4.

Q1

(1)

(2)

Answer either Question 4 or Question 5

IAS 16 Property, Plant and Equipment and IAS 40 Investment Property deals with the accounting treatment of
tangible non-current assets.
You have recently been appointed as the Financial Accountant of Norfolk PLC, and are currently involved in the
preparation of the financial statements for the year ended 31 October 2010. You have been provided with the
following information in relation to transactions relating to property, plant and equipment which took place during
the year:

New factory premises were completed and ready for occupation on 1 April 2010. Production was not transferred
to the factory until 30 September 2010 due to an industrial dispute arising from a decision by the company to
make some compulsory redundancies. Capital expenditure in relation to the new factory premises is recorded in
the Statement of Financial Position for the year ended 31 October 2009 at 1.4 million (including land of
800,000). The following costs, which also relate to the new factory premises, have been incurred during the year
to 31 October 2010:
Additional construction costs
Professional fees (legal and architects)
General and administrative overheads
Relocation of staff to new factory

On 1 April 2010, new machinery for a highly automated production line became available for use within the
factory. Costs of the new machinery amounted to 620,000 and, in addition, the company also incurred the
following:

Allocated supervisory costs of 9,500.

Installation costs of 50,000 were incurred. These were 10% higher than originally budgeted due to an
unofficial strike action.

(3)

(4)

(5)

000
104
20
55
15

25,000 was incurred in testing the new process. 10,000 of this was incurred in relation to putting on an
open day for customers to view the new machinery.
Fees of 3,000 were paid to Casement Haulage for the cost of transporting the machinery to the factory.

Norfolk PLCs headquarters building was acquired on 1 November 2003 for 2.5 million and depreciated at 4%
per annum. On 1 November 2007, it was revalued to 3 million. Following this revaluation, the company did not
make any reserve transfers for additional depreciation. As a consequence of the recent financial downturn,
professional valuers have advised that as at 31 October 2010, the building was worth 2 million.

Norfolk PLC also has a leasehold property held under a finance lease and leased out under an operating lease.
The carrying value of the property at 1 November 2009 was 2 million and during the year Norfolk PLC spent
300,000 in extending the rented floor capacity of the property. An independent valuer valued the property at
3.2 million on 31 October 2010.

Norfolk PLC uses the straight line method of depreciation, and depreciates buildings at 4% per annum and
machinery at 20%. The company values investment properties using the fair value model.

REQUIREMENT:
(a)

(b)
(c)

Distinguish between the cost model and the revaluation model for the measurement of property, plant and
equipment subsequent to its initial recognition.
(3 marks)

Prepare extracts from the Statement of Financial Position in relation to the above transactions as at 31 October
2010 and draft the note showing movements on property, plant and equipment for the year ending 31 October
2010 (working to the nearest 000).
(14 marks)

Comment briefly on your accounting treatment in relation to item (4) above.

Page 8

(3 marks)

[Total: 20 MARKS]

SOLUTION 4
(a) Under cost model, an item of PPE is carried at cost (i.e. initial cost plus subsequent expenditure) less
accumulated depreciation.

Under the revaluation model (fair value model), an item of PPE is carried at revalued amount, being fair value
less accumulated depreciation.

(b)

The choice of model is an Accounting Policy choice, which must be applied across an entire class of PPE.
(3 marks)
Financial Statement Extracts
Statement of financial position as at 31 October 2010
000
Non current assets
Property, plant and equipment (see note)
4,110
Investment property
3,200

Equity
Revaluation surplus (900 -640)

260

Notes to the financial statements

Property plant and equipment

Cost/valuation
At 1 November 2009
Additions (W2 & W3)
Revaluation loss (W1)
At 31 October 2010
Depreciation
At 1 November 2009
Charge for year (W4)
Revaluation loss
At 31 October 2010

Head
office
000

Plant and
equipment
000

Assets in the course

of construction/factory
premises
000

Total
000

3,000
(1,000)
2,000

683
683

1,400
124
1,524

4,400
807
(1,000)
4,207

240
120
(360)
-

80
80

17
17

240
217
(360)
97

2,000
2,760

603
-

1,507
1,400

4.110
4,160

Carrying amount
At 31 October 2010
At 1 November 2009

Workings

W1
Head office revaluation

Original cost
Depreciation (4 years at 4%)
Carrying value 1 November 2007
Revaluation gain
Revalued amount 1 November 2007
Depreciation (2 years at 4%)
Balance at 1 November 2009
Depreciation (4%)
Revaluation loss

