Dear Mike,
Hello!
In the BPP book, there is one example:
Question: A business owns a building which has been using as the head office. In order to reduce costs, on 30 June 20X9 it moved its head office functions to one of its production centres and is now letting out its head office. Company has the policy to use fair value model for investment property.
The building has the original cost of $250,000 on 1/1/20X0 and was depreciated over 50 years. At 31/12/20X9 its fair value was judged to be $350,000.
How will this appear in the financial statement on 31/12/20X9?
The correct answer is
Original cost (350,000) - Accumulated depreciation until 30/06/20X9 = $202,500 (carrying value at 30/06/20X9).
The answer states that as the final FV is $350,000, so the revaluation reserve is $147,500 (difference of 350,000 and 202,500).
However, for this, I have the different treatment which as follows:
My answer till the 30/06/20X9 is correct - $202,500 but I still charge half a year's depreciation for $2,500 so the final amount before revaluation is $200,000. And then, the revaluation reserve is $(350,000-200,000)=$150,000.
May I ask:
1. Is there any mistake made in my calculations and why?
2. I noticed that the entity used the FV model so will this be the reason why for the rest of half year of 20X5 (30/06/20X5-31/12/20X5) no depreciation should be charged?
3. If point 2 is correct, if the entity has chosen to use cost model, will my calculation correct?
Thanks a lot!
Have a nice day!
Ask the Tutor ACCA FR
PPE transferred to be the investment property
The fair value option for investment properties applies to investment properties and, up to 30 June 20X9, it wasn't an investment property.
However, I'm a shade worried about your dates.
You say the fair value at December 20X9 was $350,000 and, on the next line you refer to "Original cost of $350,000" and, again, you say original cost was $250,000
This isn't making any sense at all!
I'm going to assume that original cost was in fact $250,000 on 1 January, 20X0 and that 9.5 years later, on 30 June, 20X9, the decision was made to move out from the premises and instead treat it as investment property.
But you say that, at 30 June, 20X9, the accumulated depreciation was $47,500 (giving a carrying value of $202,500)
But $47,500 represents nine and a half years depreciation so the building's use for that six months to June 20X9 IS INCLUDED within the figures you have given
I think that dismisses your other two questions :-)
Ok?
@mikelittle said: The fair value option for investment properties applies to investment properties and, up to 30 June 20X9, it wasn't an investment property. However, I'm a shade worried about your dates. You say the fair value at December 20X9 was $350,000 and, on the next line you refer to "Original cost of $350,000" and, again, you say original cost was $250,000 This isn't making any sense at all! I'm going to assume that original cost was in fact $250,000 on 1 January, 20X0 and that 9.5 years later, on 30 June, 20X9, the decision was made to move out from the premises and instead treat it as investment property. But you say that, at 30 June, 20X9, the accumulated depreciation was $47,500 (giving a carrying value of $202,500) But $47,500 represents nine and a half years depreciation so the building's use for that six months to June 20X9 IS INCLUDED within the figures you have given I think that dismisses your other two questions :-) Ok?Dear Mike, Thanks for your reply! 1. After checking back on my bpp book, I can confirm that the question has been correctly copied from the book. On this occasion, should I assume that there is a mistake in the book? 2. Further to your reply, I would like to ask whether the investment property is still subject to depreciation and impairment regardless which model (FV or Cost Model) has been chosen? 3. In addition, I have summarised the charge for each model but I am not sure whether they are correct: Cost model: depreciation and impairment are applicable and when the non-current is an intangible non-current, amortisation applies. Revaluation model: depreciation and impairment are applicable. Is above all correct? Thank you once again for your help! Have a nice day!
Pity - that looks like a confusion within the BPP text where original cost is stated to be (1) $250,000 and (2) $350,000
But get over it - you can work out what is meant
Investment property cost model, depreciate and impair if necessary
Investment property valuation model, don't depreciate but impair as fair value changes downwards
Ok?
@mikelittle said: Pity - that looks like a confusion within the BPP text where original cost is stated to be (1) $250,000 and (2) $350,000 But get over it - you can work out what is meant Investment property cost model, depreciate and impair if necessary Investment property valuation model, don't depreciate but impair as fair value changes downwards Ok?Dear Mike, Thanks for your explanation! The last question regarding this is: apart from cost model, we usually refer FV and revaluation model. The some textbooks say the FV is about the perception of market but the revaluation model is about the perception of the entity/its own knowledge, both upon the price of the Non-current asset. Is that true? Should we classify both FV model and revaluation model in one category? Good night! Thank you once again for your help!
Yes, treat them as synonymous. You're WAY, WAY, WAY too deep for F7, probably even for P2
Worry about the technical nuances when you're qualified and some junior auditor comes along one day and says "Acaqub, what's the difference between "fair value" model and "revaluation model"?" and you'll be able to turn round and say .....
....."Don't worry about it! You're WAY, WAY, WAY too deep to be concerned about the semantics of fair value as distinct from revaluation"
@mikelittle said: Yes, treat them as synonymous. You're WAY, WAY, WAY too deep for F7, probably even for P2 Worry about the technical nuances when you're qualified and some junior auditor comes along one day and says "Acaqub, what's the difference between "fair value" model and "revaluation model"?" and you'll be able to turn round and say ..... ....."Don't worry about it! You're WAY, WAY, WAY too deep to be concerned about the semantics of fair value as distinct from revaluation"Thanks Mike! Have a nice day!
And you, and you're welcome
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