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I am having trouble answering the following question and would be grateful for any help:
A company (supermarket chain) has a policy for buying up available land in suitable locations for potential development for future stores. It does not have a policy for revaluing its land and buildings unless they are an investment property. At the year end they held land on which construction of a new store had started at a total cost of £30m.
How would this be treated in the financial statements?
Thanks
i can provide the easy part of the answer 🙂 it doesn’t looks like an investment property so will be valued at cost-accumulated depreciation
i think my IFRS knowledge is a bit rusty but Land does not depreciate so you can not depreciate land.
the new store being constructed should be accounted separately and the land Should be accounted using IAS 16 (NCA) therefore recognize at cost but you do not depreciate it. land only appreciates (that is increase in value).
they should be test for impairment only but no depreciation
i hope am right.That is what I have written in my answer, I will submit it and see if its right, thank you for your help 🙂
A company (supermarket chain) has a policy for buying up available land in suitable locations for potential development for future stores. It does not have a policy for revaluing its land and buildings unless they are an investment property. At the year end they held land on which construction of a new store had started at a total cost of £30m.
The key facts from your questions are: there is a policy for buying available land for potential development.
Standard: IAS40 states that Land or building, or part of a building, or both, held by the owner or the lessee under a finance lease to earn rentals and/or for capital appreciation, rather than for use in production or supply of goods and services or for administrative purposes or for sale in the ordinary course of business is an investment property.Examples of investment property: [IAS 40.8]
land held for long-term capital appreciation
land held for undetermined future use
building leased out under an operating lease
vacant building held to be leased out under an operating lease
property that is being constructed or developed for future use as investment propertyAs the company has an intention to buy this land for development it should be accounted for as an investment property.
Continued…..Mytution,
i think you misunderstood the question,
yes you are right the standard (IAS 40) states that land held for undermined future use should be accounted as investment property.
But the question made it clear that they bought the land with intention to build store on them besides they are actually started building the store. if you read it properly it says the construction of a new store on the land has started.
T
he other issue you missed is they are going to use the store in the business as supermarket stores, again the the store is not build neither to be let out (lease or rent out) nor held for capital appreciation nor mention such intention for the future. the key word is the question is a supermarket chain company. They do not buy land to let but to use as future store for expansion( the like of this kind of company in the UK is Tesco who bought land for developments of new stores)
So this land is a Non current asset as it will be use for business operations. therefore IAS 16 Should apply here.
the land should be recognized at cost and not depreciated because land dose not depreciate but could possibly be impaired. e.g land use for manning or quarry can be impaired.
i hope am right.As the company has an intention to buy this land for future development it should be accounted for as an investment property. Once the construction is complete, the IP should be transferred to owner occupied property and accounted for using IAS16 Property Plant and Equipment. (I have explained the details below)
Second key fact: It does not have a policy for revaluing its land and buildings unless they are an investment property.
Standard: Investment property is initially measured at cost, including transaction costs. Such cost should not include start-up costs, abnormal waste, or initial operating losses incurred before the investment property achieves the planned level of occupancy; subsequently IAS 40 permits entities to choose between a fair value model, and a cost model.
One has to keep in mind that IAS40 states that one method must be adopted for all of an entity’s investment property.
As it’s the company policy to measure IP at FV and the land is an IP, therefore these should be accounted for as asset at FV.mate i think you are missing the boat.
I Really don’t know where you get your analysis from but totally not correct.
anyway i did not write to try to rectifying you but was only helping the person asking for help.
anyway he happens to do exactly what i said and has submitted his assignment, so he will have a feedback soon.
if you are interested to known whether what you are saying is correct then check the original posting and get in touch with him for the feedback from his lecturer or you can email mike to clarify thinks for you which i think you need.
i will not comment on the issue again.
good luck with your studies
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