ACCA F7 (INT) Financial Reporting - Study text - 2010

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Chapter 7: Tangible non-current assets

Includedinstatementofcomprehensiveincome

$

Depreciationcharge($500,000/5years) (100,000)

=expense

Releaseofdeferredgovernmentgrant($100,000/5years)20,000

=income

5.3 Disclosure requirements

IAS20 requires the following disclosures in the notes to the financial statements.

 The accounting policy adopted for government grants, including the method of

presentation in the financial statements

 The nature and extent of government grants recognised in the financial

statements and an indication of other forms of government assistance from

which the entity has directly benefited

 Unfulfilled conditions and other contingencies attaching to government

assistance (if this assistance has been recognised in the financial statements).

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Investment property: IAS40

 Definitions

 Accounting treatment of investment property

 Transfers and disposals

 Disclosure requirements

6 Investment property: IAS40

6.1 Definitions

An investment property is property held to earn rentals or for capital appreciation

or both. It differs from non-investment property, which is property:

 used in the production or supply of goods, or for administrative purposes, or

 held for sale in the ordinary course of business.

Property could be land or a building (or part of a building) or both.

The property could be held by:

 the owner, or

 the lessee under a finance lease or an operating lease.

The following are not investment property:

 property intended for sale in the ordinary course of business

 property being constructed or developed on behalf of third parties

 owner-occupied property

 property being constructed or developed for future use as an investment

property

 property being leased to another entity under a finance lease.

6.2 Accounting treatment of investment property

The recognition criteria for investment property are the same as for property, plant

and equipment under IAS16. An investment property should be recognised as an

asset only when:

 it is probable that future economic benefits associated with the property will

flow to the entity, and

 the cost of the property can be measured reliably.

Investment property should be measured initially at cost plus the transaction costs

incurred to acquire the property.

Chapter 7: Tangible non-current assets

After initial recognition an entity may choose as its accounting policy:

 the fair value model, or

 the cost model.

The chosen policy must be applied to all the investment property of the entity. Once

a policy has been chosen it cannot be changed unless the change will result in a

more appropriate presentation. IAS 40 states that a change from the fair value

model to the cost model is unlikely to result in a more appropriate presentation.

Fair value model for investment property

Under the fair value model the entity should:

 revalue all its investment property to ‘fair value’ (open market value) at the end

of each financial year, and

 take the resulting gain or loss to profit or loss for the period in which it arises.

This is different to the revaluation model of IAS16, where gains are reported as

other comprehensive income in the statement of comprehensive income (and are not

included in profit or loss) and credited to a revaluation reserve.

The reason for this difference is to make the treatment of investment property

consistent with that of investments under IAS39.

Fair value is defined as the amount for which an asset could be exchanged between

knowledgeable, willing parties in an arm’s length transaction. If it is not possible to

arrive at a reliable fair value figure then the cost model should be adopted. This is

an exception to the rule that all investment property must be valued under either

one model or the other.

Cost model for investment property

The cost model follows the provisions of IAS16. The property is valued at cost and

the non-land element is depreciated.

Example

On 1 January Year 1 Entity P purchased a building for its investment potential. The

building cost $1 million with transaction costs of $10,000. Its depreciable amount at

this date was $300,000. The property has a useful life of 50 years. At the end of Year

1 the property’s fair value had risen to $1.3 million.

Required

Show the amounts which would be included in the financial statements of Entity P

at 31 December Year 1, under:

(a) the cost model

(b) the fair value model

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Answer

(a) Cost model

In the statement of financial position the property will be included as

follows.

Cost (1,000,000 + 10,000) 1,010,000

Accumulated depreciation (300,000 ÷ 50 years) (6,000)

–

–––––––––

Carrying amount 1,004,000

–

–––––––––

The income statement (statement of comprehensive income) will include

depreciation of $6,000.

(b) Fair value model

The property will be included in the statement of financial position at its fair

value of $1,300,000.

The statement of comprehensive income (income statement) will include a

profit of $290,000 (= $1,300,000 – $1,010,000) in respect of the fair value

adjustment. (Remember: this treatment of revaluation of an investment

property differs from the accounting treatment of a revaluation gain for other

non-current assets under IAS16.)

6.3 Transfers of investment property and disposals

A transfer to or from investment property means the re-classification of non-

investment property as investment property, or the re-classification of investment

property as non-investment property. A transfer of investment property can only be

made where there is a change of use as illustrated below.

Circumstance Transfer to/from Deemed transfer value

Commencement of

owner-occupation

Transfer from

investment property

to owner-occupied

property

Fair value at the date of change of

use becomes the deemed cost for

future accounting purposes

End of owner-

occupation

Transfer from owner-

occupied property to

investment property

Where investment properties are

measured at fair value, revalue in

accordance with IAS16 prior to the

transfer

Commencement of

development with a

view to sale

Transfer from

investment property

to inventories

Fair value at the date of change of

use becomes the deemed cost for

future accounting purposes

End of construction Transfer from assets

in the course of

construction to

investment property

Where investment properties are

measured at fair value, revalue the

property at the date of change of

use. Recognise any revaluation

difference immediately in profit or

loss in the statement of

comprehensive income

Chapter 7: Tangible non-current assets

Gains or losses on disposals of investment properties are included in profit or loss

in the statement of comprehensive income in the period in which the disposal

occurs.

The gain or loss on the disposal is calculated as:

Net disposal proceeds X

Minus: Carrying amount (X)

–

–––––

Gain/(loss) on disposal X/(X)

–

–––––

Example

Suppose that the investment property in the previous example was sold in Year 2

for $1,550,000, and that selling costs were $50,000.

Required

What amounts would be included in the statement of comprehensive income for

Year 2 in respect of this disposal under

(a) the cost model and

(b) the fair value model?

Answer

(a) Cost model

Sale value 1,550,000

Selling costs (50,000)

–

–––––––––

Net disposal proceeds 1,500,000

Minus: Carrying amount (1,004,000)

–

–––––––––

Gain on disposal 496,000

–

–––––––––

(b) Fair value model

Sale value 1,550,000

Selling costs (50,000)

–

–––––––––

Net disposal proceeds 1,500,000

Minus: Carrying amount (1,300,000)

–

–––––––––

Gain on disposal 200,000

–

–––––––––

6.4 Disclosure requirements

The following disclosures are required by IAS40 in the notes to the accounts.

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Disclosure requirements applicable to both the fair value model and the cost

model

 Whether the fair value model or the cost model is used

 The methods and assumptions applied in arriving at fair values

 The extent to which the fair value of investment property was based on a

valuation by a qualified, independent valuer with relevant, recent experience

 Amounts recognised in income or expense in the statement of comprehensive

income for:

− rental income from investment property

− operating expenses in relation to investment property

 Details of any restrictions on the ability to realise investment property or any

restrictions on the remittance of income or disposal proceeds

 The existence of any contractual obligation to purchase, construct or develop

investment property or for repairs, maintenance or enhancements

Disclosure requirements applicable to the fair value model only

There must be a reconciliation, in a note to the financial statements, between

opening and closing values for investment property, showing:

 additions during the year

 assets classified as held for sale in accordance with IFRS5

 net gains or losses from fair value adjustments

 acquisitions through business combinations

This reconciliation should show separately any amounts in respect of investment

properties included at cost because their fair values cannot be estimated reliably.

For investment properties included at cost because fair values cannot be estimated

reliably, the following should also be disclosed:

 a description of the property

 an explanation as to why fair values cannot be determined reliably

 if possible, the range within which the property’s fair value is likely to lie.

Disclosure requirements applicable to the cost model only

 The depreciation methods used

 The useful lives or depreciation rates used

 Gross carrying amounts and accumulated depreciation at the beginning and at

the end of the period

 A reconciliation between opening and closing values showing:

− additions

− depreciation

− assets classified as held for sale in accordance with IFRS5

Chapter 7: Tangible non-current assets

− acquisitions through business combinations

− impairment losses

− transfers.

When the cost model is used, the fair value of investment property should also be

disclosed. If the fair value cannot be estimated reliably, the same additional

disclosures should be made as under the fair value model.

6.5 Why investment properties are treated differently from other properties

Most properties are held to be used directly or indirectly in the entity’s business. For

example, a factory houses plant and equipment which is used to produce goods for

sale. The property is being consumed and it appropriate to depreciate it over its

useful life.

An investment property is held primarily because it is expected to increase in value.

It generates economic benefits for the entity because it will eventually be sold at a

profit. An investment property also differs from other properties because it

generates revenue and cash flows largely independently of other assets held by an

entity.

The most relevant information about an investment property is its fair value (the

amount for which it could be sold). Depreciation is largely irrelevant. Therefore it is

appropriate to remeasure an investment property to fair value each year and to

recognise gains and losses in profit or loss for the period.

The IASB originally wanted to require entities to use the fair value model only.

However, at the time that IAS 40 was originally issued, this would have been a

radical and probably controversial step. Therefore the IASB decided to allow entities

to continue to measure investment properties at depreciated historical cost if they

choose.

Paper F7: Financial reporting (International)

Paper F7 (INT)

Financial reporting

CHAPTER

Intangible assets

Contents

1 Intangible assets: IAS38

2 Goodwill: IAS38 and IFRS3

Paper F7: Financial reporting (International)

Intangible assets: IAS38

 Objective and scope of IAS38

 Definition of an intangible asset

 Recognition criteria for intangible assets

 Internally-generated intangibles

 Research and development expenditure

 Measurement of intangibles

 Amortisation and impairment of intangible assets

 Disposal of intangible assets

 Disclosure requirements

1 Intangible assets: IAS38

1.1 Objective and scope of IAS38

IAS38 Intangible assets deals with the recognition and measurement of intangible

assets, including development expenditure, and disclosure requirements for

intangible assets.

The objective of IAS38 is to set out the treatment of intangible assets that are not

covered by other accounting standards.

The most relevant exception to the coverage of IAS38 is goodwill acquired in a

business combination. This is covered by IFRS3 Business combinations. The

treatment of goodwill is considered in more detail in a later chapter, but some

introductory points are made in this chapter.

An important accounting issue with ‘intangible items’ is whether they should be

treated as an expense and included in full in profit or loss for the period in which

they are incurred, or whether they should be capitalised and treated as a long-term

asset. Most types of long-term intangible asset are ‘amortised’ over their expected

useful life. (Amortisation of intangible assets is the equivalent of depreciation of

tangible non-current assets.)

IAS38:

 requires intangible assets to be recognised in the financial statements if, and

only if, specified criteria are met

 sets out how to measure the carrying amount of intangibles assets that are

recognised

 sets out disclosure requirements for intangible assets in the financial statements.

ACCA F7 (INT) Financial Reporting - Study text - 2010 - Emile Woolf Publishing

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