- 20 Marks
FR – L2 – Q27 – Investment Properties
Question
Vantage Ltd owns several properties and has a year end of 31 December. Wherever possible, Vantage Ltd carries investment properties under the fair value model.
Property 1 was acquired on 1 January Year 1. It had a cost of GHC1 million, comprising GHC500,000 for land and GHC500,000 for buildings. The buildings have a useful life of 40 years. Vantage Ltd uses this property as its head office.
Property 2 was acquired many years ago for GHC1.5 million for its investment potential. On 31 December Year 7 it had a fair value of GHC2.3 million. By 31 December Year 8 its fair value had risen to GHC2.7 million. This property has a useful life of 40 years.
Property 3 was acquired on 30 June Year 2 for GHC2 million for its investment potential. The directors believe that the fair value of this property was GHC3 million on 31 December Year 7 and GHC3.5 million on 31 December Year 8. However, due to the specialised nature of this property, these figures cannot be corroborated. This property has a useful life of 50 years.
Required
(a) For each of the above properties briefly state how it would be treated in the financial statements of Vantage Ltd for the year ended 31 December Year 8, identifying any impact on profit or loss.
(b) Produce an analysis of property, plant and equipment for Vantage Ltd for the year ended 31 December Year 8, showing each of the above properties separately.
Answer
(a) Treatment in the financial statements for the year-ended 31 December Year 8 (IAS16)
Property 1
This is used by Vantage Ltd as its head office and therefore cannot be treated as an investment property. It will be stated at cost minus accumulated depreciation in the statement of financial position. The depreciation for the year will be charged in the statement of profit or loss.
Property 2
This is held for its investment potential and should be treated as an investment property. It will be carried at fair value, Vantage Ltd’s policy of choice for investment properties. It will be revalued to fair value at each year-end and any resultant gain or loss taken to the statement of profit or loss (GHC400,000 gain in Year 8).
Property 3
This is held for its investment potential and should be treated as an investment property. However, since its fair value cannot be arrived at reliably it will be held at cost minus accumulated depreciation in the statement of financial position. The depreciation for the year will be an expense in the statement of profit or loss.
This situation provides the exception to the rule whereby all investment properties must be held under either the fair value model, or the cost model.
(b) Analysis of property, plant and equipment for the year-ended 31 December Year 8
| Other land and buildings (W1) | Investment property held at fair value | Investment property held at cost (W2) | Total | |
|---|---|---|---|---|
| Cost/valuation | ||||
| On 1 January Year 8 | 1,000,000 | 2,300,000 | 2,000,000 | 5,300,000 |
| Revaluation | 400,000 | 400,000 | ||
| On 31 December Year 8 | 1,000,000 | 2,700,000 | 2,000,000 | 5,700,000 |
| Accumulated depreciation | ||||
| On 1 January Year 8 | 87,500 | – | 220,000 | 307,500 |
| Charge for the year (W1) | 12,500 | – | 40,000 | 52,500 |
| On 31 December Year 8 | 100,000 | – | 260,000 | 360,000 |
| Carrying amount | ||||
| On 31 December Year 7 | 912,500 | 2,300,000 | 1,780,000 | 4,992,500 |
| On 31 December Year 8 | 900,000 | 2,700,000 | 1,740,000 | 5,340,000 |
Tutorial note
In practice, with a more complex property, plant and equipment table the investment properties would be included within the land and buildings column with the required disclosures being given separately in a note to the table.
Workings
(1) Depreciation on Property 1
| GHC | |
|---|---|
| Brought forward (500,000 ÷ 40 × 7) | 87,500 |
| Year 8 (500,000 ÷ 40) | 12,500 |
(2) Depreciation on Property 3
| GHC | |
|---|---|
| Brought forward (2,000,000 ÷ 50 × 5.5) | 220,000 |
| Year 8 (2,000,000 ÷ 50) | 40,000 |
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