Financial Accounting: GAAP Principles 3e

Tutorial 5.1
(Solution included in
SQB)

Investment properties:
fair value model versus
revaluation model (PPE)

Chapter 5

Basic level

1.

List the three main differences between the fair value model and the revaluation model.

2.

The carrying value of buildings owned by the De Villiers Company at the beginning of the
year was R2,5m. The fair value at the beginning of the year was estimated at R3,5m and
at the end of the year at R3,8m. Assume that depreciation was R200 000 for the year,
regardless of when the valuation was conducted.
Calculate the carrying value of the buildings at the end of the year if:
(a) Buildings are occupied by the company and are therefore classified as PPE, and
recognised according to the revaluation model. The De Villiers Company revalues
buildings at the beginning of the year.
(b) Buildings are occupied by a third party, are classified as investment properties, and
are recognised according to the fair value model.

Department of Accounting, UCT and Oxford University Press Southern Africa

Financial Accounting: GAAP Principles 3e

Tutorial 5.2

Chapter 5

Property classification

Basic level

Ignore VAT.
Company A acquired a property on 1 January 20x2 for R1 400 000, of which R400 000
related to the cost of the land. The building was a large warehouse.
At the acquisition date it was determined that the warehouse:
Had an estimated useful life of 25 years
Would be used evenly over the period, and
Had an estimated residual value of R800 000.
The estimated useful life, residual value and depreciation method were confirmed at each
subsequent balance sheet date.
The market value (fair value) of the property was determined as follows:
Date
1 January 20x4
1 January 20x3
1 January 20x2

Land
R963 000
871 000
664 000

Warehouse1
R1 537 000
1 329 000
1 136 000

Total
R2 500 000
2 200 000
1 800 000

Required:
(a)Prepare the journal entries to record all the transactions relating to the property for the
financial years which ended on 31 December 20x3, 20x4 and 20x5, for each of the
following situations:
Situation 1:
Company A occupied the warehouse since the acquisition date. The company applies a
policy of revaluing property every year, based on the depreciated replacement cost, and
accumulated depreciation is eliminated against the carrying value of the asset at each
revaluation date.
Situation 2:
Company A signed a rental contract on 2 January 20x2, the terms of which stipulated
that the tenant would occupy the warehouse for at least 10 years at an escalating
monthly rental charge commencing at R15 000. Company A has always applied the fair
value model for rented property.
(b) Show how the property should be disclosed in the property note to the financial
statements for the year ended 31 December 20x4, for each of the two situations listed in
(a) above.
Accounting policy notes and disclosure in the statement of financial position are not
required, but comparatives should be shown.

1 This represents the current market value of the existing warehouse, that is, the net replacement cost
Department of Accounting, UCT and Oxford University Press Southern Africa

Financial Accounting: GAAP Principles 3e

Tutorial 5.3

Investment properties:
theory

Chapter 5

Basic level

For each of the following statements, indicate whether it is true or false:

1. Land that is held for long-term capital appreciation rather than short-term sale in the
ordinary course of the entitys operations is classified as investment property.
2. Land that is being held for an undetermined use is classified as property, plant and
equipment in terms of IAS16.
3. A building that is held under a finance lease can never be classified as investment
property.
4. Where a property is partially owner-occupied and rented to tenants, the property could be
investment property.
5. Subsequent to initial recognition, investment property can be accounted for on either the
cost model or the revaluation model.
6. An entity can choose to apply different measurement models to different investment
properties.

Department of Accounting, UCT and Oxford University Press Southern Africa

Financial Accounting: GAAP Principles 3e

Tutorial 5.4

Investment properties:
subsequent measurement

Chapter 5

Intermediate

Company A owns a property that was acquired for R2m on 1 January 20x8. (At that date, the
real estate valuators indicated that R400 000 represented the cost of the land and
R1 600 000 the cost of the building.) At that date, the building was expected to have a useful
life of 30 years and a residual value of R100 000. On 1 January 20x9, R50 000 was spent
repainting the building in order to remove graffiti that had been painted on it, and R200 000
was spent on a service lift. This property has always been rented out and is therefore
considered to be an investment property.
The investment property was valued at R3,2m on 30 June 20x12, R3,0m on 30 June 20x11,
and R2,65m on 30 June 20x10.
Ignore tax and deferred tax effects.
Required:
1. Calculate the carrying amount of the property as at 30 June 20x12, assuming that
Company A applies the cost model. Ignore comparatives.
2. Calculate the carrying amount of the property as at 30 June 20x12 assuming that
Company A applies the fair value model. Ignore comparatives.
3. Prepare the journal entries relating to the property for the financial year ending 30 June
20x12, applying both the cost model and the fair value model.

Department of Accounting, UCT and Oxford University Press Southern Africa

Financial Accounting: GAAP Principles 3e

Tutorial 5.5

Transfers to/from
investment properties

Chapter 5

Intermediate

B Ltd develops properties for resale, constructs buildings and invests surplus cash in
properties. B Ltd uses the fair value model to value investment properties and the cost model
for owner-occupied properties.
During the year ending 31 December 20x9, the following changes in use relating to
properties arose:
1.

2.

3.

Property A, which had previously been surplus to group requirements and was therefore
rented out, is now occupied by B Ltd. The property had cost B Ltd R2m, and the fair
value had been R2,8m at 31.12.20x8 and R2,7m at the date when occupation took
place.
Property B is a tract of land which is now under development with a view to being subdivided into 40 plots and sold. At the year-end, no plots had been sold, but R4m in
development expenditure had been incurred. The land had a cost of R8m on 01.01.20x6
and a fair value of R9,6m at 31.12.20x7. A decision to commence development with a
view to sale was made early in January 20x8, and development of the property started
soon thereafter.
An office block, Property C, is surplus to the requirements of B Ltd and has been rented
to tenants in terms of an operating lease for a three-year period. At the date that the
building was vacated by B Ltd, the statement of financial position reflected the asset at a
cost of R3,8m and accumulated depreciation of R1,2m. The fair value of the property at
that date was R3,6m.

Required:
Discuss the accounting consequences arising from the property transfers, and prepare any
journal entries required to effect the transfers. Tax adjustments should be ignored.

Department of Accounting, UCT and Oxford University Press Southern Africa

Financial Accounting: GAAP Principles 3e

Tutorial 5.6

1.

2.

3.

Investment properties
and deferred tax

Chapter 5

Intermediate

Indicate, with reasons, whether the following properties should be accounted for as
investment property by the company indicated (i.e. A Ltd and B Ltd):
(a) Property A is owned by A Ltd and comprises a building leased out to a hotel group
under a ten-year lease. The useful life of the building is estimated to be thirty years.
(b) Property B is owned by B Ltd and is a plot of land leased to another company for a
period of 20 years, after which ownership will transfer to the lessee.
ABC Ltd owns an office block that it leases to DEF Ltd in terms of an operating lease.
DEF Ltd in turn leases the office block to GHI Ltd in terms of an operating lease. Explain
what the allowable accounting treatments are by DEF Ltd in respect of its operating
lease with ABC. You are not required to deal with any measurement issues.
D Ltd has a residential property with a carrying value of R14m, which it initially bought
with the intention of selling it. It was unable to sell the property and has now decided that
it will lease the property out in terms of an operating lease. The fair value of the property
on the date of change of use is R19m. Prepare the journal entries to reclassify the
property, assuming that D Ltd applies the fair value model to its investment properties
and intends to realise the property through use. Assume a normal tax rate of 28% and a
CGT rate of 14%.

Department of Accounting, UCT and Oxford University Press Southern Africa