000
2,500
(400)
2,100
900
3,000
(240)
2,760
(120)
(640)
2,000
Page 17

W2
Construction costs
Professional fees

000
104
20
124

W3
Additions to plant and equipment
Invoice costs
Labour- installation (50,000 x 100/110)
Testing costs
Transport costs

620
45
15
3
683

W4
Depreciation
Head office (W1)
New factory (1,524 - 800) x 4% x 7/12)
Plant and equipment (683 x 20% x 7/12)
(c)

120
17
80
(14 marks)

This property is an investment property under IAS 40 and should be included within the SFP at its fair value
of 3.2 million. The gain of 900,000 should be recognised within the SCI for the year ending 31 October
2010.
(3 marks)
[Total: 20 Marks]

Page 18

8.

Nectar PLC has a balance of 800,000 on its retained earnings at 1 July 2009. During the year ended 30 June
2010 the company:

Revalued property with a cost of 2 million and accumulated depreciation of 1.2 million, to 2.5 million. No
annual transfers between reserves are to be made.
Issued shares at a premium of 100,000
Made a profit for the year of 500,000

In addition, an interim dividend of 300,000 was paid during the year ended 30 June 2010.

In accordance with IAS1, (revised) Presentation of Financial Statements, what is the closing balance on retained
earnings in Nectar PLCs statement of changes in equity for the year ended 30 June 2010?
(a)
(b)
(c)
(d)

4.
Q2

1.

1,400,000
1,700,000
1,300,000
1,000,000

Answer either question 4 or 5

IAS16 Property, Plant and Equipment and IAS40 Investment Property outlines the accounting treatment of tangible
non-current assets.

Hegarty PLC is a Limerick based computer manufacturer and during the year ended 31 October 2009 the following
transactions in relation to property, plant and equipment took place.
On 1 April 2009, a new machine was purchased by Hegarty PLC in order to improve productivity. The cost of the
machine was 600,000, but the company also incurred the following:
Delivery costs
Labour installation costs (Note i)
Management and supervision costs (allocated from head office)
Material costs used for the installation -inclusive of 223 recoverable VAT.
Cost of testing of new machine (Note ii)
Maintenance service contract costs per annum
Proceeds from sale of by-products produced as a result of the testing process
Notes:
(i)

(ii)

2.

3.

4,000
15,000
10,000
1,500
3,000
400
(100)

These were 20% higher than budgeted due to an industrial dispute at the time of installation.

Included in the testing costs of the machine was 150 in connection with a quarterly diagnostic check of
machinery.

Plant and equipment are depreciated at 25% straight line. The cost of plant and equipment at 1 November 2008
amounted to 300,000 and the accumulated depreciation was 180,000 at that date.

Hegarty PLCs head office building was originally acquired on 1 November 2003 for 2m, and is depreciated at
4% per annum straight line. On 1 November 2007, it was revalued to 2.5m. Due to the recent downturn in
commercial property prices, valuers acting for the company have advised that the valuation on 31 October 2009
should be 2m.

On 1 November 2008, Hegarty PLC purchased a property in Ennis, Co. Clare costing 500,000 for its investment
potential. The amount attributable to land was negligible, and the buildings are expected to have a useful life of 40
years. Local property indices indicate that property prices in this area have gone against the downward national
trend, and that the fair value of the property has increased during the year to 31 October 2009.

Page 6

REQUIREMENTS:
(a)

(b)
(c)

5.
(a)
(b)
(c)

In relation to the machinery and head office building, draft the non-current asset note showing the movements on
property, plant and equipment for the year to 31 October 2009.
(12 marks)
Define the term Investment Property and explain why it may not be appropriate to charge depreciation in relation
to such a property.
(4 marks)

Assuming that Hegarty PLC adopts a fair value policy for the property in Ennis, explain how the property would be
presented in the financial statements for the year to 31 October 2009, if the property has risen in value by 5%
during the year. (Disclosure notes are not required).
(4 marks)
[Total: 20 marks]

OR

IAS37 and IAS10 provides guidance on the accounting treatment of Provisions, Contingent Liabilities and
Contingent Assets and Events After the Reporting Period.

In accordance with IAS37 Provisions, Contingent Liabilities and Contingent Assets, define a contingent asset and
explain how they should be treated in the financial statements.
(4 marks)
In accordance with IAS10 Events After the Reporting Period, distinguish between an adjusting event and a nonadjusting event.
(4 marks)

You have been approached by the Financial Controller of Severn PLC. You have been asked to provide some
advice in relation to the companys draft financial statements for the year ended 31 March 2010. You should assume
that the Directors had agreed to sign the companys financial statements on 2 June 2010.
1.

At a board meeting of Severn PLC in March 2010, a decision was taken in principle to dispose of a subsidiary
company, Trent Ltd. This investment was valued in the statement of financial position of Severn PLC, at 31
March 2010, at 1,500,000. On 25 April, the management of Trent Ltd decided to buy the company for
2,200,000.

2.

Five hundred customers are bringing an action against Severn PLC for the supply of faulty goods. Severn
PLCs solicitors have confirmed that in their opinion, 20% of the claims are defendable at no cost. The
average level of damages per successful claim is estimated at 2,000. A similar provision, amounting to
600,000 was in place at 31 March 2009, and was disclosed in the statement of financial position at that
date. 400,000 was paid out for such claims during the year ended 31 March 2010.

3.
4.
5.

On 28 April 2010, 150,000 was paid to John Waldon as compensation for his removal as HR Director. Mr.
Waldon had been dismissed by a majority vote at a board meeting in March 2010. The reasons for his
dismissal were in relation to professional misconduct.

Severn PLC has renewed the unlimited guarantee given in respect of the bank overdraft of a company in
which it holds significant investment. The companys overdraft amounted to 450,000 at 31 March 2010 and
it has net assets of 1.5 million.

Materials used in the production of one of the companys key products were included in year-end inventory
at a cost of 105,000. In May 2010, the auditors indicated that the materials could have been purchased
for 60,000 in April 2010, due to a fall in world commodity prices.

REQUIREMENTS:

You are required to prepare a memorandum to the Board of Directors of Severn PLC in which you explain how each of
the above items should be reflected in the companys financial statements for the year ended 31 March 2010.
(You may assume that each of the items is material).
(12 marks)
END OF PAPER
Page 7

[Total: 20 marks]

SOLUTION 4
(a)

Cost/valuation
At 1 November 2008
Additions (w1)
Revaluation
At 31 October 2009

Head Office
000

Plant & equipment

000

Total
000

2,500

300
620.53
920.53

2,800
620.53
(500)
2,920.53

100
100
(200)
-

180
165.494
345.494

280
265.494
(200)
345.494

2,400

120

2,520

(500)
2,000

Depreciation
At 1 November 2008
Charge for year
Revaluation
At 31 October 2009
Carrying amount
At 31 October 2008

At 31 October 2009

2,000

575.036

2,575.036

W1

Additions to plant and equipment

External costs
Delivery costs
Labour costs (15 x 100/120)
Materials (1.5 0.223)
Testing (3 0.15)
Sale of by-products

000
600
4
12.5
1.28
2.85
(0.1)
620.53

Depreciation 7/12 X 25% X 620.53

25% X 300,000

=
=

90,494
75,000
165,494

W2

Head office revaluation

Original cost 1 Nov 2003
Depreciation 4 years @ 4%
Carrying value at 1 November 2007
Revaluation gain
Revalued amount 1 November 2007
Depreciation (4% for 2 years)
Balance 1 November 2009
Revaluation loss (2,300 2,000)
Carrying value 31 October 2009

000
2,000
(320)
1,680
820
2,500
(200)
2,300
(300)
2,000
Page 16

(12 marks)

(b)

Investment property consists of land or buildings held to earn rentals or held for capital appreciation (or both)
rather than held:

(i)
(ii)
(iii)

(c)

for use in the production or supply of goods or services, or

for administrative purposes, or
for sale in the ordinary course of business.

The purpose of depreciation is to spread the cost of an asset over its useful life as it is consumed in an entity's
operations. But property which is acquired as an investment rather than for use is not consumed in this way
and does not have a useful life. In consequence, the charging of depreciation is not appropriate for investment
property.
(4 marks)
On 1 November 2008, the building has a carrying amount of 500,000 and should be recognised as an
investment property.
The property should be revalued to the fair value, at 31 October 2009, amounting to (525,000 - 500,000)
= 25,000 increase.

