FR – Nov 2015 – L2 – Q7b – Fair Value Measurement (IFRS 13)

Explaining accounting treatment for investment property and calculating values for the financial statements.

Question

KOLA NITDA Nigeria Plc is a company engaged in the manufacturing of hand sanitizer to prevent Ebola disease. The following information relates to property owned by the company:

N’000
Land – Plot 404 Apapa Industrial Area
Building therein (acquired June 30, 2013)
Improvement to the building to extend rented floor capacity
Repairs and maintenance to investment property for the year
Rental received for the year

Approximately six percent of the property floor space is used as the administrative head office of the company. The property can be sold only as a complete unit. The remainder of the building is leased out under operating leases. The company provides lessees with security services.

The company values investment property using the fair value model on December 31, 2014, which is the company’s year-end. Tewogbade & Co. (an independent valuer) valued the property at N144,000,000 on that date.

Required:
i. Advise the Directors of KOLA NITDA Nigeria Plc on how the property should be treated in the financial statements of the company as at December 31, 2014 in order to ensure strict compliance with provisions of IAS 40. (5 Marks)
ii. Calculate the value of investment property that should be disclosed in the statement of financial position as at December 31, 2014 and the amount that should be charged to the statement of profit or loss and other comprehensive income for the period then ended. (5 Marks)

Answer

i. Treatment of the Property in the Financial Statements (Compliance with IAS 40):

The property should be classified as investment property because the majority of the floor space (approximately 94%) is rented out to third parties for earning rental income, which meets the definition of investment property under IAS 40.
Although part of the building (6%) is used as an administrative office, IAS 40 allows the entire property to be classified as investment property since the portion used for administrative purposes is insignificant and the property cannot be sold separately.
The property should be measured using the fair value model, as per the company’s policy. The fair value as at December 31, 2014, determined by the independent valuer, is N144,000,000.
Repairs and maintenance expenses (N2,000,000) should be recognized in the statement of profit or loss as an operating expense.
Rental income (N6,400,000) should also be recognized in the statement of profit or loss as income.

ii. Calculation of the Value of Investment Property: