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If a property developer purchases a factory. The purpose of the purchase is not stated. However, the property developer inspected the factory and it was found out that the factory was inadequate for the purpose it is used. Hence, the property developer demolished and reconstructed the factory.
May I know if this is classified as a Property, Plant and Equipment (IAS 16) or an Investment Property (IAS 40)? Are there any justifications to determine what it is?
I don’t think that there is enough information here to give a proper answer.
If it is purchased by a property developer then I doubt that there would be no purpose initially, surely they would either be developing it or knocking it down and rebuilding it.
They aren’t going to be using the property in the business so I doubt that it would fall under PPE and IAS 16, as it isn’t offices or a factory used to manufacture goods. So, I’d hazard a guess that it is most likely going to be an investment property if it is then going to be used for rental or capital appreciation purposes, but don’t rule out IAS 2 either……..
If the developer is going to construct the building for future sale then it would fall under IAS 2.
The key is that you aren’t going to get a question like this in the exam, so try not to worry.