Gain/loss should be taken directly to the statement of comprehensive income. It is not shown under
revaluation reserve/ other comprehensive income.
(4 marks)
[Total: 20 Marks]

SOLUTION 5
(a)

A contingent asset is defined as a possible asset that arises from past events and whose existence will be
confirmed only on the occurrence or non occurrence of one or more uncertain future events not wholly within
the control of the entity.

An example of such an asset may arise if the entity is involved in a legal case and will receive damages if the
case is won. IAS37 requires that contingent assets should not be recognised in the statement of financial
position.

(b)

However, they should be disclosed in the notes, if the inflow of economic benefits is judged to be probable.
(4 marks)

Adjusting events: - those that provide evidence of conditions that existed at the end of the reporting period
e.g. sales of inventories held at the reporting date.

Non-adjusting events: - those that are indicative of conditions which arose after the reporting period e.g.
announcement of a major restructuring programme
( 4 marks)

Page 17

OR

Q35.

IAS 16 Property, Plant & Equipment sets out the accounting treatment of tangible non-current assets while, IAS
40 Investment Property deals with properties held for their investment potential only. The distinction between
investment and non-investment property is very important, as the accounting treatment required is significantly
different in each case.

REQUIREMENT:
(a)

Explain the definition of Investment Property according to IAS 40.

(3 marks)

(b)

Discuss the key differences between the accounting treatment of investment properties and the accounting
treatment of non-investment properties. Why does the International Accounting Standards Board (IASB) require
a different treatment in each case?
(5 marks)

(c)

In each case (i) to (iii) below, show the entries in the financial statements of Muttingham plc for year ended 31
July 2014 resulting from recording the events described. Your answer should clearly identify any depreciation
charges involved and how each transaction may impact upon the statement of profit or loss and other
comprehensive income of Muttingham plc for the year ended 31 July 2014, if at all.
Muttingham plc has several properties on its books. During the year ended 31 July 2014, the events detailed
below took place.
(i)

Property A was acquired on 1 August 2009 for 1.6 million for use as company offices. The buildings
element of the property was estimated at 90% of the purchase price and this was assigned a 50 year useful
economic life from the date of purchase (the balance consisted of land). On 1 August 2013 an independent
valuation was obtained and the property was revalued to 1.8 million including land, this being assigned a
value of 300,000. The useful economic life of the building was assessed at 50 years from that date.

(ii)

Property B was acquired in March 2013 at an auction of distressed properties. This property is a block of
land in Galway city, which was bought for investment potential. The cost was 750,000. No revaluation took
place on 31 July 2013. However, on 31 July 2014, a professional valuer placed a value of 1,200,000 on
the land.

(iii)

Property C was a building acquired on 1 August 2006 for 4.4 million for use as a factory. This was a
leasehold property with 20 years left to run. Following a national decline in property values, a revaluation
on 1 August 2008, reduced the value of the leasehold to 1.26m. On 1 August 2013, the property was
estimated by the same professional valuers to have a value of 2.6m.

The company applies straight-line depreciation wherever depreciation is required. The fair value model of
valuation is applied wherever permitted. The company does not apply the option to transfer revaluation surpluses
annually to retained earnings. Assume all properties were correctly accounted for up to 31 July 2013, unless
otherwise instructed.
(12 marks)
[Total: 20 MARKS]
END OF PAPER

Page 8

SOLUTION 5
Marking Scheme:
(a)

Explanation of the term Investment Property

Subtotal

3
3

(b)

3 key differences in accounting treatment

Explanation of reasons for different treatment
Subtotal

3
2
5

(c)

3 parts at 4 marks each

Subtotal

12
12
[Total: 20 Marks]

SOLUTION
3
Suggested solution
(a)

Definition
Investment property is property held (by the owner or by the lessee under a finance lease) to earn rentals or
for capital appreciation or both, rather than for:

use in the production or supply of goods or services or

for administrative purposes; or

for sale in the ordinary course of business.

(b)

Accounting Treatment

There are two options given under IAS 40 for accounting for investment properties: cost model or the
fair value model.

