity A. While Entity B
could provide the products from other refineries that it owns, it is
not practical to do so. Entity B retains the right to sell products
produced by the refinery to other customers, but there is only a
remote possibility that it will do so. The arrangement requires
entity A to make both fixed, unavoidable payments, and variable
payments based on input costs at a target level of efficiency to
entity B.
8. • Entity A leases an asset to entity B for its
entire economic life, and leases the same
asset back under the same terms and
conditions as the original lease. The two
entities have a legally enforceable right to set
off the amounts owing to one another, and an
intention to settle these amounts on a net
basis.
9. Classification of leases
• Toronto Ltd has entered into an agreement to lease a 09 bulldozer to Whitehorse Ltd. The
lease agreement details are as follows:
Length of lease: 5 years
• Commencement date: 1/07/X6
• Annual lease payment, payable 30/06 each year commencing 301061X7: N8000
• Fair value of the bulldozer at 1/071X6: N34,797
• Estimated economic life of the bulldozer: 8 years
• Estimated residual value of the bulldozer at the end of its economic life: N2,000
• Residual value at the end of the lease term, of which 50% is
guaranteed by Whitehorse Ltd:
• Interest rate implicit in the lease: 9%
The lease is cancellable, but a penalty equal to 50% of the total lease payments is payable on
cancellation. Whitehorse Ltd does not intend to buy the bulldozer at the end of the lease
term. Toronto Ltd incurred E 1000 to negotiate and execute the lease agreement. Toronto
Ltd purchased the bulldozer for E34 797 just before the inception of the lease. State how
both companies should classify the lease (Alfredson e.a., problem 12.6).
• Note:
• (l) The interest rate implicit in the lease is 9%
• (2) PY of minimum lease payments = 33457
10. Classification of leases
• Toronto Ltd has entered into an agreement to lease a 09 bulldozer to Whitehorse Ltd. The
lease agreement details are as follows:
Length of lease: 5 years
• Commencement date: 1/07/X6
• Annual lease payment, payable 30/06 each year commencing 301061X7: N8000
• Fair value of the bulldozer at 1/071X6: N34,797
• Estimated economic life of the bulldozer: 8 years
• Estimated residual value of the bulldozer at the end of its economic life: N2,000
• Residual value at the end of the lease term, of which 50% is
guaranteed by Whitehorse Ltd:
• Interest rate implicit in the lease: 9%
The lease is cancellable, but a penalty equal to 50% of the total lease payments is payable on
cancellation. Whitehorse Ltd does not intend to buy the bulldozer at the end of the lease
term. Toronto Ltd incurred E 1000 to negotiate and execute the lease agreement. Toronto
Ltd purchased the bulldozer for E34 797 just before the inception of the lease. State how
both companies should classify the lease (Alfredson e.a., problem 12.6).
• Note:
• (l) The interest rate implicit in the lease is 9%
• (2) PY of minimum lease payments = 33457
