- 15 Marks
Question
Kukundawa Plc acquired a property for N8 million on which annual depreciation is charged on a straight-line basis at the rate of 7.5%. An impairment loss of N700,000 was recognized at the end of the May 31, 2018 financial year when accumulated depreciation was N2 million. Consequently, the property was valued at its estimated value in use. The company planned to move to new premises before the property was reclassified as held for sale on October 1, 2018. By this time, the fair value less costs to sell was N4.8 million. Kukundawa Plc published interim financial statements on December 1, 2018, by which time the property market value had improved, and the fair value less costs to sell was reassessed at N5.04 million. At the year end, on May 31, 2019, it had improved further, so that the fair value less costs to sell was N5.9 million. The property was disposed of eventually on June 5, 2019, for N6 million.
Required:
a. Assess the above transactions based on the requirements of IFRS 5 – Non-Current Assets Held for Sale and Discontinued Operations. (5 Marks)
b. Evaluate the impact of the events occurring on the property over time and on the financial statements up to the date of disposal. (10 Marks)
(Total 15 Marks)
Answer
a. Treatment of Kukundawa Plc’s Property as per IFRS 5 – Non-Current Assets Held for Sale and Discontinued Operations
In accordance with IFRS 5, the property transactions would be handled as follows:
- Reclassification as Held for Sale
- The property should be removed from non-current assets and presented under current assets in the statement of financial position once classified as held for sale (October 1, 2018).
- Depreciation stops from the date of reclassification. Therefore, depreciation is only charged for the first four months, from June 1, 2018, to October 1, 2018.
- Measurement Requirements
- The asset is measured at the lower of its carrying amount and fair value less costs to sell.
- An impairment loss is recognized where the carrying amount exceeds the fair value less costs to sell, impacting the profit or loss statement.
b. Impact of Subsequent Events on Property Valuation and Financial Statements
- Initial Classification and Impairment
- The carrying amount at classification as held for sale (October 1, 2018) was N5.123 million. The fair value less cost to sell was N4.8 million, leading to an impairment loss of N0.323 million, recognized in the profit or loss.
- Revaluation Adjustments Over Time
- On December 1, 2018, the fair value less costs to sell increased to N5.04 million. Since this gain of N240,000 is less than cumulative impairment losses, it is recognized in profit or loss, adjusting the carrying amount to N5.04 million.
- By May 31, 2019, fair value less costs to sell rose further to N5.9 million. The gain of N860,000 exceeded cumulative impairment, so only N783,333 was recognized in profit or loss, updating the carrying amount to N5.823 million.
- Final Disposal
- On June 5, 2019, the property sold for N6 million, resulting in a final gain of N200,000. This gain is recognized and disclosed as a non-adjusting event in financial statements.
- Tags: Financial Position, IFRS 5, Impairment, Non-current Assets
- Level: Level 3
- Topic: Impairment of Assets (IAS 36)
- Series: NOV 2022
- Uploader: Dotse