Under the cost model, properties are accounted for as under the cost model of IAS 16. This means the
property is carried at cost and depreciated over its useful economic life. If this model is chosen, the fair
value should be disclosed. There is no difference between the accounting treatment of properties under
the cost model of both standards.

Under the fair value model of IAS 40:

o
Investment properties are revalued each year to fair value.
o
Any gain or loss is credited / debited to profit or loss (i.e. through the income statement) each year.
o
Depreciation should not be charged.

Under the fair value model of IAS 16:

o
Properties are revalued sufficiently often to ensure their carrying value does not differ materially
from their fair value. This does not need to be every year.
o
Any gain is credited to a revaluation reserve through other comprehensive income.
o
Any loss is taken to profit or loss.
o
If a gain or loss reverses previously recognised losses or gains on the same property, the original
accouting treatment is reversed first.
o
Depreciation must be charged.

Page 18

(c)
(i)

Carrying value of property A at 1 August 2013 (prior to revaluation):

000
1,600

Cost
Depreciation per year (1,600 * 90% * 1/50)
Depreciation for 4 years
Carrying value

28.8
(115.2)
1,484.8

Revalued amount at 1 August 2013

Revaluation gain

1,800.0
315.2

Depreciation for year ended 31 July 2014 (1,800 300) * 1/50

Carrying value 31 July 2014
Accounting entries for year ended 31 July 2014:
SPLOCI profit or loss:
Depreciation for year
SPLOCI other comprehensive income:
Gain on revaluation of property
SOFP Property, plant & equipment:

30
1,770

(30)

315.2
1,770

Note: The date of revaluation is the beginning of the year. Therefore depreciation for the year is based on the
new valuation and useful economic life.
(ii)
Carrying value of property B on 1 August 2013:
Fair value 31 July 2014
Gain on valuation

000
750
1,200
450

Accounting entries for year ended 31 July 2014:

SPLOCI profit or loss:
Gain on valuation of investment property
SPLOCI other comprehensive income:

000

SOFP Investment property:

1,200

450
n/a

Note:
This property is an investment property as it was purchased and continues to be held for its investment
potential, and is not being used by the entity or any group company for

use in the production or supply of goods or services or

for administrative purposes; or
for sale in the ordinary course of business.

Hence the revaluation gain is recognised in profit or loss, and no depreciation is charged.

Page 19

(iii)

First revaluation of property C at 1 August 2008:

000
4,400

Cost
Amortisation per year (4,400 * 1/20)
Amortisation for 2 years
Carrying value 1 August 2008
Revalued amount at 1 August 2008
Revaluation loss

220
(440)
3,960
1,260
(2,700)

Carrying value of property C at 1 August 2013 (prior to revaluation):

Value 1 August 2008
Amortisation per year (1,260 * 1/18)
Amortisation for 5 years
Carrying value 1 August 2013
Revaluation gain (2,600 910)

1,260
70
(350)
910
1,690

Revalued amount 1 August 2013

2,600

Amortisation for year ended 31 July 2014 (2,600 * 1/13)

Carrying value 31 July 2014

200
2,400

What would the carrying value at 1 August 2013 be if no revaluation had ever taken place (HC value)?
Cost
Amortisation (4,400 * 1/20 * 7)
Depreciated historic cost

4,400
(1,540)
(2,860)

As the revalued amount (2,600) is less than the HC carrying value would have been, the entire revaluation
gain should be taken to profit or loss.
Accounting entries for year ended 31 July 2014:
SPLOCI profit or loss:
Amortisation for year
Reversal of previous revaluation loss charged to P/L
SPLOCI other comprehensive income:

(200)
1,690
n/a

SOFP Property, plant & equipment:

1,490

Note 1:
The date of revaluation is the beginning of the year. Therefore amortisation for the year is based on the new valuation
and useful economic life.
Note 2:
A revaluation gain on a non-investment property would normally be taken to OCI. However in the case when the
same property previously suffered a revaluation loss, and this was taken to profit or loss (as it would have been as
it was a first revaluation), this loss may be reversed before a gain in taken to OCI. As the gain in this case is less
than the previous loss, and does not take the carrying value of the property above its depreciated historical cost
(DHC), it it taken entirely to profit or loss. If the gain took the carrying value of the property above DHC, the excess
would be taken to OCI and revaluation reserve.

Page 20